A life estate vests the beneficial use of property in a person for their lifetime. The person who
holds the life estate is called the life tenant. The life tenant may have the right to occupy a
residential property and/or the right to income from property that is rented or leased to others.
Unless specially restricted, a life estate can be sold, leased or mortgaged. Because beneficial
use of the property accompanies a life estate, the creation, transfer or termination of a life
estate is a change of ownership under Proposition 13. Under certain circumstances that change
of ownership can lead to a reappraisal of the property and the establishment of a new base year
value. The persons who get the property at the termination of the life estate are either the
remainder holders (if other than the original grantor of the life estate) or the reversion holders
if the property comes back to the person(s) who granted the life estate.
An example of a retained life estate is a husband and wife who grant their property as a gift to
their children but retain the right to live in the property for their lifetimes. Because beneficial use
was retained by the parents and does not transfer to the children until the death of the last life
tenant, there is no change of ownership until that event occurs. The eventual transfer upon
death to the remainder holders (children) may not trigger a reappraisal because parent-to-child
transfers may qualify for exclusion from reappraisal.
A retained life estate can have different consequences. The owners of a home and workshop
occupying 1 acre of a 15 acre vineyard parcel decide that they can no longer manage the
vineyard or afford to replant it. They sell the parcel to strangers and retain a life estate only
in the residence and the workshop. Because the balance of the property was transferred free
of a life estate, i.e. the full beneficial use of the vineyard transferred to the new buyer, this
office would reappraise the 14 acres of vineyard land and the vines and non-living
improvements. The original owners would retain their base year value on the home and
workshop, and reappraisal for change of ownership of that acre and improvements would not
take place until the death that terminates the life estate.
A granted life estate occurs when Mrs. Jones decides to transfer her home to her children and
move to a retirement community while granting a life estate in the home to her good friend, Mrs.
Smith. This grant of a life estate is a change of ownership and would subject the prope r t y t o
reappraisal since Mrs. Smith is neither the parent nor the child of Mrs. Jones. After 5 years Mrs.
Smith decides to relinquish her life estate and turn the property over to Mrs. Jones's children.
This termination of the life estate is another change of ownership. However, since the remainder
interest is now going from the original grantor, Mrs. Jones, to her children, they can claim a
parent-to-child(ren) exclusion from reappraisal for this second change of ownership. Assuming
the exclusion is granted, the children would retain the base year value established at the grant
of the life estate to Mrs. Smith plus inflationary adjustments as permitted under Proposition 13,
not Mrs. Jones's Proposition 13 base year value with inflationary adjustments from her original
Life estates are usefu l in estate planning. However, granting or retaining a life estate may have
gift, estate, income tax and other consequences beyond the scope of this column. Anyone
considering retaining or granting a life estate should consult an attorney and financial advisor
before proceeding.
Probate, Trusts & Estates
Artificial Aspects of the Estate Tax System
Before 1976, the gross estate included the value of all gifts made "in contemplation of death." Because
determining whether a gift was in contemplation of death turned out to be subjective, difficult to prove, and
somewhat morbid, a 1976 amendment to the estate tax law automatically included any gift that a decedent
made within three years of death (26 U.S.C.A. § 2035(a)). Unfortunately, the effect of § 2035(a) was to
include in the gross estate the full value of the transferred property at the date of death, including any
appreciation in value since the transfer. Thus, if A transferred $3,000 worth of stock to B in 1978 and died
in 1980, when the stock was worth $25,000, the stock's full value of $25,000 was included in the gross
estate, defeating much of A's pre-death tax planning.
In 1981, sweeping tax changes eliminated from the gross estate most transfers made within three years of
death (§ 2035(d)(1)). Even so, three specific types of transfers---transfers with a retained life estate,
transfers with retained powers, and transfers effective on death--- are included in the gross estate because
the decedent owned an interest in the property at the time of death. Moreover, the value of property once
subject to certain retained interests is included in the gross estate if the release or lapse of the retained
interest takes place within three years of death, because the disposition of the retained interest is considered
a substitute for disposition at death.
Transfers with a retained life estate
Transfers with a retained life estate are covered in 26 U.S.C.A. § 2036. For purposes of the estate tax
laws, the term life estate includes more than just an expressly retained life interest in property. For
example, if A creates a trust for the benefit of B but retains the right to receive the income from the trust
for the rest of her life, her retained income interest clearly is a retained life estate in the property (§
2036(a)(1); Estate of Paxson v. Commissioner, 86 T.C. 785 [1986]; Estate of Gokey v.
Commissioner, 72 T.C. 721 [1979]). But the retention of the right to change the economic benefit derived
from the property also constitutes a retained life estate, as when A reserves the right to change the trustee
and appoint herself the trustee (§ 2036(a)(2); United States v. O'Malley, 383 U.S. 627 [1966]). It also
may include retained life estates by tacit agreement, as when A transfers her home to B, with the
understanding that A and not B will live there for the rest of her life (Rev. Rul. 78-409, 1978-2 C.B. 234;
Guynn v. United States, 437 F.2d 1148 [4th Cir. 1971]; Estate of Honigman v. Commissioner, 66
T.C. 1080 [1976]).
The mere possession of a life estate in property is insufficient to bring it into the gross estate under § 2036.
The life interest must be retained by the decedent and must apply to an interest in property that the
decedent transferred. Thus, a life income interest created by someone other than the decedent is not
includable in the gross estate under § 2036. Transfers with retained powers
Transfers in which the decedent owns, at the time of death, the power to alter, amend, revoke, or terminate
the enjoyment of the property are covered in 26 U.S.C.A. § 2038(a)(1) (Estate of Webster v.
Commissioner, 65 T.C. 968 [1976]). In contrast to § 2041, which allows general powers of appointment,
§ 2038 includes only powers associated with a property interest that the decedent gave away during his
or her lifetime. The most commonly encountered retained powers are the powers applicable to a revocable
trust. A revocable trust is a legal instrument through which an individual relinquishes legal ownership over
the property to the trustee of a trust, either retaining to himself or herself beneficial enjoyment of the
property, such as the right to income, or granting it to another individual. As its name indicates, the
revocable trust is set up so that the creator, known as the grantor, the settlor, or the trustor, may revoke
the trust entirely, may change the terms of the trust, or may change the beneficial ownership in the trust.
The creation of or an addition to a revocable trust almost never constitutes a gift. A gift must be completed
to be taxable; the creation of or an addition of property to a revocable trust is, by definition, incomplete
because the creator may change the beneficial enjoyment at some time, effectively withdrawing the "gift."
Distributions from a revocable trust may, however, constitute completed gifts. For example, if A transfers
$2 million to a revocable trust that pays income to B, the transfer of the $2 million is not a completed gift,
but the annual payment of $100,000 in interest to B is a taxable gift when it takes place. Upon A's death,
the entire value of the property subject to the power, including both the trust corpus and undistributed
income payable to B, is included in the gross estate (§ 2038(a)(1)). And, because the property is valued
as of the date of death, any increases or decreases in the value of the property since the transfer will appear
in the gross estate (I.R.S. Notice 89-24, 1989-1 C.B. 660; I.R.S. Notice 89-60, 1989-1 C.B. 700).
Transfers effective on death
The provision 26 U.S.C.A. § 2037 includes in the gross estate the value of transfers that take effect on
death. Although at a distance § 2037 seems to apply to all property transfers that occur as a result of an
individual's death, the stipulated transfers are rarely encountered. To meet the requirements of § 2037, the
beneficiary must be able to acquire an interest in the property only by surviving the decedent. Furthermore,
the decedent must have expressly retained a reversionary interest in the property that is worth at least five
percent of the property's value at the time of death. Both conditions are difficult to meet. In the first place,
the requirement that the beneficiary obtain an interest in the property solely by surviving the decedent is
exclusive: if the beneficiary could have obtained an interest in any other way, such as by surviving another
individual, satisfying a condition, or outlasting a term of years, the property is not includable under § 2037.
In the second place, the requirement that the decedent's retained reversionary interest exceed five percent
of the property's value is difficult to satisfy because most retained reversions represent remote interests that
reach fruition only if the primary, secondary, and all contingent beneficiaries die first or fail to satisfy the
conditions of ownership.
Release or lapse of rights
The gratuitous relinquishment or lapse, within three years of death, of a retained life estate under 26
U.S.C.A. § 2036, a retained reversion under § 2037, a retained power under § 2038, or an interest in life
insurance under § 2042 will subject the value of the property subject to the retained interest to inclusion
in the gross estate (26 U.S.C.A. § 2035(d)(2)). This result is a remnant of the pre-1981 policy that
transfers "in contemplation of death" should be included in the gross estate. Under § 2035(d)(2), the release
or relinquishment of a retained interest within three years of death is conclusively presumed to be "in
contemplation of death." Thus, if A transfers her home to B in 1985, retaining the right to live there for life,
but abandons that right at the end of 1991, a gift of the remainder interest in the property takes place in
1985, followed by a gift of the relinquished life estate in 1991. But if A dies before the end of 1994, both
the 1985 and 1991 gift tax returns will be ignored for estate tax purposes, and the entire value of the home
will be included in A's gross estate.
As with the retained life estate, the relinquishment or release within three years of death of a power of
appointment retained under § 2038 will cause inclusion of the full value of the property at its date-of-death
value (§ 2035(d)(2)). For example, if A creates a revocable trust in 1982, then amends it to make it
irrevocable at the end of 1992, a gift will result in 1992 when the trust becomes irrevocable. If A dies
before the end of 1995, the entire value of the trust, including any appreciation in value, will be included
in A's estate, and the 1992 gift will be ignored. Finally, the release or lapse of ownership or any incidents
of ownership over a life insurance policy will cause the entire value of that policy to be included in the gross
estate (§ 2035(d)(2); Treas. Reg. § 20.2042-1(a)(2); Hadrick v. Commissioner, 93 T.C. 171 [1979]).
Once the value of the gross estate has been computed, the estate is entitled to take deductions. Expenses
associated with administering the estate, such as funeral expenses, executors' commissions, and attorneys'
fees, as well as debts the decedent owed at death, are deductible because they necessarily reduce the value
of the property that the decedent actually is capable of transferring (26 U.S.C.A. § 2053(a), (b)). The two
most important deductions for tax purposes are the marital deduction and the charitable deduction.
The Marital Deduction
The marital deduction applies to certain interests in property passing from the first spouse to die, to the
surviving spouse. It permits an estate to deduct the value of certain property included in the estate from the
value of the gross estate, thus eliminating the estate tax with respect to that property. The rationale behind
the marital deduction is simple: that a husband and a wife should be considered a single unit for purposes
of wealth transfer. Accordingly, as a general rule, the marital deduction will be allowed with respect to
certain property passing to a surviving spouse, provided that it will be included and taxed in the estate of
that spouse on his or her death.
To qualify for the marital deduction, property must satisfy three basic requirements. First, the surviving
spouse must be a U.S. citizen (26 U.S.C.A. § 2056(d)). Second, the interest in the property must pass
directly from the first spouse to die, to the surviving spouse (§ 2056(c)). And third, the interest generally
must not be terminable (§ 2056(b)(1)). The concept of a terminable interest is complex and technical, but
for the most part, an interest is terminable for tax purposes if another interest in the same property passes
to someone other than the surviving spouse by reason of the decedent's death, allowing that other person
to enjoy the property after the surviving spouse's interest terminates (§ 2056(a)(1), (2)). For example, if
A leaves her husband, B, a life estate in her property, with remainder to their children, her bequest to B
does not qualify for the marital deduction. B's interest terminates automatically on his death, and the
children, by reason of the termination, will then enjoy the property.
If no one else can enjoy the property following the termination of the surviving spouse's interest, the
property interest is not considered terminable for tax purposes, and a deduction will be allowed. For
example, if A leaves her husband, B, her interest in a patent, and dies while the patent has ten years of life
left, the patent interest qualifies for the marital deduction, because no one else will enjoy it after it expires
(cf. Rev. Rul. 77-404, 1977 C.B. 420; Rev. Rul. 76-404, 1976-2 C.B. 294).
Whether an interest is terminable must be determined at the time of death. Therefore, even if an event
following the first spouse's death makes the termination of the surviving spouse's interest impossible, the
marital deduction will not be allowed if it technically was terminable at the time of death (Jackson v. United
States, 376 U.S. 503 [1964]).
Congress in 1981 created an important exception to the general rule that a terminable interest does not
qualify for the marital deduction. This exception, called the qualified terminable interest property (QTIP)
exception, is a sophisticated statutory rule allowing the estate to deduct the value of a terminable interest
that passes to the surviving spouse as long as the transfer meets five requirements:
the surviving spouse receives all or a specific portion of the income for life from the interest the income from
the QTIP . . . is paid at least annually the surviving spouse has the power to appoint the interest to herself
or her estate the power must be exercisable in all events no other person has the power to appoint the
interest to anyone other than the surviving spouse (26 U.S.C.A. § 2056(b)(7))
In return for the marital deduction, the estate must agree that the QTIP will be included in the estate of the
surviving spouse at death, to the extent that the surviving spouse has not disposed of the property during
his or her life (§ 2044).
The Charitable Deduction
The charitable deduction permits an estate to deduct the entire value of bequests to any of a number of
public purposes, including the following
any corporation or association organized for religious, charitable, scientific, literary or educational
purposes the United States a state or its political subdivisions, and the District of Columbia a
foreign government, if the bequest is to be used for charitable purposes selected amateur sports
organizations (26 U.S.C.A. § 2055(a))
The charitable deduction is intended to provide wealthy individuals a tax incentive to benefit the public
interest. Only bequests passing directly from the decedent's estate to the charitable entity qualify for the
deduction. Therefore, if A leaves $100,000 to her son C, who gives $50,000 to the Red Cross immediately
after A's death, A's estate cannot receive a charitable deduction for the sum given to the charity (§
Computation of Tax
The estate and gift taxes are progressive and unified taxes, meaning that each taxable transfer taking place
after 1976 is taken into consideration when computing the tax on subsequent transfers (26 U.S.C.A. §§
2001(b), 2502(a)). For example, if A makes a taxable gift of $500,000 in 1990, the marginal tax rate on
the gift is 34 percent. If A makes another taxable gift of $200,000 in 1992, the tax is computed on
$700,000, the sum of the post-1976 gifts. Because the first $600,000 of transfers during life and at death
are tax free, a unified credit of $192,800 is deducted from the tax on A's 1992 gift. If A dies in 1995
leaving an estate worth $2 million, the tax is computed on $2.7 million, the sum of the value of the estate
and the lifetime gifts; the value of the unified credit and the taxes actually paid on the 1992 gift are deducted.
Progressivity in the estate and gift tax system ensures that individuals cannot avoid increased tax rates by
making a series of small transfers. If the taxes were not progressive, then $1 million parceled out into ten
annual gifts of $100,000 would be taxed at the marginal rate of 26 percent for each gift, whereas under the
progressive tax system, the gifts are taxed at the marginal rate of 39 percent. Similarly, unification between
the transfer tax systems ensures that individuals cannot avoid paying higher estate tax rates at death simply
by giving away most of their property interests during life. Thus, in the case of A above, the marginal tax
rate on A's estate is 49 percent, computed on $2.7 million of total lifetime and death transfers, rather than
45 percent, computed only on the value of the gross estate.
Articles from West's Encyclopedia of American Law are published on West Legal Directory with the
understanding that the publisher is not engaged in rendering legal or other professional advice. If legal
advice or other professional assistance is required, the services of a competent professional person
should be sought.
Federal Estate tax is an excise tax levied on the privilege of transferring property at death
Progressive – vary with size of estate
b) State taxes are often Inheritance tax is defined as privilege of receiving property from the
Gift tax is a back stop for death taxes
Imposed on gift taxes made during life time
Sometimes known as wealth transfer taxes
At one point treated as income, before held to be unconstitutional
ii) Under present law, § 102a doesn’t include the value of property acquired by gift, devise or
(1) This doesn’t include the income from any property where the gift or devise consists of income
from property
iii) Wealth transfer taxes emphasize who as the donor and how much they transferred
(1) If the recipient is a spouse or a qualified charity, whether it is an estate tax or a gift tax
(2) Whether it is leaving the hands of the donor, or at the lifetime
iv) At the moment they are integrated –
(1) Includes the transfers during lifetime and at death
1916 tax was enacted for two reasons
(1) raise revenue
(2) deal with concentrations of wealth
(a) constitutional : NY Eisner
no apportionment
vi) 1924: credit against the federal tax for state death taxes paid
(1) if a state collects a tax, it is creditable
(2) Pick up or soak up state taxes: if no state tax is imposed, the state tax “soaks up” – to bring their
rates up to the max.
