Assignment #1

Determining Estate Tax Liability- The first step in computing a decedent’s estate tax liability is to compute a

tentative tax on the aggregate amount of the decedent’s “taxable estate” and “adjusted taxable gifts” (this is § 2001(b))

o “Taxable Estate” – constitutes decedent’s GE reduced by allowable deductions

Property of GE is valued under either 2031 or 2032 (alternate valuation date)

o “Adjusted Taxable Gifts” – the total amount of taxable gifts (section 2503) made by decedent, other than gifts taken into account in determining the GE

- The second step is to reduce the tentative taxo The tentative tax is reduced by the amount of gift taxes that would have

been payable on gifts made after 1976 had those gifts been taxed under the rate schedule in effect at the decedent’s death

The rate table for estate and gift taxes appears in § 2001(c) The rates can properly be analyzed only by examining them

in conjunction with a § 2010 credit For decedents dying prior to the year 2010, lifetime gifts made

after 1976 are automatically pulled into the estate tax structure in computing the rate of tax on the taxable estate and are subject to the same multipurpose rate table

o Credits are allowed under sections 2010-2016- The third step is to apply the applicable tax rate under § 2001(c)

Code Section Usage- FIRST STEP: Identify the Tentative Tax

o § 2001(a) simply states that a tax is imposed on the transfer of the taxable estate of every decedent

o Under § 2001(b), to compute the tentative tax, we add the amount of the taxable estate and adjusted taxable gifts

Under the § 2001(b) “taxable estate,” the property of GE is valued under either 2031 or 2032 (alternate valuation date)

Under the § 2001(b) “adjusted taxable gifts,” we look to the meaning of §2503 to determine the total amount of the “adjusted taxable gift”

§ 2503(a) – taxable gifts is the total amount of gifts made during calendar year

§ 2503(b) – the first $11,000 of gifts shall not be include in the total amount of gifts made in the year

o Where we have a present interest in property, the fact that such interest may be diminished by the exercise of power will be disregarded in applying this section, IF no part of such interest will at any time pass to any other person

o The $11,000 exclusion will become $22,000 if filing a joint tax return

o Note: § 2503(c) – “transfer for the benefit of a

minor” – all about the powers of expenditure by donee (minor) before reaching 21

§ 2503(e) – “exclusion for certain transfers for educational expenses or medical expenses” – a “qualified transfer” will not be treated as a transfer of property by gift

“qualified transfer” is any amount paid on behalf of an individual as tuition to an educational organization OR to any person who provides medical care

§ 2503(g) – “treatment of certain loans of artworks

Note:o If “adjustment for gift tax paid by spouse” §

2001(d), meaning that if decedent was donor of any gift which one-half is considered under § 2513 as made by spouse AND the amount of gift is includable in GE of decedent, THEN any tax payable by spouse on such gift will be treated as tax payable with respect to gift made by decedent and WILL be allowed as an adjusted taxable gift

o BUT, look at “coordination of § 2513 and § 2035” § 2001(e), where if decedent considered one-half under § 2513 AND amount is includable in GE of decedent under § 2035, THEN it WILL NOT be allowed as an adjusted taxable gift

- SECOND STEP: Reduce the tentative tax after finding the total under §2001(b)o § 2505(a) – allows for a credit against a tax imposed on a gift for each

calendar year in an amount equal to: If decedent dying or gifts are made after December 31, 2001 and

on or before December 31, 2009: The applicable credit amount under § 2010(c) for such

calendar year REDUCED BY The sum of the amounts allowable as a credit to the

individual under this section for all preceding calendar years

If decedent dies or gift is made after December 31, 2009: The amount of the tentative tax which would be determined

under the rate schedule set forth in §2502(a)(2), REDUCED BY

The sum of the amounts allowable as a credit to the individual under this section for all preceding calendar years

o For decedent dying or gifts made after December 31, 2001, and on or before December 31, 2009:

§ 2010(a) – applicable credit amount shall be allowed in the estate of decedent for gift taxes paid

§ 2010(c) – applicable credit amount is the amount of tentative tax which would be determined under the rate schedule in §2001(c)

Look at Applicable Exclusion Amount Table under §2010(c)

After seeing the year, find the amount excludable as a credit in the rate schedule table

- THIRD STEP: Compute the Total using the Rate Schedule under §2001(c)o Then, if within the years 2002-2010, then we look to the phasedown of the

maximum rate of tax by calendar year

Assignment #2

Section 2031, 2033- § 2031(a) – The value of GE is determined to include the value of all property,

real or personal, tangible or intangible, to the extent provided by §§ 2033 through 2046

o The “value” is the FMV Revenue Ruling 79-360 : coins or paper currency with a FMV in

excess of face amount, such as in a collection, are valued at FMV Automobile : equal to FMV of the retail price of a used vehicle of

the same make, model, or condition Drugs : valued at its retail street value

- § 2031(b) – Valuation of Stock and Securities – determined by taking into consideration the value of stock or securities of corporations engaged in the same or similar line of business which are listed on an exchange

- § 2032 – values property at its actual use rather than the highest or best use- § 2033 – decedent’s GE includes the value of all property to the extent of the

decedent’s interest thereino Reg. § 20.2033-1

Real property is included whether it came into possession and control of executor or administrator or passed directly to heirs or devisees

Property subject to homestead or other exemptions under local law is included in GE

Interest and rents accrued at the date of decedent’s death are included in GE

Dividends which are payable to decedent or his estate by reason of the fact that on or before the date of death, decedent was a stockholder of record are included in GE

o INCLUDED - § 691 – income with respect to decedent – LOOK AT p. 4-154

§ 2033 includes in the GE of decedent real property, tangible personal property (jewelry, automobiles, boats, furniture, etc.), currency in decedent’s safe-deposit box (unless shown not to be decedent’s), balance in one’s checking or savings accounts and any credit balance in one’s personal account with a brokerage firm

Checks executed by decedent while living but honored after death that are not incurred for full and adequate consideration or not payable to charities are included in GE

Bonuses payable to decedent, even though the bonus is subject to contingencies until the time of decedent’s death; bonuses awarded to decedent before death but paid to estate after death

