1)     Introduction

a)      Federal Estate tax is an excise tax levied on the privilege of transferring property at death

i)       Progressive – vary with size of estate

b)      State taxes are often Inheritance tax is defined as privilege of receiving property from the decedent

c)      Gift tax is a back stop for death taxes

i)       Imposed on gift taxes made during life time

ii)     Sometimes known as wealth transfer taxes

d)      History

i)       At one point treated as income, before held to be unconstitutional

ii)     Under present law, §102 a doesn’t include the value of property acquired by gift, devise or inheritance

(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

v)      1916 tax was enacted for two reasons

(1)   raise revenue

(2)   deal with concentrations of wealth

(a)    constitutional : NY Eisner

(i)     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(3)   repealed in 24, repealed in 26, than put in 1932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

e)      progressivity

i)       in the old way, each one was separate, in that it used its own graduated rates

ii)     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 rates

f)      community property issues

i)       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 of any non-community property could be given by one spouse to the other, without a gift tax

i)       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 scale

(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

h)      1976, we got a big change, which accomplished the basic structure of the unified taxes

i)       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

ii)     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

i)       marital deduction: 1981 – unlimited marital deduction, which has the effect of treating the maried couple as a single unit for transfer tax purposes

i)       a gift or death trasnfer from his or her wife to her husband is free of estatte tax

ii)     was party enacted on the theory from one decedent – the property time is one generation to another

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: 3^rd 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 planning

(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

2.      A single transfer of the corpus of the trust was made by the gm to the gd

a.       The property was taxed in the property of the grantor, and it could be passed though one or more generations –

b.      And it could mean that outright generations were taxable in the estates of the decedents

c.      At her death, the beneficial enjoyment would transfer to the gd

d.      A generation skipping transfer was employed

e.      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 retroactively

(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 death

(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

(i)     And if neither basis rule is applicable… § 1.1015 – Regs. Say that neither gain not loss is realized

1.      special basis in 10.1015a – within 1 year of death there is an exception

(e)    new 5% surcharge bracket § 2001b, 2001c2, 2052a

(i)     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

j)       very little revenue

i)       due to marital deductions

ii)     smaller % of the budget

2)     estate tax ch 11: tax imposed on the transfer of property from the decedent to someone else

a)      definition

i)       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

(i)     cash passes by will

(2)   property

ii)     gross estate § 2031a: value 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

(i)     law

1.      highest state court^[1]

a.       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 question

(ii)   property that they own -- interest must be a beneficial interest which survided him so that he could transfers, and that it could pass at his death to someone else

1.      real estate

2.      future interests (usually included) under § 2033

a.       calculation

i.       6163: the executor can postpone payment of the portion of the estate tax that is generated, until 6 months after the preceding interest

b.      must be vested

i.       remainder

ii.      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

i.       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)

3.      bank accounts

4.      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 payments

a.       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

c.      if they are payable to decedent or their estate don’t count, as they are transferred

6.      stocks

7.      dividends

8.      bonds

a.       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

a.       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

a.       claims for wrongful death – if by the estate

i.       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

b.      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

a.       interest in Tenants in Common will be included

b.      legal title to property or an interest in property isn’t necessary

c.      if the decedent owns property as a fiduciary for other people (for example trustee)

d.      interest must be beneficial, not as a trustee (even if title technically remains in someone)

e.      remainders

i.       vested remainder in someone else – were generally conceded to be includible

ii.      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

a.       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

c.      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 includible during the period of death or some prior period is includible 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 includible in the taxable period covering the date of death or some taxable period

a.       accrued rent or interest

b.      things actually received must be filed in final tax return

c.      becomes part of the estate if the estate acquires

d.      DIRD: expenditures that were not paid yet by the decedent

i.       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

iv.     deferred payments included

e.      deferred payments

f.       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

a.       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

(i)     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

(i)     JT – that passes doesn’t count

(ii)   Expiring life tenancy doesn’t count

b)      tax payable is equal to the tax rates * the tax base (18-55%)

i)       credits can be subtracted from the tax

c)      base computation – chapter 11

i)       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 intestancy --must pass to someone else – the transmissio

(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 non-resident”

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

i)       § 2512 gift is the value of the property at the date of the gift (minus any inadequate consideration)^[3]

b)      Gift splitting – must be elected!

i)       § 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,

ii)     allows them to use both their exclusions and unified credits

(1)   annual exclusion of $10k/donee/donor

c)      applies any gratuitous transfer of property made during life – not services

i)       any such transfer reduces the estate or the wealth

ii)     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

(i)     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 taxable

(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 gifts

(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

d)      property for gift tax purposes § 2501

i)       intent:

(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

(i)     § 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

a.       valued under 2704 regs

(3)   consumption expenditure 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

ii)     indirect

(1)   will be treated in their real form (for example closely corps will be treated as gifts to the ultimate donors

(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

(i)     as amounts are paid over to by the trust, they are considered to completed gifts