(3) repealed in 24, repealed in 26, than put in 1932
(4) rates were about ¾ of the estate tax rates on the amount of an equivalent transfer
(5) 1976: unified tax structure
(a) federal estate tax is made to transfers made during death
(b) the federal estate tax applies to a person who is a citizen or a resident at death
vii) this rule applies regardless of whether the property is located
(1) (doesn’t include territories)
viii) domicile is defined as living somewhere with no present intention of moving
in the old way, each one was separate, in that it used its own graduated rates
imposed on a rate that grew higher if it was larger
iii) if the taxpayer/donor had made other gains in their lives
(1) if it was the taxable gifts made during their lifetime
(2) the federal estate tax was progressive, and it was a higher rate,
iv) important to distinguish between marginal tax rates and what are called effective or average tax
community property issues
under community property laws, if the law provided that each spouse owned ½ of the property,
the estate would include only ½
(1) would mean that the first spouse to die was different
(2) 1942: Husband’s taxable estate would include all of the cp
(3) 1948: “marital deduction”
(a) treatment of common law decedents that would be similar to common law property
(b) property that was not cp, could be given to surviving spouse without tax on up to ½ of the value
of the decedent's separate property
ii) In a common law property state, if all of the husband’s property were in his name, it would be
deemed to be transferred.
g) Under the gift tax: ½ of any non-community property could be given by one spouse to the other,
without a gift tax
If there was a case where one spouse was the earner of any income without any property
ii) Before the 1976 restructuring the separate restructuring could create a strong transfer tax incentive
to make gifts during their lifetime
(1) This was because of the lower rates in the gift tax itself
(2) The problem was that the part that he held on to would get a new start up the progressive rate
(3) Gift had to be paid at a time that the gift tax was made, but because of the tmv it might be better to
postpone a tax until later, rather than tax advantage of the lower rate
1976, we got a big change, which accomplished the basic structure of the unified taxes
in an effort to eliminate some of the unfairness, congress restructured the estate tax and the tax
into a single integrated system of rates and progression
there is now a single unified tax structure, which uses one rate table
iii) under the unified post 1976 law, previous gift taxes paid are a credit
(1) estate tax base now includes taxable gifts made during life
(2) this was about one unified credit or one exemption equivalent
(3) this credit, which is an amount which can be subtracted from tax owing – which corresponds to a
deduction of 600k – he or she is given a credit of the amount of estate tax that would have to be paid
(a) for smaller estate there is no tax owning, since is under the amount of what is owned
(4) unified credit of 192,800 – is the amount of what would have been paid on 600k
iv) each decedent gets a deduction – so it is divided between two parts of a couple
(1) if the surviving spouse has property that might go up in value, there might be taxable
(2) if the wife can live on the remaining income, it might be worth making a gift to the children
marital deduction: 1981 – unlimited marital deduction, which has the effect of treating the married
couple as a single unit for transfer tax purposes
a gift or death transfer from his or her wife to her husband is free of estate tax
ii) was party enacted on the theory from one decedent – the property time is one generation to
iii) the unlimited marital deduction has the effect of leaving the estate to the first spouse who dies is the
one for estate tax (might want to check this)
iv) 1976-86: 3rd federal transfer tax (generation skipping)
(1) generation skipping transfer tax for 10 years that was retroactively appealed in 1976
(2) both taxes, on generation skipping transfers were designed to counteract a technique of estate
(a) For example family dispositions that don’t skip a generation. GM transmits wealth to daughter.
At her death transfer wealth to GD – to the extend that the wealth in each state exceeds the exemption
amount, the transmission of the wealth will be taxable to each generation
(b) generation skipping transfers might be made to reduce the income
(i) the simplest form of generation skipping transfer – this would mean that it would skip the death of
the granddaughter
(ii) would be taxed a separate time at the death of the granddaughter
(iii) it means that the daughter would not have the benefit of the wealth during life
(iv) it means that they would not have the benefit of ill health, old age, or dependence
(v) in order to combine the estate tax advantages of generation skipping, it would mean that they are
combing the things from grandmother, to daughter, to granddaughter
1. GM could pass the wealth at her death into a trust, and the income could go to the daughter, and
at death, the rest to granddaughter – but there wouldn’t be any estate tax applied, because the daughter
didn’t own the property, she only had an income interest
A single transfer of the corpus of the trust was made by the gm to the gd
The property was taxed in the property of the grantor, and it could be passed though one or
more generations –
And it could mean that outright generations were taxable in the estates of the decedents
At her death, the beneficial enjoyment would transfer to the gd
A generation skipping transfer was employed
The only limit on the extent of these things
(3) 1976: new generation skipping tax was designed to close the avenue, as treating the entire
property as though it had passed though the daughter (mid generation) – retroactively repealed
(4) 1986: ch 13 generation skipping tax
(a) we do have now a generation skipping tax in the form – the 1976 attempt was repealed
(b) a tax different in technique but similar in purpose was enacted but was presently the law
(c) congress enacted a carryover basis rule in the income tax -- 1980, but repealed
(i) income tax § 1014, donee of a testamentary rule takes a basis equal to the fmv of the value at
(ii) § 1015 – intervivos transfer will be the same as the basis of the donor, except if the basis is greater
than the fmv at the time of the gift, than the basis for determining loss shall be the lower amount
(iii) § 1014: testamentary, for gain and loss on later sale on exchange, takes the current fmv – so it
escapes both in hands of decedent or recipient
(d) Grey area. Property sold between the loss basis rule and the gain basis rule
And if neither basis rule is applicable… § 1.1015 – Regs. Say that neither gain not loss is realized
special basis in 10.1015a – within 1 year of death there is an exception
(e) new 5% surcharge bracket § 2001b, 2001c2, 2052a
large transfers will be subject
(5) 1990: ch. 14 2701-04
(a) valuation rules for transfers in interests in corporations and trusts (replacing 2036c)
(6) 1993: maximum estate and gift tax rate at 55% for over 3m
very little revenue
due to marital deductions
smaller % of the budget
estate tax ch 11: tax imposed on the transfer of property from the decedent to someone else
gratuitous transfer of property
(1) transfer is defined as
(a) transfer at death – some property has to pass by virtue of the decedent’s death
(b) mere shift in beneficial enjoyment that vests because of someone death (for example remainder) is
not a transfer from decedent
(c) obvious
cash passes by will
(2) property
ii) gross estate § 2031a: value of tod of all property [of the decedent] real or personal, tangible or
intangible, wherever situated
(1) property to which the decedent owns title
(2) property in which he has a bundle of rights to which he owns title
(3) 2033: all property to the extent of the interest therein of the decedent at the time of his death
(a) 2033
highest state court[1]
lower courts are only persuasive (proper regard should be given to them)
2. but, once ownership is determined, the question of how that relates to federal tax law, is a federal
(ii) property that they own -- interest must be a beneficial interest which survived him so that he could
transfers, and that it could pass at his death to someone else
real estate
future interests (usually included) under § 2033
6163: the executor can postpone payment of the portion of the estate tax that is generated, until 6
months after the preceding interest
must be vested
reversionary interest
iii. executory interest
c. contingent remainder: an interest that may fail upon the occurrence or non-occurrence of a
certain person or issue
if the interest was contingent, some courts held that the interest would not be included if it took
possession or their enjoyment
ii. the decisive conditions was not whether the interest was vested or not, the question is whether or
not it will be included in the gross estate under § 2033 at the time of death fact that it is a future interest
goes to valuation
iii. any property that expires on the death, there will not be inclusion (even if someone’s enjoyment
terminates) (there could be GST)
d. any property that expires on the death, there will not be inclusion (even if someone’s enjoyment
terminates) (there could be GST)
bank accounts
profits paid by partnerships if those payments are for work done before his or her death
5. death benefits if they are not discretionary, and the widow or widower didn’t have any right to the
social security doesn’t count, because the decedent had no control, as they were fixed by statute
b. employee death benefits that are payable only to the beneficiary whom the employer designates,
there is no estate tax –this is property not subject to the decedent
if they are payable to decedent or their estate don’t count, as they are transferred
even if the interest paid is exempt from federal income tax even if it is exempted in the hands of
the bond holders
9. congress didn’t intent 2033 to grasp everything[2] -- property subject to an exercised general
power of appointment is not included
congress didn’t intend the general rule of 2033 to attach everything to people before their deaths
10. tangible or intangible
11. cause of action that survive death
claims for wrongful death – if by the estate
survivor actions don’t count
ii. but damages that represent damages that the decedent had been entitled to during their lifetime
(medical expenses), would count
if they represent damages (for example medical expense) they are included
12. accounts receivable
13. contractual rights
14. unincorporated business
15. stock in incorporated business
16. community property or an unincorporated business
17. property
interest in Tenants in Common will be included
legal title to property or an interest in property isn’t necessary
if the decedent owns property as a fiduciary for other people (for example trustee)
interest must be beneficial, not as a trustee (even if title technically remains in someone)
vested remainder in someone else – were generally conceded to be Includable
contingent remainder, if not destroyed by the death, and if it passes
18. payment made of profits of profits attributed to work before death
19. employee death beneficiary
no purely discretionary death benefits, if there was not right or ownership
b. if only employee designates, the employee doesn’t own the property, and it doesn’t pass by
reason of their death – but it isn’t property transferred by the decedent
if employee death benefits pass to the estate they are payable
20. no lump sum payment from social security, since no control
(iii) § 691: IRD (Income in respect of decedent): things not received by accrued – all income in
respect of a decedent that were not includable during the period of death or some prior period is
includable in the estate tax
1. income tax return of the estate to include all items of income in respect of a decedent that were
not includable in the taxable period covering the date of death or some taxable period
accrued rent or interest
things actually received must be filed in final tax return
becomes part of the estate if the estate acquires
DIRD: expenditures that were not paid yet by the decedent
if they were otherwise deductible, they are deductible under the estate
ii. expenditures that were accrued but not paid, that would not be included in the return would not
be included, but if they accrued after death they would be,
iii. they are not property and do not get a fresh start basis under1014
deferred payments included
deferred payments
income that was actually or constructively received doesn’t count (income tax)
2. § 691c: income tax deduction for a pro-rated portion that is attributable to the portion of the IRD
in the estate tax
reduces the amount of taxable income by the amount that is used to pay the estate tax
(b) not limited to probate estate or is limited to claims of creditors
2039: death benefits
(ii) 2041: life insurance
(iii) 2042: power of appointment
(c) not every item of wealth become part of the gross estate under 2033
JT – that passes doesn’t count
(ii) Expiring life tenancy doesn’t count
tax payable is equal to the tax rates * the tax base (18-55%)
credits can be subtracted from the tax
base computation – chapter 11
taxable estate gross estate minus deductions
(1) 2001 is amount of tax computed on the sum of the taxable estate at death to the extent that they
exceed the gift tax that was paid
(a) If a taxpayer has made gifts of 100k each year (90k taxable). 1m @ death and total comes to
1.9m – the rates of the unified would be applied to the tax. Subtract for taxes paid during life
ii) Gross estate is defined as value of all property owned by the decedent owned at his or her death if
that property passes by will or intestacy --must pass to someone else – the transmission
(1) Cash
(2) Real estate
(3) Tpp
(4) Intangible personal property
(5) Life insurance proceeds
(6) Jointly owned property
(7) Some property that has been given away before his or her death, but is treated as if it were owned
at death
(a) Often bigger than probate estate
(b) Often bigger than non-tax definitions
iii) Deductions
(1) Marital deduction
(2) Charities
(3) Graduated rates apply against the gross estate and all post 1976 gifts
iv) Credits
(1) Unified
(2) Credit for state death taxes subtracted from the amount of tax tentatively determined to be owning
3) ch 12 – gift: backstop § 2501 “transfer of property by gift, by any individual, resident or
a) § 2511a, says that the tax imposed by 2501, shall apply whether it is in trust or otherwise,
whether it is direct or indirect, real or personal, tangible or intangible
§ 2512 gift is the value of the property at the date of the gift (minus any inadequate
Gift splitting – must be elected!
§ 2513, a gift that is made by one spouse of a married couple to a married person may be
considered to be made ½ by the spouse making the gift,
allows them to use both their exclusions and unified credits
(1) annual exclusion of $10k/donee/donor
applies any gratuitous transfer of property made during life – not services
any such transfer reduces the estate or the wealth
federal gift tax is imposed or is reported on a cal year basis
(1) rates are progressive, and they vary based on the cumulative amount of gifts made by the donor
over his or her life
(a) adding the amount of gifts during the taxable period to the amount of all taxable gifts in prior cal
year, and imposing a tax on the graduated marginal rates
(b) prior taxes paid are credited
(c) difference is the tax that is due on the current year’s gifts (check this)
(2) individuals have an annual exclusion in the amount up to 10,000 each year up to 10,000 per donee
(3) Same donor can give the money again to anyone. In any year without paying a gift tax
iii) unified credit shield up to 192k, whether the gifts are made during life or at death – this is due to
the annual exclusions per donee per years (for example new annual exclusions each year)
(1) so, exclusion hits the first 10k, than the available exclusions – and further giving taxable until the
next year- 600k will be shielded by unified credit (if not used up)
(2) tax liability -- stacked on top of
(a) cumulating all taxable gifts
gifts in excess of 10k/year/donee exclusion
(b) add current years taxable gifts
(c) apply progressive rates as they apply to the prior year
(d) subtract from total tax liability the taxes that would be due on the prior year’s gifts.
(e) if the taxable gifts of the prior years (and the current year) exceed the current years, than they are
(f) the graduated rates that apply are what applies to a current taxable gifts as they are stacked on the
prior years that are taxable
(3) if the rates don’t change, the amount of gifts payable on a donor’s lifetime transfer, will be the
same if they are in one year, or over many years
iv) gift tax base is gross transfers or aggregate bas minus annual exclusions to arrive at net taxable
(1) tax rates are applied in a lifetime cumulative manner
(2) will be reduced only by the portion of the lifetime credit that is unused by the donor
property for gift tax purposes § 2501
(1) tax is based on the objective facts of the transfer, rather than on the subjective facts of the donor
(2) objective test
(a) § 2512b, if property is transferred for less than adequate and full consideration in money or
money’s worth the excess shall for purposes of a gift tax, shall be deemed to be a gift
(b) this is different for contract law purposes
(c) things that can’t be valued, will be disregarded
(d) promised relinquishment of statutory right (dower, courtesy), will not be consideration to any
extended to a consideration in money or money’s worth
§ 2516
(e) consideration will be determined from economic values, not from contract law z
(f) ordinary course of business: every transfer or unequal exchange will not be treated as a gift
(i) transfer made in ordinary course of business, is a transaction that is bone-fide and is free from any
donative intent – doesn’t matter what the consideration is worth
1. between family members, it is difficult – including people in a family business who don’t pull their
fair share
valued under 2704 regs
(3) consumption expenditure -- old people dying
(4) a transfer that depletes the wealth of the transferor, will be treated as a gift, it will be treated as a
gift, but if it is for consideration it doesn’t reduce wealth
(5) political contributions: § 2501: all transfers to political organizations are exempt from the gift tax
-- no parallel exclusion for estate taxes
(1) will be treated in their real form (for example closely corps will be treated as gifts to the ultimate
(2) gifts on condition that they are further gifts are treated as the ultimate gift
(a) Donee’s payment of the tax. if the donor makes a gift on the conditions that the donee pays the
gift tax – this is considered to be a gift of the tax as well[4]
iii) Timing
(1) A transfers is deemed to be complete, when the donor has relinquished dominion and control, is
complete at the time the property is transferred
(a) A gift of a check is not complete until it is paid, or negotiated
(b) Gift of a check or a note made by a third party is complete at the time of the transfer or a check
(2) revocable gifts are generally not considered to be gifts
(a) if the donor retains a right to change beneficial interest in the gift, even in a way that won’t benefit
the donor, it will be regarded as an incomplete gift
as amounts are paid over to by the trust, they are considered to completed gifts
(b) if a donor retains some interest, that interest must be susceptible to valuation, otherwise it is a gift
of the whole property
(3) life interests
(a) completed gift of remainder at time the trust is established
(4) anti-nuptial agreements
(a) deemed to take effect when people first have a right
iv) doesn’t include gifts of services
v) § 2512, if the gift is made in property, the value at the date of the gift shall be considered to be
the amount of the gift
vi) property
(1) included
(a) most rights or interest that are protected by law that have exchangeable values
(b) assignment of judgements
(c) assignment of insurance policy
(d) forgiveness of debt
(e) promissory notes
promissory note of a 3rd party
(ii) promissory notes between two people are not gifts, until they are either paid, or assigned
(2) gifts will be gifts of the part of the interest that the donor does own, or does transfer
vii) other transfers included
(1) one person discharges the obligation of another to a creditor such as a bank
(a) substitution by a wife of her own promissory notes was deemed not to be a taxable gift transfer
not included[5]
(2) gift that is not complete for income tax purposes, may be a completed gift for transfer tax
purposes, and vv
(3) interest-free demand loans do constitute loans in the value of the money lent[6] -- deemed to be
making a gift of the interest that is forgone
(a) two components: arms length loan
(b) constructive gift in the amount of that interest
(c) § 7874: forgone interest is treated as a gift from the lender to the borrower
§ 7872 applies to term and demand loans
(d) deminimus exceptions for loans that never exceed $10k at any time -- but does not shelter an
income shifting gift loan
won’t work for parents to loan students money (for example .5m). Income wise it will be treated
as if they got the money, and than gave
(ii) for gift tax purposes will be treated as a loan
doesn’t include gifts of services
§ 2518 disclaimers of an interest in property, as a gift in property
§ 2518b, in which someone accepts in irrevocable refusal that is made in writing, et. (or from
when they attain the age of 21), whichever is later
if the recipient of a gift disclaims, and the disclaiming is not effective, that it is a taxable gift
marriage – property transfers in exchange for relinquishment of marital rights
marital deduction ends up equalizing community property and separate property issues
(1) if the first spouse to die transfers all of his or her property to the surviving spouse, there won’t be
any deduction under 2056
(2) dower and courtesy
(a) § 2034, full value of the property is to be included in the decedent’s gross estate without regard to
the rights in the husband or wife
(b) community property: gross estate of decedent will consist of ½ of the marital property
if the husband is the
ii) release of marital rights – will it be considered to be consideration. (also, will a transfer by an
estate in satisfaction of such a claim be consider to be a deduction of the estate tax)
(1) § 2043b, estate tax: relinquishment or promised relinquishment of dower, courtesy, contractual
marital rights, or substitutes shall not be considered to be consideration in money or money’s worth
(a) exception
(i) doesn’t cover rights to support -- deduction allowed under § 2053 – anticipatory lump sum
substitute for the rights of the husband and wife (§ 2516
§ 2553c1a: normally bonafide contractual transfers don’t count, but under marital exceptions they
2043/2516 a transfer of property shall be considered to be made for money or money’s worth
(ii) for gift tax, release will be regarded as consideration in money or money’s worth
(b) spouse’s vested rights in community property are considered to be consideration (§ 2512b test)
(2) § 2043b2 for 2053 purposes: estate tax and gift tax rules will correspond with each other in this
(a) § 2516 states that if spouses: when property is transferred in some form of property settlement 1
year before and 2 years after the decree won’t be a gift
(b) Harris: if incorporated in divorce decree, than it might be worth it
iii) Income tax view § 1041 : Gifts between spouses do not get a fresh start basis, even if the spouses
give each other fresh start. Non-recognition of gain.
iv) Gratuitous transfers made during life might produce estate tax consequences
(1) Complete gifts
(a) Intervivos transfers that are will substitutes Retained powers in transferred property (note: these
are incomplete for estate tax purposes)
(i) Must be transferred by the decedent – and powers retained or reacquired (whether exercised or
(ii) 2036-38 are called the grantor sections because they apply to questions where someone has
reacquire the rights. Won’t apply when the property was not earlier transferred by him or her
1. 2036-38: basic question is whether the transferor retained the economic benefit of the property
examples of complete
powers to designate 2036a2
(iii) people given a life interest do not have something included in their estate
(b) transfers with a retained life estate – 2036a1: applies to property that the decedent formally
owned or transferred (doesn’t count for acquisition or reacquisition)
value of the entire property transferred will be included in the gross estate at death – will be
includable only in the gross estate
(ii) not necessary that the estate be reserved in the same legal instrument
1. if the transferor retains a proportionate interest, only the portion in which this is retained will be
includable in the estate
(iii) time periods
2. not ascertainable by death (for example no installment of the annual income shall be paid during
the last year of his life)
no inclusion if the conditions didn’t actually happen
(iv) also applies to a retained secondary life estate – if the grantor retains the property in trust, and that
at her death to him for his life, and at her death to their children
the value of the remainder will be included in his gross estate
if the right hadn’t taken effect in enjoyment at the time of his death
this does require inclusion as a result of the transfer
must reduce by the value of the preceding life estates
(v) exceptions for consideration under this section
1. Allen: congress intended the estate to include either the underlying property, or an amount equal
in value to the underlying property, must be consideration for the underlying property
Gutchess: court won’t infer an agreement that two parties would life in the house.