A reversionary or remainder interest in property, if not a contingent interest that terminates upon decedent’s death, is included in the GE

An interest in property that ends upon the mere passage of time is included, while an interest that will terminate upon an occurrence of an event will not be included; but if the occurrence of the event is in another other than decedent, it is included

o NOT INCLUDED Joint tenancy property (ex: bank accounts or property) are not

included under § 2033, but are included under § 2040 Bonuses which decedent has no interest at death but that are

awarded only subsequent to death at employers discretion Bonuses paid to another other than decedent

o Insurance Proceeds – insurance on the lives of others are included in decedent’s GE under § 2033

If the owner of the policy is not the primary beneficiary of the proceeds, nothing is included in the owner’s GE under § 2033

Community property interest in life of another – half is included in GE

o Corporations or Proprietorships § 2033 includes in the GE the value of the decedent’s shares of

stock, which may be viewed as investment assetso Partnership Interests – Includable in GEo Limited Liability Companies – Interest includable in GEo Compensation for Death

Suit under Wrongful Death statutes do not have any interest in property of decedent, because it is the rights of others, not decedent, that are enforced against the wrongdoer

However, if the survivor who brings the suit dies, the amount that will be recovered will be included in survivor’s GE

Recoveries under survival statutes are not includable in decedent’s GE; however, recoveries for decedent’s pain, suffering, or related expenses are

- § 2034 – Dower and Curtesy Interestso A decedent’s GE includes any interest in property of the decedent’s

surviving spouse existing at the time of decedent’s death as dower or curtesy

o The full value of the property is included in the GE, without deduction of such an interest of the surviving husband or wife, and without regard to when the right to such an interest arose

Cases and Revenue Ruling- Goodman v. Granger – estate tax includes the interest at the time of death- Revenue Ruling 75-127 – the value of wrongful death proceeds is not includable

in the decedent’s gross estate; however, they are included if the proceeds represent damages which decedent had become entitled during his lifetime rather than damages for premature death

Problems- Trustee does NOT have a beneficial interest in property (Reg. 20.2033-1(a))- Revenue Ruling 67-370 – power to revoke is immaterial for purposes of

identifying taxable interests)- Where you have life estate, it is your death that terminates this interest; interest is

coextensive on your death- Reg. § 20.2033-1(b) – Property subject to homestead or other exemptions under

local law is included in the gross estate- Accrual v. Cash Method Taxpayer

o Income in respect to decedent (IRD – 691(c)) is taxed to the party receiving if D is a cash method taxpayer – would not include it in his final income tax return; if D were accrual, it may be included in D’s final tax return; both will be including it in his estate tax return

accrual method – person who gets income does not have to pay income because it is already in D’s final tax return

cash method – person who gets income has to pay income; the tax return will not include that amount

- Bonuses payable to the decedent at the time of death are included in decedent’s gross estate, even though the right to the bonus is subject to contingencies until the time of the decedent’s death (Estate of King v. Commissioner, 20 TC 930)

- Bonuses in which a decedent has no interest at death but that are awarded only subsequent to death at the employer’s discretion are not included in decedent’s GE even if they are paid to the decedent’s estate because the decedent does not have an interest in property

- Social Security payments are excluded from the GE of decedent because the survivor has the interest in the payments

- The value of all assets of an unincorporated business is included in the GE (Reg. § 20.2031-3)

- The value of all of the shares of stock as well as the value of the bonds issued by the corporation, whether treated as equity or debt securities (Gooding Amusment Co. v. Commissioner)

- The GE of decedent would be valued in proportion to the partnership interest, which would be ¼ (Reg. § 20.2031-3)

Assignment #3

Section 2035 – Gifts Made within 3 years of Death- General Idea

o § 2035(a) – gross estate inclusion section subject to series of exceptions and special rules found in subsections (c) through (e)

o § 2035(b) – includes in the decedent’s GE taxes paid by the decedent or the decedent’s estate on near-death transfers, regardless of whether the gifted property transferred is included in decedent’s GE

- § 2035(a)(1) - § 2035 requires property to be pulled back into a decedent’s GE if there is a transfer of an interest in property or the relinquishment of a power with respect to property inclusion and if the transfer or relinquishment is one that was made by the decedent within three years of death and for less than adequate and full consideration in money or money’s worth

o In general, the transfer occurs when the gift is complete for gift tax purposes

- § 2035(a)(2) - § 2035 only applies if the decedent transfers an interest or relinquishes a power over either:

o An insurance policy that, without the transfer or relinquishment, would have been included in decedent’s GE under § 2042 OR

o An interest in property or power over property that, if not transferred or relinquished, would have required an amount to be included in decedent’s GE under § 2036, § 2037, or § 2038

- Outright transfers of property or cash that, if retained, would have been included in decedent’s GE under § 2033 are unaffected by and NOT included under §2035(a)

- Use of other sectionso § 2042 – If donor transfers to donee a life insurance policy within 3 years

of death that, if he would have held on to, would have been included under § 2042, § 2035 pulls the life insurance policy back into the donor’s GE at its FMV on the date of donor’s death

o § 2036 – If donor makes a transfer, retains a life estate, and holds the life estate until death, § 2036(a)(1) applies to pull the entire trust corpus into the donor’s GE; if the donor gratuitously transfers the life estate to the remainder person or other person within 3 years of death, § 2035 applies to treat the transfer as never being made and include the entire trust corpus in the GE

o § 2037 – If the decedent retained a reversionary interest under this section and, within 3 years of death transferred it to another, the amount of

inclusion under § 2035 is the same amount that would have resulted under § 2037 had the transfer not been made

- EXCEPTIONS TO § 2035(a) INCLUSIONo § 2035(d) – Bona Fide Sales – If, in connection with the transfer, the

decedent receives full consideration in money or money’s worth, then the transfer amounts only to a substitution or exchange of assets, the GE is not reduced, and no estate tax is avoided

