Estate and Gift Tax

Creighton University School of Law

Victoria Haneman
Fall 2020
Estate and Gift Tax Outline

A.Gift Tax
→ Basic Statute
1. § 2501- imposes a tax on “the transfer of property by gift”
a. Definition--property is (1) transfer of (2) property (3) for “less than full adequate
and full consideration in (4) money or money’s worth.” § 2512
2. Donor pays gift tax
a. If donor fails to pay, donee is liable
3. § 1014 (step up basis), 1015 (gift tax)
4. Morrill v. Fahs-- We interpret the estate and gift tax sections floyd
→ Elements to a gift
1. Is there a transfer?
a. Applies to transfers whether indirect or direct, in trust or otherwise § 2511
b. Transfer = any transaction in which interest in property is gratuitously passed or
conferred upon another; regardless of means or device employed. § 2511-1(c)(1)
2. Is the transfer a gift [consideration]?
a. (1) a transfer,
i. Can be direct or indirect gifts
1. Examples of indirect
a. Transfers in trust
b. Indirect gifts through a strawman
c. Below market rate loans
d. Gifts by corps
e. Discharge of indebtedness
ii. Below market interest rate loans § 7872
1. Two imputed transfers
a. (1) lender-- gift = difference between stated interest and
AFR
b. (2) borrower-- discharge of indebtedness income
2. Dickman-- use of money without interest is a gift. Use of money
(interest) is a gift.
3. Does not apply to loans below 10k
iii. Hodges-- providing services without charge is not a gift
b. (2) of property
c. (3) without adequate and full consideration
i. Donative intent is not relevant. § 2511-1(g)
ii. Adequate consideration;
1. Marriage is consideration. Wemyss
2. Prenups = full + adequate consideration Rev. Rul. 68-379
 iii. Specifically not a gift;
1. Personal consumption and economic waste
2. Arm’s length transactions
3. Political contributions
4. Transfers mandated by law
5. Divorce-related transfers
6. Direct payments for education and medical care
iv. § 2703-- only in regard to gift or estate tax do we ignore the reduced
value given by buy-buy sell or option agreements at less than FMV.
1. Unless,
a. (1) bona fide business arrangement
b. (2) not a device to transfer to members of decedent’s
family for less than full and adequate consideration, and
c. (3) terms are comparable to similar arrangements entered
into by persons at arms length.
v. Reg. §2512-1-- The value of the property is (1) the price at which such
property would change between (a) a willing buyer and (b) a willing seller,
(2) neither being under any compulsion to buy or to sell, and (3) both
having reasonable knowledge of relevant facts.
d. (4) in money or money’s worth
3. Is the gift complete?
a. Taxpayer must relinquish dominion and control over the trust property-- as to
leave him no power to change its disposition § 2511-2(b)
i. No relinquishment when D reserves the following powers:
1. To revoke. 2511-2(c)
2. To revest title in the property back to himself. 2511-2(c)
3. To change beneficiaries 2511-2(c)
4. To change the interests of the beneficiaries (as between
themselves), unless fixed by an ascertainable standard. 2511-2(c)
ii. §2511-2(d)-- D may reserve the power to change the manner or time of
enjoyment,
1. E.g., provision allowing trustee to decide that income may be
accumulated and distributed with the corpus rather than
distributed annually.
iii. Substantial adverse interest-- donor does not have power to exercise
dominion and control if he shares that power in conjunction with a person
having a substantial adverse economic interest. 2511-2(e)
1. Who is a SAEI?
a. Beneficiaries of the trust (Yes)
b. Trustee of the trust (No)
iv. If an exercise may be terminated or cut down by the donor to one of less
value, the transfer constitutes an incomplete gift 2511-2(c)
1. If it is at the discretion of the trustee to distribute both corpus or
income, it is complete. Rev. Rule 77-378
 2. Presence of an ascertainable standard (HEMS), the gift of corpus
is incomplete to the extent of the enforceable right to such
distribution. 2511-2(b)
b. Part of the transfer to a trust can complete and part can be incomplete 2511-2(b)
c. Types of transfers
i. Joint Bank Account
1. Not a gift when money deposited, gift when money withdrawn by
the person who did not deposit the funds
ii. Checks
1. Complete when deposited, if it clears (or if clears before Jan 1)
a. Relation back doctrine (comes in if check doesn’t clear by
January 1)
b. Metzger v. Commissioner; Rev Rule 96-56
i. If check is delivered to non-charitable Donee,
completion of the gift “relates back” to date the
check was deposited by the Donee, provided that:
1. Donor is alive when check paid; and
2. Donor intended to make a gift;
3. Check paid by bank when first presented;
4. The Donee presented check for payment in
the year for which completed gift treatment
is sought & within a reasonable time of
issuance;
5. Check was unconditionally delivered by
Donor to Donee
iii. Contract
1. The gift is complete when the contract becomes legally
enforceable
2. Rev. Rule 19-77-- When someone promises to pay for college