3. Private or family annuity transactions, things made not in contemplation of death, in return for a
promise to make periodic payments: payments are not income from the transferred property, but on
some other cases, but in other cases, inclusion has been required.
2036a1, income that has accumulated between the date of the of the gift and the corpus and the
income – this is different between this and 2035
(c) powers to revoke 2038, 2036a2 – grantor sections. applies only when the property was both
owned and transferred by the decedent, but it does not require that the power over the enjoyment by
retained – it only has to be held by the decedent at his or her death
(i) if a property owner makes a transfer during his life and retains a power over the property such
that he can alter, amend, revoke or terminate the transfer, and he if retains that power, and it is
relinquished within 3 years of his death
1. transfer doesn’t become final or absolute, if he becomes able to alter, amend, or terminate the
(ii) will be included if the power is held by two people it is still included -- exception for a power that
is exercisable by all parties having an interest in the transaction – and if the power adds nothing to the
rights of the parties under local law
(iii) power to affect the time, possession, or nature of the property will be regarded as a 2038 power –
gross estate, under 2036a2, which includes the power to determine who will enjoy it – value of any
interest in property, which the decedent has transferred during his life, if the enjoyment of the property
or its income is subject to a substantial management or control in the property
1. if the income is provided to be paid to wife for life, with remainder to children, if the grantor
retained the power to invade for the wife
powers to terminate a trust
powers to accumulate and have it distributed
power to designate or possess the income
(iv) includes powers to alter or amend the property even if it isn’t in favor of D or his estate
exception for objective reasons
powers that are exercisable to maintaining someone in some status is objective
(v) transfers for full consideration in money or money’s worth don’t get included
(vi) the difference between 2038 and 2036a2,
1. 2036a2, will apply only when the decedent has transferred property and he has retained the
2036a2 will not apply to an acquired or reacquired power
power to revoke a trust would produce inclusion to the same extent would produce inclusion over
power to change the timing under 2036a2, and also 2038
4. if the interest or the amount of property to be included, is greater than the amount to be included
under the 1st rule – but the law has not settled whether the amounts are to be the same, but the
regulations suggest that inclusion should be the same
they should both be analyzed
the right to designate the person or persons who shall enjoy the property,
5. 2038 probably will include such property in the gross estate over the property, but they will
apparently apply to a person who makes a gift to minors under ugtma, will probably give them the
power to withhold the custodial property
if he isn’t the custodian, there won’t be such inclusion
(d) property is valued at the date of death of the decedent
(2) estate freezes: disposing of rapidly increasing assets
(a) Retention of the right to vote shares of a controlled stock, which had been given away would be
considered to be a relinquishment of the property, but the relinquishment would be a transfer of the
property by the decedent.
(i) (old to young recapitalization) one way to do this is to divide a corporation between voting
preferred shares and nonvoting shares, but they will stand in a position to appreciate rapidly if the
corporation increases in the future
(ii) senior generation is retaining preferred shares that pay a dividend
(iii) senior generation is giving away a future interest in the corporation by giving the cs to the children
(b) ch14: -- 2701-2704 provides a means to value transfers between family members of interests in
corporations, partnerships and trusts -- in a recapitalization and estate freeze, there won’t be the
transfer tax advantage, that the family has sought, there won’t be the same value, if the interests that are
retained, will be under these rules assigned a value of zero
(i) 2701 places a value of zero on a distribution, liquidation, put, call or conversion right, which is
applicable to a corporation or partnership held by the transferor or a member of the transferor’s family
entire amount of the transfer is taxed as a gift – a zero value is put on the retained interest
(ii) exception to zero valuation
1. if the retained interest consists as a qualified payment, if there are one or one or a member of the
transferor’s family immediately after the transfer, and as a result the entire value of the transfer is taxed
as a gift
exception: if the transfer consists of a qualified payment, it would be regarded as a real transfer
2701 doesn’t apply if market quotations are available
if the interest is of the same class of the same interest
the entire amount of the transfer is valued, and therefore taxed as a gift
3. interest is proportionately the same as the transferred interest, or it is the same as the voting
(iii) 2702: retained interest in interests in trusts, if the transfer is made to, or for the benefit of the
transfer’s family – doesn’t apply to incomplete (non-gift) transfers
(iv) 2703: value of property shall be determined without regard to any option, agreement, or any right
to acquire or use the property at a price less than the fair market value, or any restriction on the right to
use or sell such property ,
doesn’t apply if it a bone-fide business arrangement
2. doesn’t apply if it to be not a device to transfer to members of the D’s family for less than similar
doesn’t apply if it its terms are similar
(v) 2704: if there is a lapse of voting or liquidation rights in a corporation or partnership, the lapse is
treated as a transfer by gift
1. the value of the transfer is the excess of the interest held before the lapse over the value held after
the lapse
(3) In general there will be a credit based on what was paid earlier
(a) The 10k gift tax will be applied
(b) The estate tax base, but not the gift tax includes the assets used to pay the tax
(i) The estate tax is tax inclusive – includes lifetime transfer, if those transfers are incomplete for
estate tax purposes even if they are complete for gift tax purposes
(ii) The gift tax is tax exclusive
1. For example black-acre is 100k during his life, and the gift tax of 20k, the base was the 100k
value of the property that was given. If the donor held the real property until death, the estate tax
would apply not only to the property, but the property used to pay the estate tax.
There also might be some appreciation by the time of death
(4) § 2035 -- 3 year rule –
(a) may interact with other sections
(i) retention of life estate under 2036a1: all the property in which the life estate was retained, the
underlying property would be included in his estate, because he kept the benefits of owning it.
(ii) Old rule
a. If he keeps the remainder, and within 3 years of death, the person who retained the life estate, the
person who had it, he would not be holding a retained life estate, the combination of 2035 and 2036
would result in inclusion of the entire property, because at the time of his death, the taxpayer would not
earlier retain, but would mean that the retained life estate would have been transferred at death. Regs:
if a decedent transferred an interest in property, or relinquished a property, his estate would include
something that included a relinquishment until death
A power of appointment that was exercised, within 3 years before death, would be included, just
as if he held it at death
ii. the valuation was considered to be the date of death or the alternate valuation date, it was the
late, higher value that had to be included for transfer tax purposes
iii. if the transferee had made improvements or additions to the property, any enhancements or
improvements, were not considered to be part of the gross estate
any income received or improve wouldn’t be included
2. new rule: target is the appreciation of property which the decedent retained the enjoyment or
no inclusion of deathbed transfers in the taxable estate, valuation of transfers made within 3 years
of death will be the valuation at the date of the gift
certain gift tax inclusion transfers under § 2035d2: 2035 and the other sections are powerful
transfers of property which is included in the gross estate, of what would have been included
under the other sections
the question then arises when the
§ 2035c -- gross up rule gift tax paid within 3 years have to be included in the taxable estate
now two types of gifts that will be drawn in
gifts of an interest in property under 2036-38, 41-42 (constructive interest)
b. gifts of an interest in property that would have been included in the gross estate had he retained
until death 2035d
2035/2036a1: if F owns BA and WA, and conveys WA to son, retaining a LE in it, and gives
away BA without strings, as well as the LE in WA. Value of WA would be included under 2035
because it would have been included under 2036 if it had been retained until death. Value of BA won’t
be included, even if it is transferred within 3 years of death. Property drawn back in (WA) will be
transferred as of the date of death
ii. 2035d2 prevents life estate transfers are inherently testamentary, but an outright gift seems
somewhat less testamentary, than the two step disposition
iii. gifts of any size with respect to life insurance, or gifts with respect to which gift splitting was
elected, will all be drawn back into the gross estate.
Property that isn’t drawn back into the estate doesn’t get a fresh start
2035 increases the gross estate by any gift tax paid, within the 3 years period, and it guarantees
that if taxable string is released within the 3 year period, the decedent will be treated as if the string had
been retained until death – doesn’t cover sales, or small gifts
(b) reason: each tax would get a new start up the rate scale
(c) old rule: subjective intent as to contemplation of death (3 year rebuttable presumption)
(5) if the donor retains life estate 2031
(6) revocable 2036a2
(7) alter, amend or designate 2038
(8) 2037
ch 13- 2601-2663 generation skipping: independent from the federal estate and gift tax
gift and estate tax applies to gratuitous transfers of property
b) if the decedent owns some property at his or her death which doesn’t even pass to the decedent,
than the estate tax won’t apply. –
even if there is a transfer of economic benefit, it doesn’t mean that there is a transfer
(1) for example
(a) life estates that expire on the death of the holder don’t transfer at death
(b) for example O to A for life remainder to B. A will enjoy for life, but her heirs will not get it.
Therefore A will not own it.
No estate tax of it in her estate.
(ii) Remainder interest is treated as passing from and though the estate of the original grantor
(2) A gift, whether inter-vivos or testamentary, put in trust, with income to someone else would be
taxed as a gratuitous transfer by the grantor grandmother, but the other would not occasion any further
transfer tax taken alone
(a) To the effect of any further estate tax would not take on any further estate tax became the basis of
a lot of tax planning advice
(b) The disposition accomplishes what is known as generation skipping
(i) The result is that the property has gotten into the hands of the granddaughter without passing
through one generation
(c) Could simulate ownership by giving the son a non-general power of appointment of the property
without making it taxable, and non-general power of appointment – nearly the equivalent
Son could get the power to invade the corpus for health, education. Etc.
(ii) Son could get a 5 and 5 power to withdraw part of the corpus
It wouldn’t be treated as his property, so long as he didn’t exercise
(iii) Another trustee could be given the power to invade the trust even more for the son
(d) Even if he has nearly the equivalent of ownership, no transfer tax has to be paid so long as the
interests are no above the threshold amount
(3) To allow these generation skips was creating policy reasons
(a) Possible reforms
Cut down on the form (tighten ideas of constructive ownership)
(ii) Inheritance (or accessions tax)
(iii) Treat inheritance as income under the income tax
(iv) Impose an additional tax on the original disposition, if the disposition had a generation skipping
(v) 1976-86: Tax at the time the person in the skipped generation dies (intermediate)
complex to comprehend and computer
(b) solution: imposed on “generation skipping transfers” on wealth generations where they are “one
or more generations younger’ and whether they “escape estate tax”. Only includes direct skips, taxable
transfers, and terminations.
direct skip is defined as
estate or gift transfer to a skipped person that is made outright or in trust
(ii) taxable distribution is defined as
a distribution to a skip person
for example distribution from trust
(iii) taxable termination is defined as
shift of the beneficial enjoyment to a skipped generation
Note: no credit is given for prior transfer tax owned –
Rate at highest
No relief for other tax paid (if property held before)
No unified credit
Exemption – to every taxpayer
1m of direct skip or distribution
ii) grandparent can make a gift for medial or education expenses without tax to child if it meets
iii) an individual pays the same tax on a direct skip to a gc, as it is to a great grandchild
taxable amount is the value that is received by the transferee
tax exclusive – no tax on tax
2515 – payment of the transfer tax is, itself, a taxable gift
to transfer money to the gc, the gp has to transfer a bit less than with a direct transfer
ch 14 – valuation rules, which might be substitutes for substantive rules
Transfers during life
Question as to whether or not a gratuitous transfer of property has occurred
§ 2037: transfers taking effect at death: Transfers that are substitutes for death transfers
a) property that is transferred in such a way that the transfer resembles a transfer at death, in that it
is only upon the death of the transferor, and only by surviving the transferor that someone can possess
the property
§ 2037 tests two conditions necessary for inclusion -- if either is not met, it won’t include the
property or any interest in it, in the gross estate of the decedent
(1) survivorship requirement (for example can take possession only by surviving)
(2) must be the case that the decedent retained some form of reversionary interest, and the value of
this interest, exceeded 5% of the value of the property (immediately before the death)
(a) could be subject to a power of disposition
(b) includes a possibility that property may return to his estate or may become subject to a power of
disposition by him, but doesn’t include the possible that the income alone may become subject to a
power of disposition by him
(i) refers to any reserved right under which the transferred property under which it should return to
the grantor
(ii) does not include the possibility that the decedent might inherent the property back form someone it
has been transferred
purpose of 2037 is to tax transfers that are will substitutes.
iii) When a transfer will take effect only at the deal of the transferor, and if it true that all along, there
was a substantial likelihood that the interest transferred to his estate will be included, the property
should be included in the gross estate
iv) Size of the interest (if above 5%):
(1) No subtraction is made for non-outstanding interests
b) There are always other inclusionary exceptions that might apply – if the survivorship requirement
is not met, than § 2033 will cause inclusion, if that interest survived the death of the decadent and than
was transferred to someone else
Goes if someone transferred the property and if they retained the interest
Exception to § 2037 to bone fide sale
telling who is the grantor and § 2036 Reciprocal trusts: no inclusion if not grantor –
Substance over form
If A transfers to B, as an inducement for a transfer to A for life with remainder, A will be viewed
as the grantor of retained property with a retained life estate
ii) Suppose that there is a transfer of two equal trusts for each other, in consideration of each other,
each spouse will be attributed to the other
(1) Husband will be treated as the settlor of the trust for his benefit
(2) Each will be seen to have transferred property and retained a life estate and included in both
b) Possible for a person to be treated as the grantor of a trust, and the transferor of property, even if
they are not technically the transferor
Consideration for §§ 2035-38: general rule not included if there is inclusion
a) Marital rights: § 2043 states that a promised relinquishment of dower or courtesy or of other
marital rights shall not be considered to be a consideration in money or money’s worth, is not
considered to be a consideration in money or money’s worth
10) Incomplete transfers and their gift tax consequences
a) Question arises as to whether a transfer that will produce a transfer will produce gift tax
consequences at the time that the transfer is first made
b) A revokable transfer is not a completed gift, and it becomes complete, only when the transferor
gives up or retains the gift
§ 2036a1, gift in trust with a reserved life estate:
estate tax inclusion will come about at the time of the death
ii) there is a gift at the time of the transfer of the interest transferred – the remainder. The value of life
estate will be subtracted from the total value of the property to determine the value of the gift from
which the gift tax will apply.