Where there is a partial consideration, § 2035(d) is inapplicable, but § 2043 provides inclusion relief

o § 2035(e) – Certain Transfers from Revocable Trusts - § 2035 and §2038 are inapplicable to “any transfer from any portion of the trust during any period that the portion was treated under § 676 as owned by the decedent by reason of power in the grantor”

§ 676 – Grantor will be treated as owner of any portion of a trust where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a non-adverse party

- Amount to be Included under § 2035o § 2035(a) should result in inclusion in the decedent’s GE of an amount

commensurate with that required to be included under § 2036, § 2037, § 2038, or § 2042 if the transfer that made them inoperable had not occurred

o The GE does not include income earned by the property after the gift is made, even if the income is added to the corpus of a trust that was created within the 3 year period, provided that the decedent had no interest whatever in or control over the income when the decedent died

o NOT INCLUDED Increase in value of improvements made by donee after the gift Post transfer stock dividends, even if payable before the

transferor’s death, at least if they represent a capitalization of post-transfer earnings

o INCLUDED Shares received in a post-transfer stock split

- § 2035(b) – Gift Tax Gross-Up Ruleo § 2035(b) requires the federal gift tax paid by the decedent or the

decedent’s estate on any transfers made after 1976 by the decedent or decedent’s spouse within 3 years of decedent’s death to be included in decedent’s GE

o If the decedent’s spouse makes a transfer, the spouses elect gift splitting, and the decedent dies within 3 years, the tax the decedent paid will be pulled into the decedent’s GE under § 2035(b)

o If the decedent makes a transfer and gift splitting is elected and the decedent pays the full amount of the tax on the entire transfer, the full tax is pulled into the decedent’s GE

o Can be applied to stocks, bonds, notes, contract right that is property subject to transfer, and insurance polices resulting in the imposition of gift tax

Problem- Insurance Proceeds : Include the FMV of the proceeds at the date of death

o Where we have a situation where some of the proceeds are paid by the person receiving the insurance policy sum, we allocate the proceeds according to the percentage of premiums paid by decedent and the person receiving the sum. (Estate of Silverman)

Ex: If 88.71 percent of all premiums are paid by decedent, $8,871 of the $10,000 insurance proceeds is included in the decedent’s gross estate.

Assignment #4

Section 2036 – Transfers with Retained Life Estate- § 2036(a) – value of the GE shall include the value of all property to the extent of

any interest therein of which the decedent has made a transfer under which he has retained for his life or any time not ascertainable without reference of his death –

o (1) – possession or enjoyment of, or the right to income from, propertyo (2) – the right, either alone or in conjunction with any person, to designate

the persons who shall possess or enjoy the property or income therefrom- § 2036(b) – voting rights in a corporation are retaining enjoyment of corporation,

and the inclusion of the stock is included in decedent’s GE- Sale for Full Consideration

o The value at the time of transfer of the transferred interests that would be included in the GE if there was no consideration paid should be used as the measure to determine whether the consideration received is sufficient to negate § 2036

EX: If A transfers property to R, retaining a life estate, a payment equal to the value of R’s remainder interest should defeat the section

§ 2036 is inapplicable where consideration is received in a bona fide sale for the full value of the remainder interest

- § 2036 Trilogy: Has the decedent retained an interest:o For his lifeo For a period not ascertainable without reference to his death

EX: D entitled to income payments paid quarterly for life, but D is not to receive the trust income for the quarter in which he dies. This trust provision is not ascertainable without reference to D’s death

o For a period that does not in fact end before his death EX: D entitled to income for ten years, at the end, the trust income

terminates and the corpus to be given to D’s child. If D dies within this ten year period, D retains an interest for a period that did “not in fact end before his death”

- § 2036(a)(1) – invoked if D retains “the possession or enjoyment of” or the “right to income from” the transferred property or property interest

o “Possession or Enjoyment”

Applies if: one makes a gift of a painting for life, makes a gift of a residence but reserves a right to live in it for life, or if the transferred property produces income which the transferor remains entitled

o “Right to Income from” This encompasses a right to have the income used for the

transferor’s benefit, must be more than a mere expectancy, but transferor need not have the right to receive income directly

Applies if used to discharge the legal obligation of decedent (Reg. § 20.2036-1(b)(2))

Does NOT apply where the trustees of whom decedent is not one are merely given the discretion to use income for support of decedent’s dependent

Does NOT apply where upon the severance of the obligation (i.e. the child reaching the age of majority, property transferred under agreement works as an effective release of legal obligation)

§ 2036 is the “right to income” which the decedent has if the decedent can direct that it be used for the decedent’s benefit that brings the section into play

If the discharge of obligation is a certain amount and the trust earns more than that, and the decedent has no direct or indirect interest in the excess income and no control over its disposition, the decedent will only has a right to a portion of the income and that amount will be included and not the excess

o Enjoyment “Retained” Enjoyment to property is retained in the absence of an enforceable

right Is there the necessary implied agreement or understanding in the

case of a residence if the transferor merely continues to live in the residence

Transferee is spouse of transferor – courts say NO Transferee is family member other than spouse – courts

MIXED If the family member does not co-occupy the house with

the transferor, transferor retained an interest in the residence under an implied agreement with the family member

- § 2036(a)(2) – includable in GE if transferor retains right for life (or other trilogy) to say who may enjoy the transferred property, or the income therefrom, even if the transferor has put it beyond the power to claim enjoyment or income for the transferor’s own benefit

o Right to Designate Retained Indirectly Applies if: decedent has the right to discharge the trustee and name

the decedent as trustee, the decedent has control even if decedent

never becomes trustee and even if the decedent has the right only in the case of the trustee’s inability to serve, resignation, or removal by a proper court for cause

o Illusory Control If the decedent may direct income to others only with the consent

of some other person, decedent is still within the provision; this is so even if the interest of the other is adverse

Applies where the right to designate is in another but is subject to the decedent’s veto or consent

o Right to Designate Who Benefits The right to designate need not be authority to decide at large who

shall enjoy the property or receive its income. Authority to choose between two named beneficiaries is enough.