(b)    if a donor retains some interest, that that interest must be suciptible 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

(5)    

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

(i)     promissory note of a 3^rd 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

(i)     § 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

(i)     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

e)      doesn’t include gifts of services

f)      § 2518 disclaimers of an interest in property, as a gift in property

i)       § 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

ii)     if the recipient of a gift disclaims, and the disclaiming is not effective, that it is a taxable gift

g)      marriage – property transfers in exchange for relinquishment of marital rights

i)       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

(i)     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

1.      § 2553c1a: normally bonne-fide contractual transfers don’t count, but under marital exceptions they do

a.       2043/2516 a transfer of property shall be considered to be made for money or money’s worthwe

(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 regard

(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 incomple for estate tax purposes)

(i)     Must be transferred by the decedent – and powers retained or reacquired (whether exercised or not)

(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 (2036a1)

a.       examples of complete

i.       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)

(i)     value of the entire property transferred will be included in the gross estate at death – will be includible 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 includible in the estate

(iii) time periods

1.      life

2.      not ascertainable by death (for example no installment of the annual income shall be paid during the last year of his life)

3.      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

1.      the value of the remainder will be included in his gross estate

2.      if the right hadn’t taken effect in enjoyment at the time of his death

3.      this does require inclusion as a result of the transfer

4.      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

2.      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.

a.       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 transfer

(ii)   will be included if the power is held by two people it is still included -- exception for a power that is excersiseable 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

2.      powers to terminate a trust

3.      powers to accumulate and have it distributed

4.      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

1.      exception for objective reasons

a.       powers that are exercisable to mainting 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 transfererd property and he has retained the power

a.       2036a2 will not apply to an acquired or reacquired power

2.      power to revoke a trust would produce inclusion to the same extent would produce inclusion over both

3.      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 1^st 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

a.       they should both be analyzed

b.      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 apparantly apply to a person who makes a gift to minors under ugtma, will probably give them the power to withhold the custodial property

a.       if he isn’t the custodian, there won’t be such inclusion

(d)    property is valued at the date of death of the decedant

(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 recapitaliztion) 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

1.      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

a.       exception: if the transfer consists of a qualified payment, it would be regarded as a real transfer

2.      2701 doesn’t apply if market quotations are available

a.       if the interest is of the same class of the same interest

b.      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 power

(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 ,

1.      doesn’t appply if it a bone-fide business arrangement

2.      doesn’t appply if it to be not a device to transfer to members of the D’s family for less than similar arrangements

3.      doesn’t appply 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 intersts 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.

2.      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 undre 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

i.       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 transferree had made improvements or additions to the property, any enhancements or improvements, were not considered to be part of the gross estate

iv.     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 control

a.       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

b.      certain gift tax inclusion transfers under § 2035d2: 2035 and the other sections are powerful

i.       transfers of property which is included in the gross estate, of what would have been included under the other sections

c.      the question then arises when the

d.      § 2035c -- gross up rule gift tax paid within 3 years have to be included in the taxable estate

3.      now two types of gifts that will be drawn in

a.       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

i.       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.

iv.     Property that isn’t drawn back into the estate doesn’t get a fresh start

v.       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)

(i)      

(5)   if the donor retains life estate 2031

(6)   revocable 2036a2

(7)   alter, amend or designate 2038

(8)   2037

4)     ch 13- 2601-2663 generation skipping: independent from the federal estate and gift tax

a)      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. –

i)       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.

(i)     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 nongeneral power of appointment of the property without making it taxable, and non-general power of appointment – nearly the equivalent

(i)     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

1.      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

(i)     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 effect

(v)    1976-86: Tax at the time the person in the skipped generation dies (intermediate)

1.      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.

(i)     direct skip is defined as

1.      estate or gift transfer to a skipped person that is made outright or in trust

(ii)   taxable distribution is defined as

1.      a distribution to a skip person

a.       for example distribution from trust

(iii) taxable termination is defined as

1.      shift of the beneficial enjoyment to a skipped generation

c)      Note: no credit is given for prior transfer tax owned –

d)      Rate at highest

e)      No relief for other tax paid (if property held before)

f)      No unified credit

g)      Exemption – to every taxpayer

i)       1m of direct skip or distribution

ii)     grandparent can make a gift for medial or education expenses without tax to child if it meets 2503e

iii)   an individual pays the same tax on a direct skip to a gc, as it is to a great grandchild

h)      taxable amount is the value that is received by the transferee

i)       tax exclusive – no tax on tax

j)       2515 – payment of the transfer tax is, itself, a taxable gift

i)       to transfer money to the gc, the gp has to transfer a bit less than with a direct transfer

5)     ch 14 – valuation rules, which might be substitutes for substantive rules

6)     Transfers during life

a)      Question as to whether or not a gratuitous transfer of property has occurred

7)     § 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

i)       § 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 decedant

(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

ii)     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

(2)    

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

i)       Goes if someone transferred the property and if they retained the interest

c)      Exception to § 2037 to bone fide sale