(1) Retained interests are not transferred
(2) Taxpayer bears the burden of valuing that interest as well as identifying it.
iii) Transfer, but power to alter or amend the transfer (2038 or 2036a2 power)
(1) The estate tax will view the gift as incomplete during life
(2) But the grantor has not retained the power to revoke, so, the gift is complete, for gift tax purposes
it will be regarded as incomplete because of the power to alter the beneficiaries – the gift will be
complete only at the time that the donor relinquishes the power
(a) For gift tax purposes, the question is not whether he has parted with the property, but whether or
not the donor has so parted with dominion and control, as to leave no power in it in himself
Transfer of the property is incomplete until there is no more power to change the beneficiaries but
not until manner or time or enjoyment or fiduciary power
iv) § 2037, conditional transfers
(1) a retained reversionary interest, is met, because x y and z can take possession, only by surviving
the decedent
(2) if the reversionary interest exceeds 5% of the property, it will be included, as it was incomplete
until the transferor’s death
(a) interest will be the value to be the property transferred minus the value of the retained life estate
(b) reversion retained by the transferor will reduce the amount that is taxable
(c) if the reversionary interest were worth less than 5%, the small reversionary interest would still
reduce the amount of the gift for gift tax purposes
(3) retained powers or interest rendering things incomplete
(a) question is whether or not they have parted in dominion and control and over its disposition, nor
have they retained a power over the disposition over the property for himself or for others, a completed
gift will have been made, and the gift is not complete for gift tax purposes (not taxable)
(b) gifts will not be complete because of the retention of some managerial powers
(i) question is whether a co-manager has a substantial adverse interest, and the retention of the
power will render the gift incomplete for gift tax purposes
(4) differences between gift and income tax
(a) can be different definitions of complete v. incomplete
11) Community property § 2040, and old § 2515 and Jointly owned property
Estate tax
(1) JTROS: other tenant becomes the owner of the entire property by virtue of how the property was
(2) Property does not pass by will or intestacy
(3) Decedent’s right in the property terminated at his or her death, or if one of them severs or
partitions their interests
(a) Looks like a death time transfer, but it isn’t
(4) Bank account: each depositor has a right of survivorship and the rights to withdraw it
Community property
(1) Most places the spouses are viewed as having a vested property right of the property
(2) 2040a, of the IRC, decrees that a decedent gross estate includes the value of any estate held by
him with right of survivorship – the entire value is included in the value of the estate of the first joint
owner to die – except for anything that can be said to be the value of anything that can be the
consideration in money or money’s worth
(a) it is not just the decedent’s interest, but all the property, except for the full consideration exception
(b) if, taxpayer A gives $50k to taxpayer B, and B invests that $50k, than upon A’s death there will
be inclusion of the entire property in A’s estate (this was as a gift), but if some of the value of the joint
property is attributed to consideration independently furnished, is that percentage of the value of the
property at the decedent’s death
(3) 2040 in a non-spousal context
(a) fraction of the purchase price that each unrelated person pays will determine what is includable in
each person’s gross estate
(b) tracing is often required
(c) at A’s death the entire property would be included in A’s gross estate
(d) if A had given some cash from his separate property to B, so that A joined in his consideration of
the property
(4) 2040 in spouses
(a) 2040b: JT between spouses, notwithstanding 2040a, in the case of a qualified joint interest, the
value to be included in the gross estate is ½ the value of the joint interest
(b) includes TIE, or JTROS, but only if the decedent and the spouse are the only joint tenants
(ii) Tenants in Common: no rights of survivorship, each tenant has a separate undivided interest in the
property that they can transmit during life
1. Surviving tenant in a Tenants in Common doesn’t become automatically entitled to the co-tenant’s
2. Rule for Tenants in Common; property held by a decedent in a Tenants in Common will be
included under § 2033
½ will be included in the gross estate of either tenant who died
(iii) 2040b2: all JT tenancies between spouses are qualified joint interests, and ½ of them are qualified
in the first to die
doesn’t matter so much with marital deduction
(c) it is true that 2035d2 will apply in such a case to gross up the amount of the gift by the amount of
the gift taxes paid
gift tax
unlimited marital deduction
ii) if a JTROS is formed with joint owners who are not spouses, the results are governed by general
gift principles
(1) if one of the JT contributes a proportionate share, and the tenancy can be severed, no gift tax
consequences will be made at that time
(2) if A and B purchase property for 100k, and take title as joint owners, and if A contributes the
entire purchase price, he or she will be deemed to have made a gift to B, or if it is proportionate
(3) Joint tenancy could be severed by either tenant, and either one could obtain the proportionate
share of the property
(a) If JTROS is formed with joint owners who are spouses, there won’t be gift tax payable because
of § 2523 of the gift tax law
iii) 2040 no longer depends on §§ 2515, and 2515a
12) Life insurance § 2042
Not limited to just a commercial life insurance policy
Can be term insurance, or ordinary life insurance as well as other things
Insured person pays premiums to the insurance company
iii) At the death, the insured pays premiums to beneficiaries
Death of the insured is the time that things are transferred
Estate tax treatment – two rules
§ 2042(1) requires that the value of the decedent’s GE must include the value of all property to
the extent that it is receivable by the debtor
(1) insurance proceeds by or for the benefit they must be included
(2) if state law gives them directly to the beneficiaries (not the estate) they are not deemed to be
ii) will include the amount receivable by all other parties, provided that the decedent possessed any
of the incidents of ownership
(1) right of the insured to the economic benefits of the policy (including the power to assign, change
policy, etc.)
(2) if the insured takes out a policy on his right or retains the right to cash it in, or to borrow on the
policy, because it is property whose economic benefit he held before death
(a) decedent will be deemed to possess incidents of ownership at his death, if he or she has the
general legal power to – whether or not they actually can at the moment
(Noel: just because one has the incidents of ownership, though physically disabled)
(3) mere possession of the incidents of ownership in a fiduciary capacity doesn’t count
(4) group term policies: if the employee has the right to designate and redesignate a beneficiary that he
d) escape from tax: if the insured makes them payable to beneficiaries other than his estate or his
executor, or no powers to appoint or surrender, or borrow
amount included is the full amount receivable
if the proceeds are payable over a period of years
(1) if the policy proceeds are paid in lump sum, than lump sum
(2) amount used by the insurance company to determine the amount of the annuity given
lump sum
community property
½ of the interpolated terminal reserve or replacement cost value of the policy will be included in
the wife’s estate when she dies if the husband died first
ii) revocable transfers in community property, as it is only revocable when the last spouse dies.
Afterwards the wife will have been deemed to have made a gift of her ½ interest in the policy
iii) if 2 insurance policies are purchased with community funds on H and W with the other spouse as
beneficiary, ½ of his policy is included under 2032, and ½ the value of the other is included under 2033
(1) if the policy has value, because it has a cash surrender, if it is term, it will be considered as zero
other inclusion rules
if the decedent had none of the incidents of ownership, and no transfer, than no part of the
proceeds would be includable
ii) does not apply to the value of rights of an insurance policy on the life of a person other than the
decedent, though other rules will apply
(1) death benefits may be classified under § 2039
iii) the proceeds will not be includable if they are not payable to the estate, if they didn’t have any of
the incidents of ownership
(1) old test: includable if they were making premium payments
iv) § 2035 (transfers within 3 years)
(1) if a person holds a life insurance policy on her life, and she has been paying the premiums, and she
has all the incidents of ownership, if she transfers within 3 years of death she will be treated (under §
2035d1) that the combination of § 2035a and § 2035d2 to apply – she should life more than 3 years
from when she transfers
(2) transfers more than 3 years before her death, but with payment of premiums: the fact that she
continued paying the premiums, or at least in the amount payable within three years of death will be
includable in their gross estate
(a) new rule: No inclusion even for the premiums pay by the decedent within 3 years of her death
(b) old rule: while no part of the proceeds are to be includable in the gross estate, the amount of
premiums payable within 3 years of death are to be includable (at least before 1981).
(3) If an insured takes out an insurance policy within 3 years and pays the premiums
(a) Purchase and gift, than 2035 applies to impose a tax on the proceeds
(b) If the insurance is taken out within 3 years of the decedents death by the beneficiary, the proceeds
are includable under § 2035, even though there hasn’t been any transfer
(i) After 1981, look to § 2035d2 (different than § 2035a): if the decedent never possessed any
incidents of ownership, but just paid the premiums (and had no interest) the proceeds would not be
included in the GE. But, it would be the subject of an intervivos distribution
(ii) For example
Revocable transfers
One in which the transferor retained a life estate, 2038, or 2036a
b. Since the provisions of 2042, are not exclusive, other code sections, might in principle be applied,
if they would include more – but most of the time 2042 includes more
Power of appointment that would produce inclusion, for example
h) inclusionary principles only cover insurance on the life of the decedent, everything else is under
different sections
if the insured person has died before the decedent, proceeds will simply be cash under § 2033
ii) § 2035b2 includes language that provides that life insurance with restricted rights is not eligible for
the exclusion in favor of transfers that are beneath the amount that us below the $10,00 annual
gift tax consequences of life insurance
i) § 2035b2 includes language that provides that life insurance will be treated as a present interest if
it is completely surrendered else it is a future interest
ii) on life of donor
(1) gift can be transferring the policy
(2) paying premiums on his or her own life when the policy is owned by another person, whether or
not it was ever the subject of a transfer: insured has made a gift of the value of the policy, or to the
extend of the premiums paid
(a) timing for gift tax purposes: complete when the donor has divested himself of all incidents of
ownership and all dominion and control of the policy
(i) if they transferred everything except for the right to designate, it isn’t included, because it could be
(ii) holder of the right to designate the beneficiary conceivable could be
(iii)if the donee of the transfer, were there is a retained power of appointment, a completed gift is
deemed to be taking effect then
(b) strong incentive to transfer them, in order to avoid inclusion in the gross estate, so long as he
doesn’t do it within 3 years of death, and shouldn’t retain any reversionary interest or any power to
revert the economic benefits,
iii) on life of some other person
(1) donor is making a transfer of property of the life insurance of someone else
policy’s cost
other similar policies
iii) if not, adding to the interpolated terminal reserve of the policy the proportionate part of the gross
premium before the date of the gift, which cover the part that extends beyond the date of the gift
13) annuities § 2039 is defined as payment or the right to a period of payments for a period of time,
such as they are a right to a payment for a term of years
other sections
If the estate of the primary annuitant is entitle to a refund at her death, 2033 will bring the refund
itself into the estate for estate tax purposes
ii) 2036 or 37 might apply if the taxpayer has an option to take a lower joint and survivor annuity if
the exercise of the option amounts to a transfer of a retained life estate
private annuities
to close associate, to be made to the annuitant and other people
ii) this kind of arrangement is subject to testing under § 2039, or § 2036 – to see if there are any
strings attached
(1) if there is a transfer with a retained life estate, either because the transfer is security, than § 2036
will require the inclusion of *all of the transferred property, not just the value of the annuity*
c) gross estate will include the value of an annuity receivable by any beneficiary under any form of
contract entered into, other than as insurance policies on the life of the decedent, either alone for his life,
or for any period not ascertainable by his death
time of death is defined as having received the payment, and the decedent possessed the right to
d) for example annuity purchased for self, money is transferred in return for a promise in return for a
promise to pay $80k to the taxpayer
taxpayer is defined as annuitant
each payment each year is a payment of the annuity
iii) general rule of § 2039b is that only include such part as is proportionate to that part of the
purchase price contributed by the decedent.
iv) types of annuities – § 2039 confines its rules to estate tax to survivor annuities
(1) single life non-refund annuity (one payment in exchange from streams), no tax consequences,
because nothing transfers
(a) no inclusion under § 2039, since no one takes by reason of survival
(b) this is simply an expiration at death
(2) annuity contract that goes into effect at death for someone else
(a) no estate tax under § 2039, because she didn’t have any interest in the annuity
(b) gift tax would apply, though
(3) single life refund annuity: if the annuity period comes to an end, before a number of payments have
been paid, the company will pay a refund
(a) something that pays to someone after death, will produce estate tax consequences
(b) § 2033, refund to the estate
(4) self and survivor annuity: upon the death of the primary annuity the annual payments will be paid
to another
(a) something that pays to someone after death, will produce estate tax consequences
(5) joint and survivor annuity: specified sum will be paid each year to two annuitants jointly, and than a
same or smaller amount will be paid to a survivor
(a) annuity results in a transfer that shifts to the survivor at the first annuitant
(6) employer annuities: purchased by an employer for an employee
(a) § 2039b says that any contribution by a decedent’s employer (or former) is to be considered as
contributed by the decedent, if it was made by reason of his employment – will be included even if there
is no direct contribution
(i) if an employer selects the beneficiaries, and if the employee never gets anything, § 2039 will not
include the value of the payments to anyone
(ii) if the employee has a power to designate the beneficiaries, there might be a § 2031 power of
(b) ss doesn’t count, because it isn’t a contract
(c) gratuitous things don’t count
(d) if the right is forfeit able as a result of events that are not in the control of the employee, it won’t
be included
(e) but if the right was not forfeit able, or only forfeit able only within the control, than she will be
deemed to have an enforceable right
(7) included: amount that is receivable by the beneficiary valued at death, prorated to take into
account any other contribution
(a) any funds she holds from previous things will be included under § 2033
community property must be done under general principle
gift tax principles and annuities
a taxable gift may be involved if one person purchases an annuity solely for the befit of another
(1) the purchaser may be making a transfer to another person
(2) need to determine when the transfer is complete
(3) if there is anything offsetting
(4) whether it is offsetting
(5) if there is to be inclusion, what amount is to be included
(6) if it is a future interest, it is not eligible for the annual per donee exclusion
14) Power of appointment : power over property that is held in trust or otherwise, that is exercisable
either during life or death, or by will to determine who will become the income from property. Exercise
is like a transfer
a) Estate: § 2541: will include the value of property the with respect to which the decedent,
exercised, released, the power of appointment – whether or not or how it was exercised, released or
Power of appointment for estate tax: all power of appointment regardless of the technical words,
or local property law connotations (for example power to invade a trust is a power of appointment
(1) Power to affect the enjoyment of trust property or its income is considered to be a power of
(a) Powers to terminate would count under § 2041
(2) Two categories of power of appointment: will include the value overall property in which the
decedent has a general power of appointment, or has at any time they have exercised or released a
general power of appointment, if it was something that would have made it be included. There mere
possession of the power, is treated as such an important component of ownership that the decedent
should be subject to transfer tax.
(a) General power of appointment: unrestricted selection of beneficiaries:
Similar to beneficial power because it can be exercised in favor of the holder
(ii) One could argue this is similar to beneficial ownership
(iii)§ 2041b1 direct or indirect: defines a general power of appointment as something that can be
exercisable in favor of his estate, his creditors, etc. the decedent, or the creditors of his estate
a. powers to consume, invade or appropriate property for the benefit of the decedent based on an
ascertainable standard
b. jointly: if the other person is the creator of the interest, or the other person has an adverse
(iv) testamentary powers are included! – because she could have changed that result by an exercise of
that result, because she chose not to do so
(v) questions
1. whether it was a general power of appointment that was held by the decedent at the time of
death, or exercise at the time of his death
2. if the decedent held a general power of appointment, it is taxable, whether or not it was actually
exercised. – will be effective whenever it is deemed to take effect
3. if the power is contingent on another event, and that event has not occurred, the decedent will not
be deemed to have held the power
if the decedent power is one that is not a general power under estate tax law
4. creation of another power of appointment: § 2041a3 provides that property will be included, if
the decedent by his or her will, actually exercises the power, by creating another power, it is included
only if the second power can be validly exercised as a matter of state law so as to postpone the vesting
of such property for a period that is determined without regard as to the date that the first power was
a. if, by will someone appoints someone as life beneficiary and gives someone a power to appoint
the remainder, and this postpones the vesting of the estate under state law
exercised general power of appointment -- § 2041 does require if a general power of
appointment is exercised or released during life (like incomplete until death circumstances of 2035-38)
if it is property with respect to which the decedent at any time exercise or released a general
power of appointment a disposition equivalent to a general power of appointment owned by him. For
example a power that is used to appoint a remainder to someone while retaining a life interest
the release or lapse of a power of appointment is treated as an exercise of the power.
c. The lapse of a power is treated as an amount exercising the power and is treated as if it was
exercised. If someone releases the power, it will be included in the estate, if he had transferred the
property itself it would have been included under 2035-38
Exception where the power is permitted to lapse, if it didn’t exceed 5 or 5, whichever is greater.
Usually it is by year
b. The amount which exceeds the greater of 5 or 5 will be considered with 2041a2 or 2046a2 –
they have transferred the property subject to the unused power to the reamindermen
c. If something is irrevocably exercised, or released, etc. it won’t be included if it is 1) not within 3
years of death and 2) the former holder of the power retains no interest or control of the property !
Inclusion of power of appointment
Gross estate will include all of the property that is subject to which the decedent held at their
death, or had exercised in a way that is covered under 2041
ii. If a power of appointment exists only as to a limited interest, it will apply only to such interests or
such parts
iii. If there is an overlap between 2041 and 2048 – § 2041 will not be allowed to reduce the amount
of an inclusion – power of appointment doesn’t exclude the amounts reserved by the decedent to his
Disclaimer of renunciation of a general power of appointment not a release of such power
(b) Special power of appointment: can only be exercise in favor of a restricted group of beneficiaries
(i) Non-taxable power of appointment:
(3) Holder of the power doesn’t need to have owned, or ever owned the property to be taxable. §
2041 is not a grantor section.
b) Gift: § 2514b: exercise or release of a general power of appointment shall be deemed to be a
transfer of property by the individual who possessed the power, but the disclaimer will be treated as a
Lapses will treated as lapses out of 5/5
ii) Definition of general power of appointment for gift tax purposes under 2514c, is like estate tax
iii) Lifetime taxes or release are treated as a release by the gift tax
iv) The exercise, which creates another power, under state law, can be exercised so as to postpone
vesting, for a period without regard to the creation of the first power, will be treated as a holding by the
first power
Term doesn’t include powers reserved by a donor to his or herself
(1) The power of an owner of a property to dispose of his own interest is includable under 2511,
without regard to 2514
(2) If a trust is created by H, and it provides for income to W, with power in the wife to appoint the
property to a class of people, and a further unlimited testamentary power if W exercises the intervivos
power in favor of her children, this is a taxable gift! This also constitutes a relinquishment of her general
power of appointment by will.
vi) Gift tax treats someone who exercises a power of appointment, even in favor of the person who
would take in default, much as the same way they would have taken the same power that they exercise
(1) By exercising the general power in favor of someone else, they are giving power that they could
have given to someone else
(a) The exercise of a non-general power of appointment, isn’t taken as a gift, except under 2514d,
when it is used to suspend.
(b) Generally one has to apply general gift tax principles as to the complete, etc.
15) Inclusion – is separate from the valuation
a) When applying an inclusion rule, first ask whether anything at all will have to be included in the
Once it has been determined that an interest is to be included
16) Valuation
Fair market value of the property in which the interest is held
Determine size of interest
For example gift
(1) What property has been the subject matter of the gift
(2) Separate question of how the includable interest shall be valued
§ 2031 and § 2033
§ 2033
(1) if property is included, value shall be the value the date of death, unless there is an alternate
valuation date
(a) the fair market value is defined as the price in which things would change hands between a willing
buying and seller
(b) not the price of a forced sale
(c) not the price in which some item is sold to the public
(d) stocks and bonds – fair market value per share or per bond on the valuation date, on bid and ask
prices, or based on the soundness, the interest yield, date of maturity
stocks will look at fundamentals
(e) unlisted stocks will include all relevant factors – including similar corporations
(f) note: special rules for valuing the transfer of a corporation, and what goes to a family member.