O’Malley: there mere right to direct the accumulation of trust income that would otherwise be payable to named beneficiaries is a proscribed power to designate under (2), if the accumulation will eventually or only probably pass to a third person remainderperson

§ 2036 v. § 2038 If the power to accumulate is a power to alter, at least a

power to alter as to the time of enjoyment, as it should be viewed, the application of § 2038 would include only the interest subject to altercation

If the power to accumulate is a right to designate persons who will enjoy the property, as it should only sometimes be, then the entire trust corpus may be swept into grantor’s GE

In O’Malley, the accumulated income might ultimately pass to third parties, not merely the named beneficiary or the beneficiary’s estate. This is the ability to shift income to others who shall enjoy the income and is a power to designate

- Indirect Interests or Controlso Commercial Transactions – Where a donor transfers land to another but

they agree that the donor will use the land rent-free for the donor’s lifetime, there is a retention of enjoyment of the property

o Transfers of Stock § 2036(b) – the direct or indirect retention of voting rights in a

“controlled corporation” is considered a retention of the enjoyment of transferred property so as to trigger application of § 2036(a)(1)

Requirements: Must be controlled corporation

o The ownership of stock or voting rights must have been at a time after the decedent’s transfer of the property to the trust and during the three year period ending with decedent’s death

Decedent must have retained voting rights with respect to the corporation

o This requirement is met if the decedent transferred stock to a trust naming decedent as trustee with the trustee having the power to vote the stock

Also look at others on p. 4-213- Amount to be Included

o § 2036 includes in the GE the date of death value of the property interest transferred in the prescribed manner

Assignment #5

Section 2037 – Transfers taking effect at Death- § 2037 – shall include in the estate the value of property if the decedent has made

a transfer (exception clause), by trust or otherwise, if:o Possession or enjoyment obtained by surviving the decedent (person focus

of inquiry must survive decedent) ANDo Decedent has retained reversionary interest by expressed clause or by

operation of law ANDo Value of the reversionary interest exceeds 5% of the value of the entire

property (ex: trust corpus)- Exception - Full and adequate consideration, section will not apply- An interest in transferred property is NOT includable in a decedent’s GE under

§2037 if possession or enjoyment of the property could have been obtained through the exercise of a general power of appointment (§ 2041) which was exercisable immediately before the decedent’s death

Assignment #6

Section 2038 – Revocable Transfers- § 2038 will tax only the interest subject to the minor change; if § 2036 applies, it

taxes the entire property in which the changeable interest exists- Powers by the Decedent

o Power to Revoke Power of Attorney – p. 4-255 Reasons for revocable trusts – p. 2-256, note 28

o Power to Alter or Amend Power to change beneficial interests among a limited group of

persons, such as the power to shift proportionate interests among persons already enjoying rights as beneficiaries is within the section

Revenue Ruling 80-255 : Decedent’s ability to have more children and thereby add new beneficiaries to a trust created by him was not a power to change beneficial interests

o Administrative Powers

Mere administrative powers are not within statuteo Powers of Investment

Investment discretion that is subject to judicial restraint should be classified as a mere administrative or managerial power

If individuals have uncontrolled power over trust investments and it is obvious that the remainder person’s interest is threatened if the power holder invests in speculative high-yield mortgages and the income beneficiaries’ interest may be eliminated if the power holder opts for non-dividend-paying growth stocks, it will exceed authority

o Power to Terminate Only interests taxed are those whose enjoyment was subject to

change through the exercise of such powers (even if favorable)o Gifts to Minors

Property transferred by decedent is includable in GE if decedent names himself custodian and the decedent dies before minor reaches the age of majority

To get exemption, name someone other than decedent custodian

o Power in “Whatever Capacity”- Jennings v. Smith: Decedent’s power as trustee to pay out income to the son or his

children if necessary … “in accordance with the station in life to which he belongs” is NOT SUBJECT TO § 2038

o However, “if circumstances so require” is an ascertainable standard and requires INCLUSION

o The difference is that, in the first, decedent was carrying out terms of the trust; the second, trust is left up to the decedent to make up terms or conditions for invasions of the corpus

- Look at lists of “ascertainable standards” for inclusion and exclusion under § 2038 – p. 4-263, notes 64 and 65

o Between § 2036 and § 2038, what constitutes a standard for one is the standard for the other

- EXCEPTION where decedent transferor may hold power with others that will be disregarded under § 2038, relies on 2 FACTORS:

o 1) Required consent of all interested persons, vested and contingento 2) A provision of local law that would allow such persons to alter the

terms of the trust in any event and the power adds nothing to the rights of the parties under local law

- § 2035(e) : For purposes of 2035 and 2038, any transfer of portion of a trust will be treated as transfer made directly by the decedent

o Transfers from the trust or relinquishment of such power is an outright gift and no longer within the sections 2035 and 2038

- QUESTION: What is the value of the interest in property, the enjoyment of which is subject to a power held by the decedent, either alone or with others

o The answer to this is the amount to be included in the GE- Difference between § 2036 and § 2038

o The principle difference is the amount to be included in decedent’s GE If decedent has retained the power to designate who should have

the income from property transferred for one of the prescribed periods, the value of the entire property is included under § 2036(a)(2) – for life or any period that can not be ascertained without the death of decedent

Under § 2038, only the value of the alterable income interest will be included

Revenue Ruling 70-513: - G → T income to A for life, remainder to A’s estate

o Provision provided that the trustees could terminate the trust and pay the corpus over to A; grantor had the power to veto any action by trustees

- Result: Only the value of the remainder interest is includable in the GE of grantor because A’s life estate was not subject to change by the decedent’s power

- The amount includable under § 2038 is limited to the value of the property interest that was subject to the decedent’s power

Assignment #7

§ 2039 – Annuities - General Rule : the value of amounts receivable by beneficiaries by reason of their

surviving the decedent is to be included in decedent’s GE- EXCEPTIONS :

o Life Insurance Policies - § 2039 is inapplicable to insurance under policies on the life of the decedent; these proceeds are includable in the GE under § 2042