See estate freeze issue – under § 2701
(g) interest in a partnership is valued at the amount that a willing buyer would pay a seller
(h) promissory notes valued at the value of unpaid interest
cash at value
household effects is willing buyer and seller
(2) see 25.2703 which contains rules for property subject to options and agreements if the contract
has been changed after 1990
(3) capitalization approach takes the income from property and capitalizes it at some rate or other
(4) annuities, life estates, terms for years
(a) longevity of the person who is alive on the valuation date becomes central, becomes central –
ii) ch 14 – 2701-04 valuation rules for transfers of interests in corporations and partnerships and
trusts when those transfers took place between family members
(1) family might recapitalize the corporation, and the senior general in the family might give the
common stock in the younger generation, holds most of the value in the corporation, and the future is
speculative, and the future holds the dividend rate in the preferred stock
(2) this is what keeps the property that has high value, but other things that have low value – the point
that has the big vale – the potential is to get this out of the hands of the corporation between their deaths
(3) § 2701 places a value of zero on a distribution, put, call or conversation rite, which applies to an
applicable retained interest on family transfers, this means that if property is given away, but is subject
to some sort of right that would reduce its value, that right will be valued at zero, and therefore the
entire amount of the property will be taxed as a gift
(a) exception: qualified payment is a dividend payment payable on a qualified basis, to the extent that
it is determined at a fixed rate
(b) 2701 doesn’t apply if market quotations are available, or the retained interest is of the same class
(c) 2701 doesn’t apply if the retained interest is proportionately the same as the transferred
ownership without regarded to non-lapsing differences in voting power
(4) 2702: interests in trusts, they will be a zero value in the retained interest and therefore increases
the amount which will be applicable by the transfer trust
(a) 2702 doesn’t apply to incomplete non-gift transfers
(5) 2703: value of property shall be determined without regard to any option, agreement, or price
less than fair market value, or any restriction on the right to sell or use this property .
(a) doesn’t apply if the option meets three requirements
bone-fide business arrangements
(ii) not a device to transfers for less than full consideration
(iii) similar to arms-length transaction
(6) 2704: if there is a lapse of voting rights in a partnership, and if the individual and their family hold
the interest, it will be treated as a gift
(a) value is the excess of the interest held before the lapse over the value after the lapse 25.2704
iii) special use valuation… 2032A of the code
(1) only for estate – can be an election with respect to qualifying farm and small business real
property, qualifying property can be viewed at less than its fair market value
(a) this is to keep things in their current use (for example farms as farms) – fair market value is usually
for highest and best use
(2) to qualify
(a) must have been used as a farm
(b) or a small business
(c) must be family owned
(d) must pass to qualified heir
iv) alternative valuation date – § 2032
(1) executor can elect to value everything according to alternative valuation rules, provides that
property included in the gross estate, which hasn’t been sold, shall be valued as of that date
(2) if this election is made, and there e is property that has been sold, exchanged, etc. that property
must be valued as of the disposition, sale, etc.
(3) any interest that is to be effected by a mere lapse of time, it is to be valued as of the date of death,
any interest that is effected by a mere lapse of time (for example patent, life estate, etc.)
(a) original purpose was to soften the impact of the estate tax, and the drop in property values
(b) the alternate valuation date must be elected, if it is elected it applies to all of the property in the
estate, not just to the exceptions. Can only be used if the effect is to decrease the value of the gross
estate, the gift estate and the generation skipping tax.
(c) Now, income earned from the GE between the death and the avd, doesn’t count. But incomes
other things
Included property continues to be the same for valuation purposes
(ii) Property earned or accrued after the date of the decedent’s death, is excluded in valuing the
decedent’s estate
Property that has been transferred during life
Value at death of the property that was actually transferred
If the gift was made in the form of cash, the value is the value of the cash gift
iii) 2035: neither income received after the transfer, nor property that is purchased with the money is
to be included in the estate
(1) stock dividends won’t be included
iv) retained powers
(1) 2036a2: powers of revocation will cause the full value of what could have been gotten back will be
included – including what was purchased.
(a) If the power at death pertained only to some interests, than § 2038 would require the inclusion
only of the value of that interest
(b) If a decedent dies with the power to alter or designate the beneficiaries are under 2036a2 or
(c) Income that was accumulated and added to trust principle after the gift and before death had to
be included in the estate
(i) Some say that a retained 2036 or 38 power, makes it incomplete, makes things incomplete until
(2) Consideration that is received in return for an incomplete inter-vivos transfer
(a) Value of the consideration shall be determined at the time of the exchange – not based on
subsequent facts
(b) In determining whether adequate and full consideration was received, the value is determined at
the time it was received
Valuation for gift tax purposes
2512: gift in the form of property, will be valued at the date of the gift
ii) if property is valued at less than full consideration in money or money’s worth, than the value will
be established as of the date of the gift
(1) the clause value as of the date of the date of the gift is the price that the property would change
hands between a willing buyer and seller
(2) Rev. rul 93-12: corporate control in the family won’t be considered in considering the corporate
control in transfers between children
iii) Note: 2701 and its regs for corps
iv) 2702 for trusts to family members
no alternative valuation date
vi) no special valuation procedures for farms, and businesses
17) Unified credit provides a credit that is constant – comes off the bottom. Every estate that rises
above the exemption equivalent gets the same benefit, even though it operates as a credit. It isn’t
18) Exemptions
There are no longer an exemptions
19) Exclusions
a) § 2503: Exclusion, in computing taxable gifts, a per donee exclusion of $10k is granted to every
§2503a: amounts of gifts made during the calendar year, minus the deduction for charitable and
gifts of future interests will always be included
Heyan: substance over form
6019: gift tax must returned if the exclusion and deductions don’t take care of everything
transfers made in satisfaction of a support obligation are not the same
amounts paid as tuition or medical care
doesn’t need to be a dependant of the donor, and it doesn’t need to be a tax exempt institution
gifts of future interests cannot be covered under the annual exclusion
exclusion should be available only if the donees can be identified with certainty at the time of the
future interests for purpose:
(1) reversions
(2) remainders
(3) and other interest or remainders or estates, whether vested or contingent
(a) even if they know who it is, and even if it can be said with certainty of at least some certainty
(4) term future interest does not refer to the contractual rights that exist in bonds, notes, etc.
(5) : unrestricted right to the immediate use or possession to property is a present interest in property.
(a) Possibility that the exercise of some power might diminish it, is to be disregarded, as long as no
power would pass to someone else.
iii) Transfers in trust, go to the beneficiary – so they have to show that some beneficiary has to show
some present enjoyment.
(1) Term present interest connotes the right to a substantial present economic benefit
(2) The time not when title vests, but when enjoyment begins
(3) A mandatory accumulation trust won’t count, since even the right to income will only vest later
(a) Discretionary probably not as well
(4) If the trustee has the power to invade corpus for the benefit of the remainderman, but only to the
extent that he couldn’t touch it would be considered to be present
(5) Crummy If the amount of income to be received at the time, and the beneficiaries have a power to
compel the payment or both on demand, that power makes the gift a future interest
(6) A gift that is incomplete will not be taxable at all, but a gift will be taxable even if it is ineligible,
because it is a future interest
iv) § 2053c: Gifts to minors, Crummey trusts
(1) minors usually can’t enjoy in the same way
(a) now dispelled: there was concern that even an outright gift would have to be treated as a future
interest because the minor’s legal disability meant that until he was an adult he wouldn’t really own the
(2) usually made to a custodian – which is regarded as a present interest
(3) Crummey: a Crummey withdrawal power given to a minor will make it a present interest so long
as there is no impediment to the appointment of a minor to let them possess the thing on the minor’s
(a) Not a future interest, if the income may be used by the minor for the minor before 21, or as the
donee may appoint under a general power of appointment
(b) If the requirements are met, than both the income interest and the gift of the corpus will qualify
(c) However, if it is restricted beyond 21, only the property up until 21 will qualify as a present
Income interest between 21-25-x will be considered to be future
(4) If neither the statutory tests, or crummy tests are met, it can still satisfy, if income is paid annually,
and corpus being distributed at the age 25 – a gift of the present interest with respect to the right to
income, and a future interest with respect to the rights to corpus
20) Deductions subtracted from the gross estate to arrive at the taxable estate
Estate tax
§ 2053a: Expenses
(1) Expenses
(a) Funeral expenses as costs of the community
Please visit
(b) Administration
(c) Claims against the estate – state law can limit
Claims against the estate can be deducted in full if the represent personal debts of decedents
(2) Deaths
(3) Taxes
(a) State and foreign death taxes – § 2053d can deduct or credit
If they deduct it is a waiver of the credit
(ii) Usually the credit will be more advantageous
(4) Losses: To the extent not compensated by insurance
(a) Fire
(b) Storm shipwreck
(5) In a community property state it is only those whose obligation of the decedent, or ½ of the estate
§ 2053b: expenses in administration of what is in the gross estate, even if not in the probate estate
(1) for example deduction in defending a lawsuit
iii) § 2053c: limits 2053a,b to claims against the estate are limited shall be limited to the extent that
they were bone-fide and for consideration
(1) gifts to charity be okay, and the deduction will only be allowed only to the extent in § 2055, only
to the extent in general
(2) tort damages
(3) anything that exceeds the value of property that is subject to claims will be disallowed, unless they
have already been paid
iv) § 6430g – can’t take the same deductions on income tax and estate tax return
(1) can take the deduction either in the estate tax return or in the income tax return for the estate.
Deductions under 2621a2, and 2622a2 can’t be claimed on any deductions
charitable deduction § 2055
(1) estate tax
(a) definition
unit of government
(ii) Religious, etc.
(iii) veterans organization
(b) power of appointment and charitable contribution deductions
(i) power of appointment over property, the property subject to the power is included in their gross
(2) Gift tax
(a) Contributions to charities are not treated as taxable gifts
(b) Disallowing charitable gifts of future interests, under § 2055e, and 2522c to prevent abuses by
some taxpayers who gave future interest in property to charities but retained a life estate, but whose
deductions were overstated
(c) § 2055 disallows deductions of most remainders to charities in estate tax unless a
(i) CRAT – must received a fixed dollar annuity but not less that 5% of the trust corpus at the time
for the trust
(ii) Or CRUT – fixed percentage not less than 5% of the trust’s assets
(iii) Or PIF is used, maintained by the donee charity, with remainder to charity
(d) Works of art and copyright are separate properties, and will qualify – if the donee’s use is related
to its exempt purpose
21) Policy about deductions
Deductions have a wealth variant quality
b) $1k expense. The amount of the tax saving depends upon the applicable rate of tax to the top
$1k to the estate
smaller net estate pays tax at a different rate
the deduction saves each estate the amount it would pay if it didn’t have the expenses to bear
22) Marital deductions and split gifts
a) Allowed for property that passes to the surviving spouse that passes on the decedent’s death, in
the estate tax to his or her surviving spouse
Split gifts, lets people elect to allocate ½ of each gift to each spouse
§ 2056 Unlimited marital deduction under ERTA to the surviving spouse
(1) requires that the transfer consist of any interest in property that has been included in the decedent’s
gross estate
(2) state requires that the interest not be a terminable interest
(a) § 2056b – limits marital deduction to non-terminable interests (property which qualifies for the
deduction will eventually be taxed in the surviving spouse), shouldn’t be allowed if it passes to someone
else without taxability. Likewise, property that has been shifted between spouses should be shifted
when it leaves that generation
(i) a terminable interest will avoid taxation, because 2033 doesn’t reach interest that terminate at
death, therefore property disposed of like this shouldn’t be allowed to avoid taxation by qualifying for
the marital deduction in that estate
(ii) an interest in property won’t qualify for the marital deduction, if it will fail or terminate on the lapse
of time, if an interest in the property passes or has passed for less than adequate consideration to a
deduction will not be allowed for a terminable interest for his decedent
2. there mere termination of the surviving spouse’s interest alone will not make the bequest ineligible
– it is designed to research situation such as a life estate where a non-relegated reainderman might
possess the pro
(iii) five exceptions to the question of whether or not the surviving has received a non-deductible
terminable interest (interests that expire don’t count
common disaster clause in will or within 6 months,
2. life interest in income from property and a general power of appointment with respect to that
marital deduction should be available, since, under 2041 it will be taxable
life insurance, endowment or annuity contracts that are payable under specified circumstances
often in concert with marital deduction trust
all the income must be paid to the wife each year (will be taxed)
ii. a residuary trust may be created to pay to the wife all of the income for her maintenance (this
won’t be eligible for deduction) but will be taxed
b. life estate in qualified terminable interest property will not be treated as a terminable interest, if the
decedent’s executor so elects – and its’s entire value qualifies for the marital deduction
c. property with respect to which a property election is made, and passes from a decedent to a
spouse, and is entitled to all the income for life, payable at least annually
executor can only appoint to the surviving spouse
qualifies for deduction in decedent’s estate
interest is taxable in the surviving spouse’s estate, even though they don’t own all of it
iii. value of the entire property is transferred
iv. if the surviving spouse were to make a lifetime transfer of his or her lifetime transfer will be treated
as a surviving spouse interest
an interest that would normally not be taxable, can be made to qualify for that deduction if it is
agreed that the underlying principle won’t be taxed in the second spouse
e. this allows a decedent to qualify his or his property to the marital deduction – it isn’t necessity to
will it.
Can be in trust
Doesn’t need to be subject to a testamentary power of appointment, thought it can be
If she has a power of appointment, than it will be subject to transfer tax at the date of her death,
or when she disposes of it
2059 and 2044
5. life estate granted to a surviving spouse, if the remainder passes to a qualified charity upon the
spouse’s death – it is the life estate only that qualifies, the remainder goes to the charity
(iv) bequest in trust will not be deductible, a contingent requirement is that the trust has to be funded
(3) if it is to be paid out of assets not qualified, it must be reduced by the value of ineligible assets
(a) a husband who left his interest in community property to his wife, because the theory of unlimited
marital deduction is now a theory of allowing rearrangement between the spouses
(b) the statutory terms interest in property, and passes or has passed from the decedent or the
surviving spouse
(4) § 2056 qdots for non-citizens – disallows unless in a qdot, because they might not be taxed
(a) must have one trustee who is a US citizen
To remove the difference, congress attempted to eliminate the estate and gift tax advantages
iii) A testamentary or lifetime gift would automatically be deemed to be a gift of the total gift by each
Marital deduction in the gift tax can only be limited to the aggregate of the includable gifts
23) Credits taken against estate taxes
24) For estate tax purposes: excise tax on giving wealth
Tax base
(1) inclusion
(2) Deductions
iii) credits
(1) unified credit (including death and gift taxes)
Tax base: at time of death
(1) 2033: all property the decedent had an interest in at TOD (instant after death)
(a) must be a beneficial interest
(b) must be transferable upon death by decadent
(c) vested remainders includable
(d) eclectic states rights[8] -- only by state court[9]
(i) Homestead interests[10] are includable as long as the high court of a state does not say that the
estate didn’t own them
(ii) If the highest state court doesn’t do anything than the federal government can do what it is
(e) Joint tenancy with right of survivorship (will be included in 2044):
(f) contingent remainders
if a contingent remainder did not fail on decedent’s death, it is includable[11]
(ii) if a contingent remainder conditioned on the survivorship it is not includable[12]
(g) back salary that the employer owed (decedent’s rights have vested)[13]
(h) IRD: Interests and rents due at death
Death benefits that vest at death are includable: Fair market of assets immediately after death[14]
Expectancies are really not included
(k) Shares of stock as investment assets
(i) Unincorporated business: fair market value of assets of the proprietorship that the decedent
(ii) Giving someone shares, but still have the right to vote are considered to be the retention of
(iii) Incorporated: fair market value of the shares of the corporation
(m) Insurance
Joint and survivor annuity – one will continue to get the policy as long as the other lives
(2) § 2035: any gifts within 3 years are brought back into the estate, rather than as a gift. Assumption
is that a gift is inapplicable, unless otherwise stated
(a) 2035a: if he hadn’t made the fit, section 2033 would have included it, it is included under 2035a
36: income
(ii) 37; reversion
(iii) 38: revocable transfers
(iv) 42: life insurance section
1. if you hold any incidence of ownership over a life insurance policy at the TOD, it will be included
in the estate
if you make 3 premiums on the policy, the full 100k proceeds will be included in the estate
(b) doesn’t include things sales for adequate consideration
(c) Therefore, the appropriation is taxed to the estate, at a higher value, rather than as a gift as a
lower vale
(d) Insurance policies gifted to others
Insurance on the decedent -- Value of policy at date of decedent’s death[17]
(e) Had it been retain, would have enlarged under other provisions[18]
(f) Gift tax paid within 3 years of transfer is included in gross estate[19]
(g) Note, no income fresh start[20]
(h) Revocable transfer, that the decedent had the power of revocation over, is not includable in gross
estate, but is treated as a gift
Life insurance:
Would be included in the estate if you owned any incidence of it
(ii) But if decedent gives life insurance on themselves to someone, it is only value at its fair market
value. So, shifting between gift and estate tax is dramatic under 2035.
(iii) No overlap (2036 only) where the decadent transfers to a trust, with income for life
(iv) 38 only
(3) Comparing 2036 and 38
(a) If a decedent retained a power to designate who shall have the income, the value of the entire
property is includable under 2036a2, but under 2038 it would only be included only to the value of the
alterable income interests
(b) On the other hand, the same result would be reached whichever rule would be allied
(4) 2036: (income and property) value of the interest in the property included. inclusion with respect
to income, (cf may apply if at death, the decedent has no currently effective interest, right or power -2038 applies only to interests that are subject to change when the decedent dies)
(a) if enjoyment is retained in the property it is includable under 2036[21]
for his life
(ii) for a period not ascertainable without reference to his death
1. for example entitled to income payable quarterly for his life, but will receive none of the income
for the calendar income in which he dies (not always recognized)[22]
2. Transfer by D to W for life, than to D for life, with remainder to children. – period for which D
has retained an interest that can’t be determined without reference to his life
(iii) for a period that does not, in fact, end before his death
1. for example: trust with income for 10 years, with remainder to C, and if he dies within 10 years,
it comes in
(b) basic rule is that retaining income interest is equivalent to ownership
(c) if they have transferred property, but retained beneficial interest, and control over other’s interest
corporate shares
1. 2036b: retention of the right to vote directly or indirectly, are considered to be the retention
closely corporate shares (possessing at least 20% of the total voting power of all classes of stock)
of a non-closely held corporations don’t seem apply
(d) transfer for bone-fide ownership pulls it out of 2036
(e) transfers for insufficient consideration of an remainder (annuiting, UIT, or remainder) interest
2036 could be applicable (2nd) – treated as almost a gift (to non-family members)
if not a gift than: the value of the corpus at the time of death – check this (page 11 of note)
if an individual makes a transfer in trust, and they retain an interest in the trust
2702 transfer – transfer to family member
(ii) 2036 might not be applicable (3rd) – treated as bone-fide sale
(iii) note: 2702 values the income interest of a familiar transfer at zero
and you wouldn’t be making an insufficient transfer to a nonfamily member.