- The applicability of § 2039 and § 2042 depend on the nature of the contract at the time of the decedent’s death

o Reg. § 20.2039-1(d) If a retirement income policy with death benefits has begun to be

paid to the decedent during decedent’s life, there is not an insurance element at death and § 2039 controls the amount to be included in GE

If the decedent dies after the reserve value equals the death benefit, there is no insurance element and § 2039 controls, even though the policy may not have matured before the decedent’s death

A contract under which the death benefit could never exceed the total premiums paid, plus interest, contains no insurance element and § 2039 controls

- Requirements : GE will include the value of the annuity or other payment receivable if:

o Under a contract or agreement Include understandings, arrangements, or plans NOT § 2039 if:

Benefit payments paid under public laws where the decedent has no voice in the designation of beneficiaries or payments to them

o EX: veterans benefits to a surviving spouse Where either the decedent or beneficiaries have only a

mere expectancy If employer retains complete discretion to determine

whether payments will be made to decedent or survivors Salary payments due to decedent at death

o If either two things: Annuity or other payment was payable to the decedent, OR

Satisfied where decedent at death was actually receiving payments without regard to whether the decedent could require their continuation

Decedent possessed the right to receive such annuity or payment, either alone or in conjunction with another

Satisfied if the decedent had an enforceable right to receive payments at some time in the future; whether or not, at the time of his death, he had a present right to receive payments

If payments have not commenced, § 2039 will not apply unless, at death, decedent’s rights to future payments are nonforfeitable

o For the decedent’s life or similar period The trilogy: 1) for life, 2) for a period not ascertainable without

reference to death, or 3) for a period that did not end before his death

- Nature of Beneficiaries’ Interesto A forfeiture provision in connection with the beneficiaries’ interest will

not defeat § 2039, but will be taken into consideration in the valuation of interest

o An employer who has contributed to the cost of decedent and beneficiary’s interest will not be treated as a beneficiary, even though he is entitled to a refund of contributions at decedent’s death

- Amount to be Included o Valuation

Annuities are valued in accordance with the cost of “comparable” contracts issued by the company

The test for value is what it would cost at the date of death to acquire a policy for the survivor with benefits such as exist under the contract

If not paid by the company, a replacement-cost approach is used, using the valuation tables

If the term is expressed in a lump sum, it is the commuted value that is the present value of the rights to future payments

o Percentage Restriction

§ 2039(b) – the amount included is only such part of the value of the annuity or other payment receivable by beneficiaries as is proportionate to the part of the purchase price contributed by decedent

Amount Included = [(Decedent’s contribution) / (purchase price)] x (Value of Annuity)

A contribution toward the purchase price of a contract by employer or former employer of decedent by reason of decedent’s employment, is treated as a contribution by decedent

Assignment #8

§ 2040 – Joint Interests- Four instances

o If decedent’s and other co-owners’ interests were acquired by gift, bequest, devise, etc., then only the decedent’s proportionate share is included in GE

o If decedent’s wealth created all joint interests, all is included in GEo If decedent’s interest was acquired entirely gratuitously from another co-

owner, nothing is included in GEo If wealth from both decedent and co-owner, it is the portion of the

property commensurate with the decedent’s share of the cost of acquisition- Types of property interests

o Joint Tenantso Tenants by Entiretyo Joint Bank Accounts – where deposit is payable to either co-owner or

survivor o A “bond or instrument” in the name of the decedent and any other person

and payable to either or the survivor In the case of US savings bonds, registration or reissuance is

needed to convert joint ownership into outright ownership outside the reach of § 2040

- Things to Remember under this section:o Decedent does not have to have a transferable property interest when he

dies to have liabilityo The value of decedent’s jointly held property is not a measure of what is

included in GEo Payment of the gift tax does not make the property less subject to estate

tax- Amount to be Included

o § 2040 includes the value of jointly held property, except to the extent that the surviving tenant or tenants contributed to the cost of the acquisition of the property

o Decedent’s estate includes the entire value of the property, except such part as may be shown to have originally belonged to the survivor and never to have been received or acquired by the survivor from the decedent

for less than an adequate and full consideration in money or money’s worth

o Estate must prove to things to have any amount excluded: That the surviving joint tenant did make a contribution to the

acquisition of property or did receive the property jointly with the decedent by gift, bequest, devise, or inheritance from a third party AND

That the contribution does not represent cash or property acquired from the decedent for less than an adequate and full consideration

- Survivor’s Contribution Ratioo Amt Excluded = [(Survivors Cont.) / (Entire Consideration)] x (Entire

value of Property at death of Decedent)- Property Acquired by Gift from Others

o Persons acquiring are treated just as if each had contributed an equal part of the purchase price

EX: 3 people getting: each has 1/3 taxed in GE- Endicott Trust Co. v. US: Court held that where D transfers property held by D to

A, both holding an interest as joint tenants, then sell the property and use the proceeds to purchase another land and hold as joint tenants, that the whole value of the purchased property was included in D’s GE

o Courts have rejected the contention that only half should be proportioned to D and the other half be included in A’s GE

- Termination Prior to Deatho If Decedent provides all of the consideration for property held by the

decedent and someone other than the spouse as joint tenants and the decedent predeceases that person, the whole value of the property is included in the GE

o If, before the decedent’s death, they sever the joint tenancy to make it a tenancy in common, only one half of the property is included in the GE under § 2033

o If decedent and other joint tenant transfer the property outright to a third party gratuitously, even if within 3 years of decedent’s death, no property is included in the GE of decedent

o If decedent and other joint tenant transfer property in the trust reserving a life estate for their joint lives, one half of the property is includable in the decedent’s GE

- § 2040(b) Exceptiono § 2040(b) General Rule : One-half of the value of the property jointly

owned is included in the estate of the predeceasing tenant in the case of a “qualified joint interest”

A “qualified joint interest” is when the only co-owners are husband and wife and there is a right of survivorship

o Two Exceptions to the General Rule The rule is inapplicable to qualified joint interest created prior to

1977 It is inapplicable where the surviving spouse is not a US citizen

If not a US citizen, § 2040(a) controls If prior to filing the decedent’s estate tax return, the

surviving spouse becomes a US citizen and the surviving spouse was a US resident at all times after at all times after decedent’s death and prior to becoming a citizen

Assignment #9

Section 2041 – Powers of Appointment- Powers of Appointment

o A person who has a power of appointment over property has the authority to determine who, possibly including the individual, will become the beneficial owner of the property

This authority is NOT considered an interest in property that is taxable on that individual’s GE under § 2033

- Powers within § 2041o Power of appointment is a right that may be exercised either during life or

by will, not necessarily both, to direct who shall become the owner of the property subject to the power

o Power of appointment exists if the decedent has the power to affect the beneficial enjoyment of a trust property or its income by altering, amending, or revoking a trust instrument or terminating the trust

o If decedent has an actual ownership interest in property, § 2033 brings the value of that interest into the decedent’s GE even if the decedent also has a power of appointment over the interest that, under § 2041, would require something less or perhaps nothing at all to be included

- Exceptions to the General Power of Appointment o If a power may be exercised only in accordance with an ascertainable

standard relating to the decedent’s health, education, support, or maintenance, it is NOT treated as a general power of appointment (§2041(b)(1)(A))

Must be within an ascertainable standard – see p. 4-320o If a pre-1942 power can be exercised by the decedent only in conjunction

with some other person, it is NOT a general power for estate tax purposes (§2041(b)(1)(B))

o Three exceptions provided relating to post-1942 powers that may be exercised by the decedent only in conjunction with another person (§2041(b)(1)(C))

If the decedent can exercise only in conjunction with its creator, the decedent does not have a general power of appointment

In these circumstances, § 2036 and § 2038 may bring the value of the property or some part of it into the estate of the creator of the power for federal estate tax purposes

If the decedent can exercise a power only in conjunction with someone who has a substantial interest in the appointive property, which interest will be adversely affected by an exercise of the

power in favor of the decedent, the decedent does not have a general power of appointment

If the decedent’s power to appoint to himself, his estate, his creditors, or the creditors of his estate can be exercised only in conjunction with one other person in whose favor the power may also be exercised, only one half of the value of the property will be treated as subject to the general power of appointment in the decedent

This reasoning carries over to a situation in which more than one other person in whose favor the power may be exercised is required to join

o If there are two other possible appointees with whom the decedent must join in order to exercise the power, only one-third of the value of the property is treated as subject to a general power of appointment for the purpose of determining the decedent’s GE

- When the decedent has a power of appointment but no interest recognized within § 2033, and when other sections are likewise inapplicable, what, if anything, may be included in the decedent’s GE must be determined under § 2041

- Pre-1942 Powerso A pre-1942 power of appointment held by the decedent gives rise to estate

tax inclusion only if the power is a general power and the decedent exercises that power

o Exercise of Power: The power must be exercised by either will or in some other manner akin to testamentary disposition in order to cause the estate tax liability

If a pre-1942 general power is exercised by a disposition of a type that would be caught by §§ 2035-2038 if an actual transfer of property were involved, estate tax liability results (§2041(a)(1)(B))

o Complete Release: Statute specifies that a complete release of general pre-1942 power is not to be deemed an exercise of the power

Complete Release will not cause estate tax liability because it is NOT an exercise of a general power

o Partial Release: The exercise of a pre-1942 power that was a general power but that has been partially released so as to make it no longer a general power will constitute the exercise of a general power of appointment

- Post-1942 Powerso Difference between pre- and post-1942 powers are that the later created

powers need not be exercised by the decedent in order to cause estate tax liability; estate tax liability may result even from a complete release

o Ways to have the “Power” of Post-1942 under § 2041 Decedent has possession at the time of death

A person can have a general power even though at all times after its creation, the person is under a legal disability to exercise it

o Incompetency of a holder of a power will not make the power unexercisable for estate tax purposes

Even if the decedent has only an inter vivos power that cannot be exercised by will, the decedent is treated as having the power at death

o Snyder v. US: § 2041 applicable even though the decedent could exercise the power only during life

Mere possession of a post-1942 general power of appointment is sufficient to cause inclusion of the property in a decedent’s GE even though the decedent is unaware of the power’s existence

If the decedent’s power is exercisable only upon the happening of some event (ex: turning the age of 30), and the event has not occurred before the decedent’s death (he has not reached 30, he is 24), the decedent does not have a power at death (Reg. § 20.2041-3(b))

o However, if the event is within decedent’s control (ex: dismissal of trustee if one has such a right and the right to appoint oneself, and if one can thus acquire a power exercisable by the trustee), decedent will be treated as possessing the power even though the decedent has taken no action to obtain the power, and even though the decedent is required to give the trustee notice prior to dismissal

Decedent completes a pre-death exercise of a post-1942 general power in a testamentary fashion

This requires inclusion of the value of the property that is subject to the power in the GE

If decedent has exercised a power by appointing to the decedent, such a lifetime exercise of a power is not a testamentary exercise within the statute because the decedent has made no transfer to another such as is contemplated by §§ 2035-2038

Interaction between § 2041 and § 2035o If a decedent held a post-1942 power that the

decedent previously exercised retaining a § 2036, 2037, or 2038 interest or power AND the decedent then relinquished such interest or power within 3 years of death, § 2041(a)(2) would apply, interacting with § 2035

Lifetime release of power by the decedent is the equivalent of an exercise of the power

If a post-1942 power is released during life, estate tax liability with respect to the property subject to the power depends on the manner of release

If a general power is released and the power holder retains no interest in or power over the property, there are no estate tax consequences, even though the release occurs within 3 years of power holder’s death

An individual who is given a post-1942 general power of appointment may avoid any tax consequences with respect to the power

§ 2518 provides that a person making a qualified disclaimer with respect to any interest in property that is subject to estate, gift, and generation skipping transfer taxes to avoid the tax liability on these transfers

A “release of a post-1942 power” includes a lapse of a power during donee’s lifetime

Five-or-Five Rule: the general power of appointment rule is inapplicable if the power that lapsed was such that during any calendar year its exercise was limited to $5K or 5% of the value of the property out of which the power could have been satisfied, whichever is greater