(f) Powers to invade corpus for other party
(i) A mere power to invade corpus (for another party) does not bring the estate under 2036[23], but
if one can invade the corpus, for if one can invade the corpus, so that the income interest of one of the
benefices is reduced in size, than the ownership will fall under 2038)
(g) Enjoyment retained
Two ways
Have you retained a right to enjoy income from property? – under 2036a1 this is include
For example income to life and remainder to C (2036a1)
Do you have the power to designate who is going to enjoy the income (2036a2)
(ii) Where the trustee is required to pay income or corpus under certain circumstances, whether or not
those circumstances have occurred
(iii) Trustee is required to pay income or corpus to discharge the decedent’s debts or the child support
(iv) Trustee is required to use the income or corpus to pay premiums on life insurance owned by the
(v) Examples of no retained enjoyment
1. Trustee has absolute discretion on whether or not to pay income to the decedent, and does not,
provided that there is no pre-arrangement
2. Trustee is required to pay amounts to someone, there is no right to direct the use of the money for
support purposes
(h) Power to designate (really a 2036 power), and unless the power to design changes the value of
one of the beneficiary’s interest (2038 power) it won’t be includable
If it relates in any way to principle than 2038 applies
Power to accumulate /not accumulate income is really a designation issue[24]
Retention of a power to accumulate is a power to designate[25]
(ii) Some people say that a power to accumulate is really a power to direct it to someone else
(j) Unrestricted power to restrict the power to change the trustee is not 2036 power unless you have
to appoint yourself[26][27]
(i) If a court removes someone as trustee than 2036a2 applies, but if they are replaced with an
independent trustee, than it won’t apply[28]
(k) If a trustee is subordinate, that it will apply – the trustee should be totally independent
If a trustee’s powers are determined by ascertainable standards than 2036 doesn’t apply[29]
Non-adverse parties are not related, or employed
(m) If it is a non-adverse party, can still be excluded if for ascertainable standards[30]
(n) Giving someone shares, but still have the right to vote are considered to be the retention of
(p) Controlled corporation
If D or D’s relatives own over 20% of a controlled corporation
(ii) Question is what percentage of the stocks does he have
(q) 318
only voting stock matters: inclusion if right to vote the stock transferred was retained
(ii) control is defined as ownership of 20% or more of the voting stock[32]
only needs to control within 3 years of death
voting power is defined as power to elect directors[33]
(iii) any stock owned by trusts or relatives is attributed to the decedent
3. if the decedent has the power to obtain the right to vote, he has retained the vote for purposes of
(r) 318 inclusion of value of income from transferred stock in controlled corporation
(i) Control of cooperation is defined as after the transfer and within 3 years of his death, the descend
t had the right (alone or in junction with any1 else) to vote 20% or more of the total voting stock, or the
decedent or his family owned 20% or more of the total voting stock.
He has retained enjoyment only of the voting stock
2. The fact that a relative of the decedent is trustee of a trust, it shall not require that a trustee has
retained that stock
If the decedent has the power to obtain a right to vote, he has retained a right to vote[34]
Right to vote means the power to vote that is either alone or with other people[35]
(ii) If a trustee happens to own 20% of the stock, and the trust owns 5%, than it is not includable –
check this
(iii) The cessation or relinquishment of the right to vote the transfer stock is transfer of property for
purposes of 2035
(iv) Doesn’t matter how much is in a trust that D doesn’t control, it matters how much stock D owns
(for example treating the corporation like a trust)
(v) Additional purchases don’t count as ownership, unless party who sold them the stock is a family
decedent will be treated as owning a closely held corporation, if his decedents own a share in it
(vi) if donor doesn’t retrain voting right
(vii) division of voting rights and ownership
no inclusion in GE if the transferred stock has not the voting rights
(5) 2037: transfers taking effect at death (reversionary interests)
(a) transfers of remainders in which the decedent has a reversionary interest in the property
(b) four criteria
transfer by decedent
(ii) current possession only by surviving decedent
(iii) retained reversionary interest
(iv) value of reversionary interest has to be greater than 5% of the whole property
(c) reversion by operation of law does count: [36]
(d) if there is a general power of appointment than 2037 doesn’t apply (2041 does apply)
(e) can avoid by setting term of years that is reasonable
(f) reversionary interest does fall under 2033 if the contingent remainder doesn’t fails at death
if it fails at death, it isn’t included
(ii) if reversionary interest is cut off at death, than 2033 doesn’t apply
(g) if there is a reasonable term of years, 2037 doesn’t apply (another 2036 does)
(h) if possession of the property could have been obtainable though surviving the decedent or
something else, than not includable
if happens to fall into the three period, there may be a gross-up of the gift tax
once 2037 does apply, the reversionary interest will apply at the tod for the entire amount
(6) 2038 (revokable actuarial transfers) will include property and actuarial value of rights to enjoy the
(a) 2038 powers are upon the value of any property that has transferred during his lifetime, which
could be revoked (is “subject to any change through the exercise of a power by the decedent”)[37]
(i) Whether there was a power: if the property was transferred by the decedent during their lifetime,
but the decedent retained an interest in it, than 2038 will take effect.
The powers to revoke the transfer must be revocable at death
Powers that are subject to contingencies do not count[38]
Contingency must not be in the control of the decedent[39]
Contingency did not occur[40][41]
c. Factual or legal disability to exercise the power does not make the power cease to exist (for
example if someone is incompetent to exercise the power, he still has power)[42]
But, powers subject to judicial restraint, are not taxable[43]
3. If the power arises by operation of law, than it is included as a power under 2038[44]. For
example state statue gives H a right the revoke a transfer to W.
(ii) What the power was - ministerial powers don’t count (to alter, amend, revoke or terminate) – the
power must affect enjoyment
1. But, on the other hand, ministerial conditions where the contingency is subject to only a ministerial
condition such as the giving of notice or expiration of time.
Note: if a time period is involve, the amount included in the estate is discounted[45]
b. Power to allocate receipts and disbursements will effect the be consider to be managerial, not
c. Power subject to an ascertainable standard is not includable[46] but power that are vague
Note: if there is a fixed, external standard by which such, that could be used by the
Decedent/transferor to compel distributions it will count
Powers to alter or amend, or allocate
Powers to alter and amend are treated the same
Power to add new beneficiaries, or invade corpus for the benefit of an income beneficiaries or
ii. Power to alter the interest of beneficiaries will bring it in, even it could be exercised only by will!
iii. Power to accumulate is not taxable[49]
b. Power to allocate capital gains either to capital gains or income, means that the decedent has
retained the power[50]
Acceleration of enjoyment is a change
Power to accumulate is not taxable[51]
Power to revoke is a power
Power to revoke with nominal consideration (for example borrow or transfer the trust corpus) is
a power to revoke[52]
Power to terminate
If D can either terminate or effect the time and manner of the trust property it is enough to be
Transfers to minors under UTMA
Is includable, if the D dies before the minor attains minor attain majority. Custodian may apply
income or principle for the minor’s benefit, for the support or maintenance[54][55] -- can be gotten
around by naming someone else custodian, will not be involved if a 3rd party is involved and 2036 will
not be invoked
Power must be exercisable either by decedent or by the decedent and another
Joint powers
Doesn’t matter if someone who holds the power has an adverse interest[56]
ii. Adverse interests might be an a requirement of the concurrence of someone who stands to lose
their interest in the trust
Solely by another
If a power to alienate is exercisable solely by another it doesn’t count at all
Power to replace trustee is consider to be a power to alienate[57]
Power to compel the use of the trustee’s discretion is considered to be a power
Power to affect the enjoyment of others is sufficient[58]
(iii) Effect of a release (within 3 years to D’s death)
Relinquishment of a power within 3 years of death, means that they still have the power[59] --
2035 – 3 year rule: if relinquished during the 3 year period before the death, than it is
2. Not under 2035d2 (no longer here): If the decedent had a revocable trust, and than allocated,
irrevocable portions of the trust, this is a withdrawal followed by a gift.[63] (will be treated as a gift
and into the beneficiary’s estate)
(iv) The amount of the power (taxable): value of the interest that is subject to taxable power
1. If the power only effect’s a particular beneficiary’s interest, than only the value of that taxable
interest is in the transferor’s estate[64]
To allocate income between beneficiaries, doesn’t change the amount that is includable in the
estate, but 2036a2 will get this because the power to designate who shall possess or enjoy
Important to realize whether the income or the corpus is within the control of the Decedent
3. If the decedent has the power to direction invasion of corpus and distribution to the owner of the
remainder, the entire value of the trust property is included because the other beneficiaries are
The only time that 2038 applies without 2036
If Decedent’s power effects only the remainder, and not the income interest, than 2038 is in
exclusive control. 2036a2 powers don’t include a power of the transfer of property itself, which don’t
effect the value of the income of the decedent’s life[66]
b. If the decedent doesn’t retain a power in connection with a lifetime transfer. D with income to A
for life, with
(b) Relationships that 2038 has with other sections
2036 won’t affect transfers made before 1931, and 2038 effects transfers regardless of their date
2038 doesn’t care about the source of the power, whereas 2036 wants the power to be retained
2038 applies even though the power will only affect enjoyment of interest after decedent’s death
2036 is limited to only income or property interest that will be affected during the decedent
2036, unlike 2038 will not operate if the power is subject to a contingency beyond their control
5. 2036, unlike 2038 taxes the entire property to which the retained interest or power relates.
2036, on the other hand taxes specific interests
(ii) interaction with 2035 – 3 year rule: if relinquished during the 3 year period before the death, than
it is include[67]
(iii) 2037 – transfers taking effect at death, interaction with 2036 revocable interests
1. if the decedent retained a reversionary interest in the property worth more than 5% of its value,
2037, 2038, and 2036 would apply
(c) Remainder interests (all property beneficially owned by T at the TOD):
(i) Election If the estate of a decedent includes a remainder interest[68] the executor can pay that tax
6 months after the termination of the precedent interest[69]
Policy: property is not available to pay the tax
IRS can extend this length of time 3 years by a showing of reasonable cause[70]
(ii) Each probability of each remainder must sum to 100% -- sum of their interests equal to the value
of their property is equal to 100[71]
Need the interest rate and the terms
(d) Smith v. Seanaucy: Gift tax is not defeated if the interests are complex. All interests must add up
to 100%
(e) Power that would pass, and require the giving of notice are included[72] –
Any power to alter or amend, or alter – than it is included –
All powers include powers that could be exercised to benefit anyone, not just the decedent[73]
Power to terminate is a power[74]
Might not bring the entire corpus into estate, because only includes interests that are subject to
change as a result of the power
If he wouldn’t have had it anyway, it doesn’t matter[75]
Power to name more beneficiaries is a power
It is not a power,
If the power is exercisable only with the consent of the parties having an interest (vested or
b. But, if more children are added to the will it is not a power[77] (decedent’s ability to have more
children, add them to the will, is not a power to change the beneficial interest)
Power to invest is a power – if there is a possibility to gamble, it is a power[78]
Restrained power is not a power[79]
(ii) must be demonstrable, not speculative[80][81]
(iii) If the power is given to other, under which the decedent has no control, than it is not included[82]
(iv) Reservation of a power to alter:: If the decedent has the power to revoke a transfer, than it is
included in his estate, if he had power when he died[83] -- but if it is governed by an objective standard
it isn’t a power to alter[84]
(f) Revocable trusts are usually not included[85]
A right to accumulate interest in a corpus,
(ii) Revocable living trusts
(7) 2039: annuities (not life insurance): the value of an annuity of an annuity or other payment
receivable by any beneficiary by reason of surviving the descend under any form of K or
(a) defining annuity (four ways it could apply) (includes understandings, arrangements, and plans) [87]
and doesn’t include benefits paid by law[88]
straight annuity that terminates on death – nothing includable
(ii) straight life annuity that gives benefits to other, nothing includable, unless the decedent had the
power to change the beneficiary (which would bring it under 2038)
(iii) refund annuity (where a guaranteed amount is payable) payable to estate
refunds are payable to the estate under 2033
not taxable under 2039 because not taxable to a surviving beneficiary
if no refund is owned, nothing is included
(iv) refund annuity payable to another, if the decedent has the right to change is a 2038 revocable
(v) Joint survivor or self annuities is defined as payments are made to the purchaser and another joint
during their lives, with benefits continuing in favor of the survivor during life. Under a self and survivor
annuity plan, the primary annuitant receives payments during life, and after death the payments continue
to a designated beneficiary
(vi) Does not include a situation where the decedent or the beneficiaries have a mere expectancy
(b) Inclusion: the estate tax is imposed upon that value of the survivor’s benefit that is proportionate
to contribution made by the decent[89] but any contributions made by the employer are treated as
having been made by the decedent
Defining the decedent’s interest[90]
If the decedent alone, or with another person[91]
Possessed the right to receive, or received the benefit[92]
If the decedent was entitled to receive a pension upon retirement, with a death benefit payable to
a designated survivor, and he died before retirement, the survivor’s benefits would be includable under
§ 2039
If the decedent’s right to receive future payments is subject to a remote contingency[93]
c. If the decedent has received everything payable under the contract, and there is no more to get, it
is not includible[94]
For his life or for any period not ascertainable without reference to his death[95]
Or for a period that does in not, in fact end with his death[96]
(ii) Separate contracts don’t preclude taxation. If two annuities (one to employer and one to
designated beneficiary) are created at different times, (for example by employer) than both are included
in the estate (assuming qualified plans)[97] [98]
If a an employer consecutively sets up three plans, they are considered to be one
Life insurance can fall under a package, but only under the 5th circuit[99]
(iii) if there was a right to retirement benefits, that right may be viewed as a part of the annuity contract
as a part of the annuity contract under 2039[100]
(c) Control and definition of contract
If the employer has complete discretion, there is no contract[101]
(ii) Survivor’s benefit’s don’t count
(d) Must be “payable to the decedent” in that the decedent was actually receiving payments without
regard to whether he could require their continuation[102]
(i) If there are multiple criteria – 2039 doesn’t require that the beneficiary’s interest be conditioned
solely on surviving the decedent
1. We look to which criteria was actually fulfilled if there were multiple criteria, so if, for example
there was an alternative criteria (such as the beneficiary reaching age 70, and age 70 is reached, than it
is not includable)
(e) Excluded
(i) salary is excluded if it comes after death[103] (but retirement benefits disguised as salary are not
(ii) “right to receive’ if the payments are at the time of the decedent’s death enforceable, even though
the decedent may be dead at the time scheduled for payment[104]
(iii) doesn’t include life insurance policies on the life of the decedent[105]
1. whether a life insurance risk exists at the date of the decedent’s death is defined as when is when
under the contract (premiums paid plus earnings allocated to the cash value of the contract) is less than
the proceeds that become payable to the beneficiaries upon the death of the primary annuitant
(insured)[106] -- all or nothing – if the difference between the reserve value and the amount of the
proceeds is even one cent, than it is life insurance
(iv) salary payments are not included
(f) amount included
size of what is payable to the survivor, minus what the decedent paid (see fn)[107]
(8) 2040: joint interest
(a) joint interests
revocable joint interests don’t count
(ii) if the decedent’s interest and that of the other co-owners were acquired gratuitously from others,
a co-owners estate is taxed at death on his ratable share of the property, even though his interest
expires with him[108]
gifted property is treated as if co-tenant had contributed an equal amount
if jtros acquired, the amount is the value of the property divided by the # of tenants
(iii) if the decedent created the interests in other people, the entire value of the property is taxed in his
estate[109] -- exception: if it is husband and wife it is ½ [110]
qualified joint interest is defined as[111]
property title
Joint tenancy with right of survivorship
H&w are only tenants
Spouse who is not a citizen doesn’t count[112]
(iv) if the decedent’s interest was acquire gratuitous from another co-owner, his estate is not taxed at
all at death[113]
1. if there is less than full consideration for money or money’s worth, it only the part of the property
that is proportionate (imputing the value of the share based on the sham value)
amount excluded=(survivor’s consideration/entire consideration paid)*entire value of property
(v) proportionate share: if the wealth of the decedent and their co-owner went into the acquisition of
the property, congress attributes to the decedent, a portion of the property commensurate with what he
paid[114] -- IRS looks at proportionate of shares you bought, not what you legally own
if the decedent gave nothing, nothing will be included[115] (even if he gave him this amount)
if this was really a gift, there can be a credit towards gift tax paid
(b) three categories (state law)
(ii) Joint tenancy with right of survivorship (will be included in 2040): fractional dividing by the number
of joint tenants[116]
Joint tenancy with right of survivorship is defined as the owner can pass it
(iii) Joint bank accounts are incomplete gifts – unless money is withdrawn from them[117]
(c) Probate estate doesn’t matter
(9) 2041: power of appointment are generally included authority created or reserved (has to be a
power that is donated) by a person having property subject to his disposal enabling the donee to
designate within such limits as may be prescribed that the donor, the appointees of the property or the
shares, or the manner in which such property shall be received[118]. Power of appointment are
powers that which are exercisable in favor of the decedent, his estate, his creditor, or the creditors of
the estate.[119] (retained power under 2036)
(a) exercise of a power of appointment by will are included[120] (if the donee through the will is
dictating who gets to do what, or give it to his creditors)
(b) Exclusions from general power of appointment[121] (power of appointment are included in the
estate tax)
Mere powers of management don’t count
(ii) Power which is exercisable for ascertainable standard[122]
(iii) Power which is exercisable under with the extent of the creator of the appointed
(iv) Power which is exercisable only with the consent of an adverse party
1. For example someone who stands to receive less because the other hold of the property would
receive more
(v) Powers to a limited class of person not included the decedent, his creditors, his estate, or the
creditors of his estate are not a general power of appointment
If the hold can use the power of appointment to discharge debts, it is included
2. If the hold can use the power of appointment to support those who he has to support it is
include[123] (for example minors) – even if it an ascertainable standard
(vi) special power of appointment are excluded
1. 5 and 5 powers: if the power that lapsed was such that during any calendar year the exercise was
limited to $5k or 5% (whichever is greater), noncumulative, of the value of the property out of which
the exercise of the power could have been satisfied, whichever is greater[124]. Note, if there is a
power to invade corpus greater than 5 or 5, it will be included in the estate, even if lapsed.