If the lapsed power exceeds $5K or 5%, its lapse is to be treated as a release only to the extent of the excess

Lapse rule only applies during life- Amount to be Included

o Pre-1942 - § 2041 includes in the GE the date of death or alternate value of property with respect to which the power was taxably exercised

o Post-1942 - § 2041 includes the date of death or alternate value of the property subject to the power the decedent had at death or with respect to which the decedent had in a taxable manner exercised or released the power

o The power itself need not be valued; IT IS THE VALUE OF THE PROPERTY THAT THE DECEDENT COULD OR DID APPOINT THAT IS BROUGHT INTO THE DECEDENT’S GE

Assignment #10

Section 2042 – Proceeds of Life Insurance- The proceeds of insurance policies on a decedent’s life are to be included in the

insured’s GE if they are:o Receivable by the executoro Receivable by other beneficiaries and the decedent had any incidents of

ownership in the policy at death- This section deals with only insurance policies on DECEDENT’S LIFE

o Not applicable where decedent owns insurance policy in the life of another and the decedent predeceases that person (§ 2033 would apply)

o Not applicable where decedent makes a lifetime gratuitous transfer of an insurance policy in another’s life

- There must be an element of risk shifting or risk distribution of premature death in order to fall under this section

- Death benefits not classified as insurance may be taxed as annuities, as indicated in the discussion of § 2039, and if such amounts are payable to the estate of the decedent as of right, they will be included in the GE

- Amounts Received by Executoro Proceeds are included in the GE that are “receivable by the executor” if

they are “receivable by or for the benefit of the estate” The test is whether the proceeds are payable into the estate or

legally committed to the discharge of obligations of the estateo If insurance proceeds are payable to a named beneficiary but are in fact

used, though not legally required to be used, for estate obligations, the named beneficiary has made a gift to estate beneficiaries

o An insurance payable to a creditor as security for a loan to decedent is “receivable by the executor,” presumably up to the amount of the loan, although the amount included may be offset as a deduction under §2053

o Simultaneous Death of Insured and Primary Benficiary if beneficiary is not the owner of the policy on the insured’s life – goes to secondary beneficary

- Amounts Received by Other Beneficiarieso If at death, decedent had any of the incidents of ownership in the policy,

exercisable alone or in conjunction with any other person, the proceeds form a part of the decedent’s GE

o Full ownership is NOT required under § 2042; if the decedent had at death one or more rights that go to make up complete ownership, it is enough to bring the proceeds of the policy into the decedent’s estate

o Some incidents of ownership: Right of the insured or his estate to the economic benefits of the

insurance Power to change the beneficiary Power to surrender or cancel the policy Power to assign the policy Power to revoke the assignment Power to pledge the policy for a loan Power to obtain from the insurer a loan against the surrender value

of the policyo Reversionary Interest

A reversionary interest is an incident of ownership only if the value of the reversionary interest exceeded 5% of the value of the policy immediately before the decedent’s death

It is immaterial whether the reversionary interest arose by express provision in the insurance policy or any instrument or transfer by operation of law

Reversionary interest includes “a possibility that the policy, or the proceeds of the policy, may return to the decedent or his estate, or may be subject to a power of disposition by him”

o Buy and Sell Agreements – p. 4-354- Incidents Incidentally Held

o Stockholder in a Corporation If the proceeds of a policy on the life of a controlling shareholder

are payable to the corporation, the corporation’s incidents of ownership will not be attributed to the decedent and §2042 will not apply

However, if the proceeds are not paid to or for the benefit of the corporation, if the decedent has legal or equitable ownership of more than 50% of the combined voting power of the corporation, the corporation’s incidents of ownership will be attributed to the decedent

o Partnership’s Insurance on Partner The insured partner has ownership interests “in connection with”

the other partners, which brings the insurance proceeds into the partner’s estate under § 2042

However, if the policy is an asset of the partnership, it may enter into the measure of the value of the deceased partner’s interest includable in the partner’s estate under § 2033

Revenue Ruling 83-147 : NO § 2042 where the partnership agreement precluded insured partner from exercising incidents of ownership

- Assignment of Group Term Insuranceo An employee may effectively assign a nonconvertible group policy if the

employee assigns all of the employee’s rights.o Even if employee has a conversion privilege that would convert the policy

into an individual policy should the individual cease employment, it is not an incident of ownership and will not be included in the GE

- Amount to be Includedo If the estate or beneficiary can take a lump sum as proceeds of the policy,

it is the full amount receivable to be includedo If payments are to be paid periodically in the form of an annuity with no

option to take a lump sum, the amount receivable is the “sum used by the insurance company in determining the amount of the annuity”

However, if the periodic payments are merely payments of interest on the proceeds and not an annuity, the face amount of the policy is included

Assignment #14

§ 2044- If the transferee spouse makes no inter vivos disposition of any part of the

qualifying income interest during the transferee’s life, § 2044(a) includes the full

value of the property in which the transferee had the qualifying income interest in the transferee’s GE

o The full value of the property is included even if the transferor spouse’s transfer qualified for a § 2503(b) annual exclusion (Reg. § 20.2044-1(a))

o If the transferor spouse’s executor treated only a portion of the property as qualified income property, only that portion is included in the GE

§ 2056 – Testamentary Transfers to Surviving Spouse- § 2056 – Congress allows a marital deduction to a transferor spouse or transferor

spouse’s estate for the total value of a gift or bequest of property to a transferee spouse, even though the transferee receives only an estate (“qualifying income interest”) for the transferee’s life and all other interests in the property (including the remainder) to third parties

- Two Basic Features of the Marital Deductiono The estate is allowed a deduction under § 2056(a) for the value of any

interest in property that either passes at death or has passed during life from a decedent spouse to a surviving spouse

The deduction is available for property interests that do not pass by will or intestacy (property not in the probate estate)

o The interest passing to the surviving spouse MUST be a “deductible interest” in property in order to qualify for the marital deduction. It is deductible if:

Included in D’s GE Not otherwise deductible under some other estate tax provision Not a terminable interest

Terminable interest is one that, if disposed by gift or at death, may subject the transfer to the imposition of either gift or estate tax