If the decedent didn’t exercise before death, it would included (for that year) to the full extent of
that year’s power in his gross estate[125] -- this is often avoided by making the power of appointment
only excisable on certain days during the year.
b. Regulations require the valuation of the percentage of the trust valued at the date of the lapse of
the power that could have been appointed under the lapse power in excess of the allowed $5k or 5%
c. If someone dies, with a limited power of appointment of a trust corpus that is above $5k/5% than
the includable portion is defined as:
Steps to determining
Determine power to invade corpus (from trust conditions)
What portion of the power to invade corpus is above the 5/5 rule?
iii. Multiple step 2 by size of corpus
Add to power to withdraw (from step 1)
Crummy power of appointment ( bypass trusts)
Holder of the power must have some interest in the trust, such as having a few days to extract the
property subject to the power from the trust corpus. He doesn’t even need a beneficial interest in the
trust triggered by the annual exclusion.
Amount of present interests generated by the power, is limited to the lesser of the amount of the
transfer, or the amount of the annual exclusion. If there are several beneficiaries, than each beneficiary
can claim a qualified amount as an excludable present interest
Ability to exercise – service said it has to be non-illusory
(c) Powers exercisable with concurrence are included[127]
(i) If the coholder of the power is the donor or a person with substantial interest in the donor, than it
is excluded[128]
permissible appointees who possess no other interest in the property are not adverse parties—
note: people are taxable only to the fraction of the number of permissible appointees (including
the decedent). (for example if the decedent has an interest as does the co-holder than it is divided by
2. a person who after the death of the decedent would be able to exercise power of appointment in
his own favor is an adverse party[129]
(ii) If the coholder of the power has nothing to do with the done than it will be included[130]
(d) Renunciation of power of appointment
A categorical release is considered to be a release[131]
(e) doesn’t matter if the decedent is legally or physically incapable of exercising the power[132]
(f) If the power is exercisable, in favor of the decedent, his estate, his creditors, or the creditors of his
estate, than it is includable in his estate.
Interpretation of this is under local law, but not necessarily under local adjudication[133]
(ii) Doesn’t matter the capacity in which the power is exercisable
(iii) If the decedent has the authority to compel exercise of a power it is exercisable
(iv) Contingent power of appointment : If the power of appointment is subject to a contingency
beyond the decedent’s control, it is not subject to a general power of appointment [134]
(g) Disclaimers by those who were given the general must be done within 9 months of the death of the
Must be in writing[136]
(ii) Must be received by donor within 9 months or 9 months from the day on which the donee attains
age 21[137]
(iii) Donee must not have accepted the interest or any of its benefits[138]
(iv) Must not have accepted the interest or its benefits prior to the disclaimer[139]
(v) Must pass to a person (except for the spouse) other than the person making the disclaimer[140]
as a result of the refusal to accept the property
Surviving spouse can disclaim an interest in the property, and it won’t be in her estate
2. If the wife retains the right to decide who gets to retain the property, and it isn’t subject to estate
or gift tax, than the spouse will have it included in their estate, unless it is limited by an ascertainable
(vi) If there is a refusal to accept the power of appointment, the interest must pass to a person other
than the disclaimant without any direction on the part of the disclaimant
(h) If there is a Remainder to decedent’s estate
Two views
1. Included (probably correct): the existence of a power freely to direct the transfer of property and
not the source of the power that is critical for estate tax purposes. Hence, if a decedent elected to
place the residuum of the insurance proceeds in a position which the decent could appoint without
restriction, he created a general power of appointment [142] -- doesn’t matter that it isn’t a
testamentary power, it is a power
Excluded: the power that the deceased has arose via state law[143]
(10)2042: insurance proceeds that are receivable by executor.
(a) Define life insurance
Whether the economic risk of death must be shifted or distributed[144]
(ii) When payment of death benefits cease to be insurance, when the terminal reserve value equals the
death benefit, because by that time, the insurer has saled away enough proceeds to pay the insured
without incurring a loss[145]
(iii) Exclusion
Life insurance annuity packages
Endowment policies or retirement income policies, if they matured
3. If the insured transfers within three years of death, an incident of onershp, it will be taxed,
because of 2035 powers[146]
proportionate exclusion based on the premiums paid by donor.[147] If the insured assigns the
policy to another within 3 years of death and the donee thereafter pays all the premiums, only that part
of the proceeds proportionate to the premiums paid by the insured prior to the assignment is includible.
Since the premiums are required to keep the face value of the contract in tact.
(b) Included “if the beneficiary is D’s estate, than it is taxable, otherwise, if not it is only taxable if D
incidents of ownership at his death
Incidents of ownership
Possession of incidents of ownership (along or in conjunction)
Joint ownership is included[148]
Disability from exercising incidents of ownership
Doesn’t matter if unable[149]
Doesn’t matter if legally disabled[150]
iii. Note if the beneficiary had been irrevocably designated, the courts have held that there is no
residual economic interest in the policy[151][152]
2. If the decedent pay the premiums, but he doesn’t possess incidents of ownership, his payment
won’t result in inclusion
proportionate exclusion based on the premiums paid by donor.[153] If the insured assigns the
policy to another within 3 years of death and the donee thereafter pays all the premiums, only that part
of the proceeds proportionate to the premiums paid by the insured prior to the assignment is includible.
Since the premiums are required to keep the face value of the contract in tact.
Retention of the following rights is consider to be an incident of ownership[154]
Right to change beneficiary[155]
Right to surrender policy for money or to cancel[156]
Right to borrow against policy[157]
Right to pledge policy as collateral[158]
Right to assign policy[159]
Right to prevent cancellation of policy owned by donor by purchasing policy for cash value[160]
g. If the employee, in an employer group insurance plan quite the job, quitting the job, and affecting
the cancellation is not an incident of ownership[161]
h. Reversionary interest, by which the insured (or executor) can regain one or more of the above
rights, in the event that the beneficiary should die before the insured[162][163]
It is reversionary, only of the reversionary interest exceeds 5% of the value of the policy
immediately before death. [164]
Corporate ownership
If the insured owns more than 50% of the corporation that owns the insurance policy, than he is
deemed to be the owner[165]
Rights can be permanently assigned away, thereby removing the exposure to the estate tax[166]
4. If the insured transfers within three years of death, an incident of onershp, it will be taxed,
because of 2035 powers[167]
(c) Taxation of life insurance payable to estate are fully taxable[168]
If they are payable to someone who has to pay the debts of the estate, they are fully taxable[169]
(ii) Note: in some states, life insurance goes directly to beneficiaries, not the estate[170]
(d) Taxation of proceeds that go to someone else provided that the decedent possessed none of the
above incidents of ownership
(e) Amount includible – full amount receivable[171]
If they have the option of receiving a lump sum, that is the full amount includible[172]
(ii) If the proceeds are payable in installments, npv is value includible[173]
1. If the periodic payments are payments of interest and not an annuity, the face amount of the
policy is included[174]
(iii)Payment of premiums of donee
1. proportionate exclusion based on the premiums paid by donor.[175] If the insured assigns the
policy to another within 3 years of death and the donee thereafter pays all the premiums, only that part
of the proceeds proportionate to the premiums paid by the insured prior to the assignment is includible.
Since the premiums are required to keep the face value of the contract in tact.
Exclusion – § 2010 and 2505 $675,000 for year 2000[176]
iii) Deductions § 2055, 2056
(1) § 2055, charitable deduction, for all property on death by the decedent for public religious,
education, etc. (must be qualified charity)[177]
(a) must be qualified charity
(i) split interest gifts: charitable deduction is generally limited to the value of the interest actually
transferred to the charity[178]
(ii) forms of gifts of split interest-- must be in the these three
1. annuity trust: a trust in which the trustee is required to distribute annually to the noncharitable
beneficiary a specified sum that is at least five percent of the value of the trust assets[179] -- [180] -[181]
no deduction is allowed if another, noncharitable remainder precedes the charitable remainder, or
the income interest is for a term of years (rather than a life estate) and the term exceeds 20 years.[182]
Disqualified if can be invaded for private use[183]
2. unittrust: trustee must distribute annually a sum that is either a fixed percentage (at least 5%) of the
trust estate (determined annually) or the entire trust income, whichever is less[184][185]
no deduction is allowed if another, noncharitable remainder precedes the charitable remainder, or
the income interest is for a term of years (rather than a life estate) and the term exceeds 20 years.[186]
Disqualified if can be invaded for private use[187]
3. pooled income fund: a trust where a public charity is trustee, and several donor’s contribute
property to the trust, each reserving for himself a life estate in proportion share of the combined
property The public charity must have an irrevocable remainder[188] - [189]
undivided interest in property (for example Tenants in Common )[190]
remainder interest in a personal residence or a farm following a legal life estate[191]
(b) deathtime
power of appointment to charity deductible
1. if there is a power of appointment that is granted to a charity that would be taxed under § 2041, it
would be taxed as well (for example D grants a power of appointment to a charity which isn’t
exempted under 2041)
2. he is entitled to a charitable deduction for amount actually received by the charity as a result of
the exercise or failure to exercise, release or lapse of the power[192]
3. transfers to spouse, if the spouse is over 80 years old at the time of the decedent’s death, who is
entitled for life to all the income from the property, who has a testamentary power of appointment,
exercisable in favor of charities that qualify under 2055, which actually exercise the power in favor of
such organization[193]
(ii) limits on deductible amount
1. the deduction can’t exceed the value of the transferred property that is included in the decedent’s
gross estate[194]
2. if the property transferred to the charity is burden with an obligation to pay any death taxes
imposed upon the decedent’s estate, the charitable education will be reduced by the amount of such
taxes, since the outstanding obligation also reduces the amount that actually passes to charity[195]
(c) lifetime transfers
if the transfers would have been taxable in the gross estate, they can be deducted
(ii) power of appointment to charity deductible
1. if there is a power of appointment that is granted to a charity that would be taxed under § 2041, it
would be taxed as well (for example D grants a power of appointment to a charity which isn’t
exempted under 2041)
(2) § 2056 marital deduction: all property passing to the spouse is deductible deduction for property
that passes to surviving spouse on the decedent’s death, for all property passing to the spouse (can be
intervivos). Doesn’t have to be spouse at time of transfer, just at time of death[196][197]
(a) marital deudction now accepted for equalization clauses[198] because they said that the
spouses’s interest could be determined
(b) simultaneous death: will follow uniform simultaneous death act
(c) the deduction follows what actually passes (what the spouse elects to do at a will, or what will is
probated or agreed upon)
(d) marital deduction authorized:
defining “passing”: interest acquired by law (dower curtesy) pass to surviving spouse[199]
1. lifetime transfers that create a pass are included (such as reserved life estates, joint interest) do
(ii) property that is encumbered by a mortgage, will be reduced by the value of that
1. if the property is not received unconditionally, than only the excess of the value of the property
received under the will over what the spouse was require to relinquish is deductible[202]
(iii) marital deduction trust (bypass): a transfer in which the surviving spouse is to receive all the ince
form the property during her life (or all the income from a specific portion of the property) and is
tranged an unqualified power to appoint the property, to to herself or her estate will qualify for the
marital deduction[203] (can be restricted to a dollar amount)
spouse must receive all property payable at least annually,
if the trustee has any powers to accumulate, they must be subordinated to the spouse’s power to
2. if the spouse is entitled to a portion of the trust, a deduction will be allowed under the specific
portion rule, however the amount of the deduction will be restricted to the proportionate value of the
property transferred on trust[204]
if the spouse has a power to appoint, and is entitled to a portion of it, the deduction only covers
the lower amount of the two
3. spouse must have the power to appoint the property to herself or her estate, and this power must
be exercisable by the survivor alone and in all events[205]
power doesn’t need to be exercisable by life and by will, just by life or by will
powers to consume are not enough[206]
5. powers must be exercisable by the surviving spouse alone (not with anyone), not subject to
contingent events, and not in no power must be in a third party that is is “in opposition” to that of the
surviving spouse”)[207]
for example: where H gives W a life interest in income and a general testamentary power of
appointment , the marital deduction is allowed even though a third party can appoint the property after
W’s death in the event that W has not exercised her power
(iv) if the surviving spouse is not a citizens (doesn’t matter what the dead spouse was) money must
pass to her though a qualified domestic trust[208][209]
(v) value of the interest (deduction) must be reduced by any federal estate or other death taxes
payable by the spouse or payable out of the interest passing to her[210] -- could become circular xx
(vi) support allowances (criteria determined at date of death, not probate ruling)[211]
1. if state law required a fixed amount to spouse, this amount will qualify for the deduction – but, if
the probate orders these benefits after death, than no allowance is granted[212]
(e) marital deduction not authorized:
four criteria for disallowance (must all coexist)
pecuniary bequest: specific amount or under formula
2. distribution in kind: executor is authorized to distribute assets in kind to satisfy the pecuniary
3. select assets: executor is authorize to select amount assets: executor is direct to use estate tax
values in effecting distribution
estate tax values
(ii) can’t condition spouse receiving on the spouse suriving a period of time more than 6 months, after
the death of the decedent[213]
(iii) surviving spouse might be able to disclaim
(iv) estate shouldn’t get a deduction that was not subject to the estate tax in the first place
(v) property that is encumbered by a mortgage, will be reduced by the value of that
(vi) property must be included in the gross estate of the dead person
1. Property from which the deduction is sought must be included in the gross estate of someone who
is now dead.[215]
(vii) Isn’t deductible under § 2053, (expenses, indebtedness, and taxes)[216]
Not a casualty loss under 2054[217]
(ix) Is not a terminal interest, that will terminate on a lapse of time, or contingency[218]
Life estates
Terms for years
Wasting assets (for example tangible goods like cars)
Bonds are not terminable interests. (bonds are deductible)
(x) Property received by the surviving spouse upon exercise of a nontaxable, special power of
appointment does not qualify
(xi) Deduction is limited to interests that are subject to tax in the decedent’s gross estate
(xii)non-deductible terminal (if upon some contingency’s the interests of the spouse will fail) interest
types of non-deductible terminal interests
Decedent to spouse with interest to third party for less than full or adequate consideration[220]
(assuming no q-tip)
Executor required to acquire terminable interest is a non-deductible terminal interest[221]
Purchase of a annuity for life by the executor is not a deducible interest
ii. No maritial deduction, where the decedent, order the executor to covert the spouse’s interest into
a terminable one[222]
iii. Contingent gifts, (for example things that will terminate upon her death or remarriage)[223]
Can’t get around it by requiring contrually the spouse to pass interest or create will to third parties
Passes required by law (dower) do not qualify for the deduction[224]
e. if a state allowance is for an indefinite period or is depends upon the spouse sirviing throughout
the period of allowance, it is a terminable interest and doesn’t qualify
2. if the estate of decedent contains a terminable interest, itself, the marital deduction is reduced by
this amount[225]
Exceptions to non-deductible terminable interest rule: Q-TIP[226]: qualified
terminable interest property is defined as property (or an interest therein) that passes from the decedent
in which the surviving spouse has a qualifying income interest for life, and with respect to which the
descent’s executor makes an election to have the property qualify as a q-tip interest[227]
Charitable q-tips
If q-tip is passed to a spouse and a charity, as long as the spouse is the only non-charitable
interest, than one can the marital deduction. Spouse’s interest must be for life or for a term of less than
20 years.[228]
Deduction of the full value of the property transfer
Marital deduction
iii. Charitable deduction
b. Testamentary trust – income to surviving spouse for life, remainder to charity, with direction to the
executor to elect to qualify property held in the trust as a q-tip
2. Surviving spouse must have a right to all the income from the property for the spouse’s life,
payable annually or more frequently[229][230]
Must be income from a all the property or from a specific portion, not a ascertainable standard
4. No one can have the power to appoint any property for the spouse’s lifetime except for the
spouse’s benefit[231]
5. Someone (including the surviving spouse) can be granted a power of appointment to be
exercisable at the surviving spouse’s death[232]
6. Election: Marital deduction is allowed if the passing is contingent upon an election by the
Entire property will be included in the surviving spouse’s estate, not just the income interest[234]
b. Partial election: executor can qualify a portion of the qtip property, especially in the form of a
formula like ‘so much of the property as may be necessary to reduce the federal estate tax liable to
zero, after taking into account all other allowable deduction and credits”
7. Stub income (income that “accidentally” due to additional ) goes to QTIP spouse does not
disqualify the estate [235] -- will be included, but won’t disqualify
8. No POWER OF Appointments while the surviving spouses is alive damnit! away from surviving
spouse by anyone (including the surviving spouse)
If there is a power of appointment after the spouse is dead, it is okay[236]
3rd person invasion
no restriction for anyone having a power to invade the corpus during the spouse’s lifetime, as
long as it was for her benefit[237]
prohibits an invasion of the corpus for anyone other than the surviving spouse
c. if the spouse invades corpus, the surviving spouse can be legally bound to give that money to a
3rd party, without adequate consideration, than it is invalid[238] -10. if the suriving spouse makes a lifetime transfer of her interested in the qtip property, the value of
the property, will be treated as a taxable gift
11. upon the death of the surviving spouse, the qtip property will be included in her gross estate[239]
if there is an insurance or annuity contract, where there is a life estate with power of
appointment are satisfied, this is not interest – if the spouse has a right to all intrest or intsllment
payments with respect to insruacnes, this is an exception[240], but if the balance is a fixed number of
payment, with a proportion payable to another, the entire amount is not deductible
rate schedule[242] -- look up
shortcut is that tax on 1m is $345,800[243]
(1) 750-1m, rate is 248k, excess is 97,500 = 345,800
minus credits
unified credit (including death and gift taxes), like a checking account
Credit amount on page 84
25) For gift tax purposes – completed and full and adequate consideration for less than money and
money’s worth[244]
Annual exclusion:
Eduction, medical (has to be paid directly)
(1) Note; if there is an obligation under local law to pay, there is no gift
$10k/donee per donor
(1) split gifts: spouses can treat gifts made to 3rd parties as though each spouse had transferred ½ of
the property, without regard to who the actual transferor was[245]
(2) gifts made by a trust are taxable to the owners of the trusts
(3) annual exclusion doesn’t apply to future interest
(4) future interests don’t count toward 10k exclusion
(a) nonascertainable present intersts don’t count to the exclusion
discretionary powers don’t count
(ii) conditional gifts
(iii) unproductive property
(b) future intersts
(ii) remainder
(iii) possible reverter
(iv) forward starting life estates
(v) distribution of corpus upon the termination of trust is a future interst
(c) non-future intests
income from a trust is a present interest, so long as it is a vested right[246]
(ii) crummy powers
1. Holder of the power must have some interest in the trust, such as having a few days to extract the
property subject to the power from the trust corpus. He doesn’t even need a beneficial interest in the
trust triggered by the annual exclusion.