- § 2056(a) – the value of the property interest can enter into the computation of the marital deduction “only to the extent that such interest is included in determining the value of the GE”

- Terminable Interest Ruleo Renders an interest in property passing to a surviving spouse non-

deductible if: An interest in such property passes or has passed from the

decedent to any person other than surviving spouse Has to be for LESS than full and adequate consideration in

money or money’s worth If by reason of passing, such person may possess or enjoy any part

of such property after such termination or failure of the interest so passing to the surviving spouse

o The marital deduction is lost ONLY if ALL three elements of the terminal interest rule are present

o Terminable Interests: A legal life estate or life interest in a trust is terminable because it

will terminate or fail upon the occurrence of an event

Interest is terminable if it will terminate or fail upon a “lapse of time” (term of years)

The occurrence of a contingency (ex: surviving spouse’s remarriage)

Failure of an event or contingency to occur (ex: daughter does not marry by the time she is 30 years old)

o Jackson v. US: the issue of terminability and, accordingly, deductibility must be determined at the time of the decedent’s death; subsequent events that may render an interest indefeasible do not cure a marital deduction effect

o A widow’s allowance is non-terminable ONLY if it vest immediately at death – it must survive the spouse’s death or remarriage

o The marital deduction is not defeated by a bequest of a terminable interest to another prior to a vested interest in the surviving spouse

o Terminal Interests that ARE Deductible: Patent, survivorship annuity paid only to a surviving spouse,

installment sales payment, and corporate recapitalization plan directed by the decedent’s will

If a terminable interest passing to a spouse can be a deductible interest, it is also true that an interest in property can pass to someone other than the spouse without defeating the marital deduction for the interest in the same property that passes to the spouse

EX: D leaves Blackacre to S and child as tenants in common, S’s interest qualifies as a deduction

o Executor-Purchaser Provision : If a decedent directs an executor or trustee to acquire for a surviving spouse a terminable interest, the terminable interest passing to the surviving spouse is disqualified even if no interest in the property passes or has passed to another

o Tainted-Asset Rule : where a bequest may be satisfied out of assets that would not qualify for the marital deduction

It is enough that the bequest could be satisfied out of the proceeds of such assets in order to run afoul of the rule

This rule requires a reduction in the value of the interests passing to the surviving spouse in the amount of the value of the tainted assets

- Terminal Interests that DO Qualifyo Common Disaster and Related Provisions

§ 2056(b)(3) – Interest passing to a surviving spouse is NOT to be considered a terminable interest if it will FAIL ONLY UPON EITHER OF THE THREE:

Surviving spouse’s death within 6 months after the decedent’s death

Surviving spouse’s death as a result of a common disaster, causing the death of the decedent as well

Occurrence of either of such events if such failure does NOT occur

This exception can be invoked ONLY if contingent failure of the surviving spouse’s interest is necessarily limited to the 6 months or common disaster situations

o Life Interests with Powers § 2035(b)(5) – exception to allow the marital deduction where the

value of the property over which the surviving spouse has a power of appointment will be subject to either the estate tax or the gift tax in the case of such surviving spouse

The spouse must be the holder of the interest – there must be no power in any other person to appoint any part of the interest to any person other than the surviving spouse

These provisions have the effect of allowing a marital deduction with respect to the value of the property transferred in trust, by or at the direction of the decedent, where the surviving spouse, by reason to her right to the income and a power of appointment, is the virtual owner of the property

Requirements that MUST BE MET if the exception is to apply: The surviving spouse MUST be entitled for life to ALL of

the income from the entire interest or a specific portion of the entire interest, or to a specific portion of all the income from the entire interest

o This requirement is met if the surviving spouse gets substantially the degree of beneficial enjoyment of the trust property during life which the principles of the law of trusts accord to a person who is unqualifiedly designated as the life beneficiary of the trust

o NOT likely to be defeated by trust provisions: Requiring stock dividends or the proceeds

from the conversion of trust assets to be treated as corpus OR

Prohibiting assignment or alienation of the spouse’s right to income

o If the specific portions identified for income interest and general power of appointment purposes are in differing amounts, § 2056(b)(5) is applicable only to the smaller of the portions

The income payable to the surviving spouse MUST be payable annually or at more frequent intervals

The surviving spouse MUST have the power to appoint the entire interest or the specific portion to either surviving spouse or spouse’s estate

The power in the surviving spouse MUST be exercisable by the spouse alone and (either by will or during life) MUST be exercisable in ALL events

The entire interest or the specific portion MUST NOT be subject to a power in any other person to appoint any part to any person other than the surviving spouse

o Insurance With Powers Insurance proceeds that pass outright and unconditionally to a

surviving spouse constitute a “deductible interest” for marital deduction purposes

The insurance exception has 5 Requirements (similar to the exception concerning life interests with powers) – p. 4-158

o Election with Respect to Life Estate for Surviving Spouse § 2056(b)(7) – permits the entire value of property disposed of in

this manner to qualify for the marital deduction The statute provides that, in the case of a proper election,

“no part of the property is treated as passing to anyone other than the surviving spouse” even though the surviving spouse has only a life interest and the remainder actually passes to others

Three Requirements that MUST be Met: Property MUST pass from the decedent

o The income interest, as opposed to the entire corpus, does qualify for a marital deduction

Surviving spouse MUST have a qualifying income interest for life in the property

o Two Requirements: Surviving spouse MUST have a right to all

the income from the property for spouse’s life, payable annually or more frequently

No one may have the power to appoint any part of the property during spouse’s lifetime except for spouse’s benefit

o Income Interest: the surviving spouse’s income interest must generally commence at decedent spouse’s death and extend for surviving spouse’s entire life

o Powers Over Property During the Surviving Spouse’s Life: An interest is a qualifying income interest ONLY if NO ONE, including surviving spouse, has a power to appoint the underlying property to anyone other than the surviving spouse during spouse’s lifetime

Decedent’s executor MUST elect to apply § 2056(b)(7) Joint and Mutual Wills – p. 5-175 Charitable Remainder Trusts – p. 5-178