Amount of present interests generated by the power, is limited to the lesser of the amount of the
transfer, or the amount of the annual exclusion. If there are several beneficiaries, than each beneficiary
can claim a qualified amount as an excludable present interest
Ability to exercise – service said it has to be non-illusory
(5) Minor’s trusts
(a) Can make gift to custodian
(b) Minor’s trust can be deemed to be a present interest, if at all times the trust is distributed by a
trustee for the minor’s benefit[247] -- but the residuum of the corpus must be distributed at age
21[248] -- must be payable to the minor’s estate (or he can appoint under a general POWER OF
APPOINTMENT under 2513c
(i) Corpus can continue to accumulate after minor reaches 21, ex-minor must have the right to
require distribution
iii) defining gift (donative intent not relevant)
(1) donor
(a) not trustees
(b) entities can make gifts, and is taxable to their beneficial powers[249]
(c) indirect gifts: gifts made on the condition that the gift be transferred to a 3rd party are handled as
direct gifts to the third party[250]
(2) donee
(a) transfers to trusts (or corporations) are treated as gifts to the trust’s beneficiaries[251]
(b) donee’s do not need to be ascertained
(3) subject matter
(a) below market loans
loans that
(b) equitable
a transfer by a trust beneficiary of her interest in the trust isa taxable gift of the interest
(c) future
gifts of future interest as well as present interest may be the subject matter of taxable gifts
(d) concurrent interests in property: when property is acquired and title is taken in a form of
cotenancy, there is a taxable gift to the extent that the value of the interest acquire by one co-tenant
exceeds what that party contributed to the purchase price
severing a joint tenancy is not a gift if they both receive a proportionate share
(ii) creation joint tenancies might not be gifts
joint tenancy in real property created by spouses is not a taxable gift[252]
(e) bank accounts are incomplete gifts
(f) contingent
valued actuarially
(ii) can’t be revocable
(iii) gifts that have a conditions “void of subject to gift tax” have that condition voided as contrary to
public policy
(g) types of property that are subject
most thing
(ii) foreign real estate
(iii) bond
(iv) gifts of services not subject to gift tax[253]
(v) qtip
1. if the hold of qtip property disposes of the interest during his lifetime, the spose will be treat as
having made a gift of the full value of the property to which the interest relates, not just the life interest
(vi) interest free loans are considered to be taxable gifts
demand loans are still taxable gifts
2. below maker rate loans are calculated based on the difference between the loan and the
applicable federal rate[255]
(vii) springs lapsing rights
if the donor donates a gift which requires the exercise by the donee, this is considered to be a gift
(crummy powers)
(4) sufficiency of the transfer (incomplete gifts)
(a) estate freezing
grantor retained income trust (GRIT)
1. grit is defined as grantor transfers income to trust (retaining income) for a term of years less than
his life expectancy, with remainder to children. The remainder would be a small portion of the valye of
the property making up the corpus of the trust. – transfers currently, and pays a very small gift tax,
because the actual is low or zero.
If grantor outlived term of years, the pos tranfer appreciation in the valyue of the corpus would
escape the tax imposed by ch 11 and 12. – and transfer tax would be avoided on value of the
transferred corpus and the post transfer appreication corpus.
b. If grantor underlived, than assets would be distribued to the remainder persons. – just like as if
the transaction had never happened.
c. Interfamily gifts now they say that the value of retained interest is zero, so the gifted remainder is
valued at 100% of the trust corpus! – so fuck you! [256] (if children pay consideration, than it reduces
the size of the gift)--1) must be a transfer of an interest in trust 2) for the benefit of a member of the
transferror’s family 3) an interest in the trust must be retained by the tranferrror’s and an applicable
family member – than the interests are valued at zero
Note, Tenants in Common, JTROS, or TIE 2702 doesn’t apply[257]
ii. This doesn’t apply to non-family members, so a this needs to be proportaiontally allocated
between the lower valuation for the family members, and the higher valuation for the non-family
iii. If the grantor retains a life estate, and then he provides a secondary life estate to child (for example
grantor for life, and than child for life), and if the grantor has the power of appointment to appoint the
remainder, it is a completed transfer of the value of the corpus, ther remainder is a retrained interest,
and both the life estate and the remainder are given a zero value under 2702, with the result that there is
a transfer of the entire value of the corpus to child.[258] IF it was a power to revoke child’s interest, it
would, of course, be an incomplete.[259]
(b) grant retained annuity trust (GRAT) or GRUT
(i) irrevocable right to receive as frequently as annually a fixed amount (% or dollar) of initial fair
market value of the property [260]
(ii) a qualified unit trust (GRUT) is right to receive at least annually a fraction or percentage of the net
value of the corps
(c) marital rights (dower, etc.) cannot be considered to be consideration[261]
(d) transfers that are a product of arm’s length negotiation are not taxable gifts[262]
(e) contributions to political parties are exempted from gifts[263]
(f) unlike the estate tax, a gift, in which the transferor retains the power to affect the time or manner of
enjoyment is a gift[264]
(g) the same power of appointment that would be subject to the estate tax are subject to the gift tax,
except that
(i) lapse of noncumulative annuals powers are exempt from the gift tax to the extent of 5k or the 5%
of the value of the pro pout of which the power could be satisfied[265]
(ii) note: 2514 refers to the lifetime exercise of a power to transfer, rather than the estate tax which
focuses on the existence of the power
(iii) a transfer which is conditioned upon something that is not beyond the grantor’s control, will not
render it incomplete
(iv) unlike estate tax, a transfer that can be altered or revoked by the settleor only with the consider of
a person possession a substantial adverse interest is a complete transfer and taxable[266]
(h) incomplete transfers are
(i) retained interest: value of the property transferred is the value of the property minus the retained
administrative powers don’t count
must effect beneficial enjoyment
must be exercisable in non-trustee capacity
(ii) revocable transfers are not taxable
must discretionary, not a mandatory or ascertainable duty[267]
discretionary power held by a third party doesn’t render the gift incomplete
(iii) mere power to change beneficiaries are the trust render the transfer incomplete
(5) disclaiming of gifts – no property interest is acquired[268]
(a) criteria for disclaimers
Must be in writing[269]
(ii) Must be received by donor within 9 months or 9 months from the day on which the donee attains
age 21[270]
This seems to foreclose the way to disclaim unidentified future intersts
(iii) Donee must not have accepted the interest or any of its benefits[271]
(iv) Must not have accepted the interest or its benefits prior to the disclaimer[272]
(v) Must pass to a person (except for the spouse) other than the person making the disclaimer[273]
as a result of the refusal to accept the property
(b) Partial disclaimers[274]
Credits –
unified credit (including death and gift taxes) – deduction from estate tax of any gift tax
deductions § 2522
charitable deduction
(1) must be real charity, and limited to the amount of the property deducted
marital deduction
(1) same as for estate ta
(2) have
(3) same as under estate tax
(4) have to be married at the time of the gift
(5) can only deduct only once between spouses
(6) life estate with power of appointment
(7) q-tip
(8) can’t exclude more than you have deducted
26) For generation skipping purposes
If the transfer would be excluded uder the GT, it is exclused under the GST
ii) If they paid the gst before, and they are in the same generatoin as the persion who paid the tax,
than there is no gst
Direct skip: bequest or inter vivos gift to a grandchild
(1) had the property been transferred first to the tranferor’s child, there would be some additional
estate or gift tax consequence
(2) exception with predeceased parent[277][278]
ii) taxable termination: any termination (by death, lapse of time, release power) to an interst property
held in a trust, except where a non-skip person has an interest in the property immediately after
termination, or if no distribution may thereafter by made to a skip person[279]
iii) Taxable distribution: distribution of income or principle from a trust to a skipped person, unless the
distribution is a taxable distribution or a direct skip[280]
Skip person
Skip person
(1) More than one generation below[281]
Non skip person
Generation assignments
Family generatoins
(1) Ususually logic
(2) Except if deceased generation
Non-family generation
(1) Imputed to be 12.5 years adopted child goes by years
iii) Entities
(1) Entities are the generation of their beneficial holders[282]
iv) Trusts, a trust is a skip person, if all the current interest in the trusts are held by skipped person, or
if no person holds a present interst in the trust but all future distribution from the trust must be made to
skipped persons.[283]
Amount taxable
Taxable distributions
(1) Amount receved (less expenses)[284] – if the trust pays the gst for the receipt of taxable
distribution, the amount of the gst so paid is considered to be a distribution[285]
Taxable termination
(1) Vale of all property that was subject of the termation, reduce by the expses of a nature that would
be allowable under the state tax
iii) Direction: all property received by the transferee
iv) Formulae
(1) GST exemption: everyone gets 1m allocated by a transfer or his executor to any property[286] -a certain amount of property will be exempted, to make the exclusion ratio zero
27) As compared to income tax
Recipeints of shares get basis in the shares[287]
Tranferred basis as gift as compared to devise
(better to give as a gift) -- check this
28) Policy issues
never been a good source of revenue
original justification is that we needed it in order to avoid concentrations of wealth
c) McCaffre: encourages rich people to spend money and to exasserbate differences in T's living
The tax does encourage charitable constributions
-------------------------------------------------------------------------------[1] Bosch
[2] no substantial owner: Helvering v. Safe Deposit
[3] § 2512b
[4] Diedrich (income)
[5] Bradford
[6] Dickman
[7] 2001
[8] 20.2033-1b
[9] Estate of Bosh
[10] 2033-1b
[11] 2033
[12] 2033
[13] 2033
[14] Goodman v. Granger
[15] 20.2031-2f
[16] 2036a2
[17] rr 72-282
[18] 2035a
[19] 2035c
[20] 1014
[21] 2036a1
[22] 20.2036-1b1
[23] 20.2036-1-b-3
[24] 2036a2
[25] O’Mally, Struthers - questionable
[26] 20.203-1-b-3
[27] rr 2558
[28] Farrow v. US
[29] 672c
[30] 2036a1
[31] 2036a2
[32] 2036b1
[33] 20.2036-d-2d
[34] 20.2036-2-c
[35] 20.2036-2-c
[36] Spiegel
[37] 2038a
[38] 20.2038-1b
[39] 20.2038-1b
[40] 20.2038-1b
[41] Jennings v. Smith
[42] Round v. Commissioner, Hurt v. Commissoine, Inman
[43] Old Colony Trust
[44] 2038a1, 2038a2
[45] 20.2038-1b
[46] Jennings v. Smith
[47] Hurd v. Commissioner
[48] Comm. V. Chase national bank
[49] O’Malley
[50] Uniform principle and income act § 3b, Commissioner v. Estate of Hagar
[51] O’Malley
[52] Commonwealth Trust Co. v. Driscoll
[53] Lober v. US
[54] 70-348, 59-357, 57-366
[55] Prudowsky
[56] 20.20381b
[57] 20.20381a3
[58] Walter v. US
[59] 20.2038-1f, 2038c
[60] 2038-1e1
[61] 2038-1e2
[62] 2035d
[63] Kisling
[64] Bridgeport
[65] Walter
[66] 20.2036-1b3
[67] 2035d
[68] 6163
[69] 6163
[70] 6163a
[71] Smith
[72] 2038b
[73] Porter v. Comm, Fl Nat. Bank
[74] 20.2038-1a
[75] rev. rul 75-13
[76] Reg. 20.2038-1(a)(2)
[77] Rev. 80-255
[78] Commonwealth Trust of Pittsburgh v. Driskoll
[79] Old Colony, US v. Powell
[80] Tulley v. US
[81] Estate of Musgrove
[82] 2038
[83] 2036a1
[84] Estate of Wilson
[85] 2038a
[86] 2039a
[87] 20.2039.1b1
[88] Rev. Rule 81-182
[89] 2039b
[90] 2039a
[91] 2039a
[92] 2039a
[93] Bahen
[94] 20.2039-1b2 example 2
[95] 2039a
[96] 2039a
[97] 20.2039-1b1, example #6
[98] Bahen
[99] Montgomery v. Commissioner
[100] Gray
[101] Estate of Barr, 20.2039-1b2, example #4
[102] 20.2039-1b1
[103] Fusz
[104] 20.2039-1b
[105] 2039a
[106] 20.2039-1d
[107] amount included = (decedent contribution/purchase price) * value of annuity
[108] 2040a
[109] 2040a
[110] 2040b
[111] 2040b
[112] 2056d1b
[113] 2040a
[114] 2040a
[115] 20.2040-1-c-3
[116] 2040b
[117] 25.2511-1b4
[118] NY Definition
[119] 2041b1
[120] 2041a1a
[121] 2041b1a
[122] 2041b1a
[123] 20.2041-1c1
[124] 2041b2
[125] 20413d3
[126] 20.20243d4
[127] 2041b1c-ii
[128] 2041b1ci,ii
[129] 2041b1cii
[130] 2041b1ci,ii
[131] 20.20413dc
[132] Freeman
[133] Estate of Bosh
[134] 2041b1
[135] 2518
[136] 2518b1
[137] 2518b2
[138] 2518b2
[139] 2518b2
[140] 2518b2
[141] 2518e2
[142] Keether – 5th Cir
[143] Dallman
[144] LeGierse
[145] 20.2039-1-d
[146] 2035
[147] Silverman
[148] 2042.2
[149] Estate of Noel
[150] Nance
[151] Morton
[152] 20.2041-1a2
[153] Silverman
[154] 20.2042.1.c.2
[155] 20.2042.1.c.2
[156] 20.2042.1.c.2
[157] 20.2042.1.c.2
[158] 20.2042.1.c.2
[159] 20.2042.1.c.2
[160] 20.2042.1.c.2
[161] 72-307
[162] 20.2042.1.c.2
[163] 2042.2
[164] 2042.2
[165] 20.2042-1-c-2
[166] 72-307
[167] 2035
[168] 2042(1)
[169] 20.20421b1
[170] Webster v. Commissioner
[171] 20.2042-1a3
[172] 20.2042-1-a3
[173] 20.2042-1-a3
[174] IRC 101c
[175] Silverman
[176] § 2010 and 2505
[177] 20.2055-1a
[178] 2055a
[179] 2055e3
[180] 664d
[181] 1.664-2
[182] 6644
[183] 170c
[184] 664d
[185] 1.664-3
[186] 664d
[187] 170c
[188] 642c
[189] 1.664-2
[190] 170f3b
[191] 170f3b
[192] 20.2055-1b1
[193] 20.2055-1-b2
[194] 2055b
[195] 2055c
[196] Stevens v. US
[197] rr 72.7
[198] 82-23
[199] 2056c3
[200] 2056c4
[201] 2056-b –4-b
[202] Stapf
[203] 20.2056b, 20.2056b5f8
[204] 20.2056b –5b
[205] 2056b5
[206] Pipe
[207] 20.2056b5j
[208] 205d2
[209] 2056a
[210] 2056b4a
[211] Jackson
[212] Jackson
[213] 2056b3
[214] 2056-b –4-b
[215] 20.2056a-2a1
[216] 20.2056a-2b2
[217] 20.2056a-2b3
[218] 20.2056a-2b3
[219] 2056b
[220] 2046b1a,b
[221] 20.2056b1g example #7
[222] 2056b1c2 (and ¶f)
[223] Mappes
[224] 20.2056e2c
[225] 2056b2
[226] 2056b7a
[227] 2056b7b-i
[228] 2056b-8a1
[229] 2056b7B-ii(II)
[230] 2056b7B(iv)
[231] 2056b7B-ii(II)
[232] 2056b7B(ii)
[233] Estate of Clack, 2056b7Bii
[234] 2207Aa
[235] Howard
[236] 2056b8Bii(last sentence)
[237] 2056b7BiiII
[238] 20.2056b-d-6
[239] 2207aA
[240] 2056b6
[241] 2001c
[243] page 400 of book (jumpt to next backet
[244] 2501a1
[245] 2513
[246] 25.2512.6
[247] 2503c
[248] 2503c
[249] 25.2511-1-g-1
[250] 25.2511-1-h
[251] Hutchings
[252] 25.2515-3
[253] 56-2
[254] 2519
[255] 7872
[256] 2701a1
[257] 25.2702-4a
[258] 25.2702-2a4, 25.2702-2d1, example #6
[259] 2702-2d1
[260] 2702b1
[261] Merrill
[262] 25.251-8
[263] 2501a5
[264] 25.2511-2d
[265] 2514e
[266] 25.2511-2e
[267] 25.2511-2g
[268] 25.2511.1c
[269] 2518b1
[270] 2518b2
[271] 2518b2
[272] 2518b2
[273] 2518b2
[274] Treas. Reg. 2518-3a
[275] 2001b
[276] 2601
[277] 2612c
[278] 2651e
[279] 261a
[280] 2612b
[281] 2623a1
[282] 2651e
[283] 2613a3
[284] 2621a
[285] 2621a
[286] 2631
[287] 1014