after they graduate from college, the gift is complete when the
executory contract is completed by graduating from college
iv. Guaranteeing a loan is not a gift
v. Promissory note
1. Assignment of an interest in promissory note is a gift
a. If only a promise to pay, not complete until some value is
transferred
b. If creates legally enforceable agreement-- the note is
completed on the date it signed
2. Forgiveness of a note [add more when we understand]
vi. Installment Sales and Loans
1. Installment sale → more than one payment received for the purchase of
an item outside of the tax year in which the transaction is closed
 2. Whether it is a gift or sale depends on whether grantor intended to
forgive the notes that were received when grantor transferred the
property. Rev. Rule 77-299
a. The real concern-- is it a legitimate transaction
i. Rev Rule 77-299-- if you don’t tell your kids the
notes were never in existence; suggests it was an
illegitimate transaction
ii. To determine whether a bona fide sale, look at
whether notes are: (1) properly executed, (2)
interest accruing, and (3) collected upon. Estate of
Berkman.
b. Intent to forgive notes is different from donor donative
intent.
c. Forgiveness of notes as they became due is not sufficient,
alone, to support inference that the notes were without
legal substance. Estate of Kelley v. Commissioner
3. Estate of Kelley v. Commissioner
a. Usually a court will respect the form of the transaction
i. If there is evidence of an agreement or other
egregious facts, a court may hold that the
substance of the transaction prevails over the for
4. Courts will closely scrutinize intra-family transfers
5. Gift = spread between consideration received and fair market
value of the asset
4. What is the value of the property transferred?
a. Marriage cannot be valued, and therefore, cannot be a gift. Wemyss
5. Any exclusions or deductions available?
a. Annual Exclusion-- policy-- if we didn’t have exclusion non-compliance would be
rampant, because this is a self-enforcing tax system
i. §2503(b)(1)-- First $15,000 of such gifts to such person shall not be
included in the total amount of gifts during the present year
ii. Three-Part Test to receive annual exclusion
1. Donee must receive the immediate use, enjoyment, or possession
of the property (i.e., it is a present interest) 2503-3(b).
a. Don’t confuse with completion-- the issue is not whether it
is vested, but whether the donee has immediate use of the
propertyTo see if an income intr
b. Need a substantial present economic benefit
i. Facts and circumstances:
1. (1) limits on transferability may make it not
present (e.g., spendthrift clause),
2. (2) limits on distribution may
 3. (3) If you have a right to income--but the
asset is sterile, it is not present. (needs to
pay out at least once a year)
4. (4) if discretionary power to accumulate
income, then it is never present §2503-3(ex.
3)
a. If required to distribute = present
5. (5) if discretionary power to determine share
of distribution to beneficiaries, then no
present interest §2503-3(ex. 3)
ii. To see if an income interest in present:
1. Assets need to produce income
2. Distribute at least annually
3. Trustee must not be able to alter the
proportional share or streams of income
4. Must be capable of being valued at the time
of transfer
iii. To see if a trust has a present interest:
1. Trust will receive income
2. Some portion of that income will flow
steadily to the beneficiary
3. The portion of income flowing out to the
beneficiary can be ascertained
iv. To see if LLC or Partnership has a present interest:
1. No right to transfer
2. Distributions subject to a manager
3. No rights to use assets
v. It is the nature of the property itself that delays the
use or enjoyment and not any restriction placed on
the property of the donor §2503-3(a)
c. An income interest is a present interest
2. Identity of the donee must be ascertainable
3. Value of the gift must be ascertainable at the time of the gift
iii. §2513 Gift Splitting
1. §2513(1)-- a gift made by one spouse to any person other than his
spouse shall be considered as made one half by him and one half
by his spouse.
2. Requirements:
a. (1) Both spouses must be citizens or residents of the U.S.
b. (2) Donor must not give spouse a general power of
appointment over property
c. (3) Donor must be married to spouse at the time of gift and
not remarry during the calendar year
 d. (4) Gift splitting must be elected by filing a gift tax return by
both spouses.
3. Should just use unlimited marital deduction and transfer to donee
through spouse
4. Substance over form doctrine-- cannot use a strawman to transfer
gifts to your children. Heyen v. U.S. (10th circuit)
5. Who is the donor?
a. If a trust-- then it is the beneficiary
b. If a corp-- entities are not subject to estate a gift tax, so it is
the shareholders
iv. Gifts to Minors (only if it is a future interest).
1. Issue→ takes care of future interest. Issue--where gift has to be
managed by someone else then minor, and would thus, be considered a
future interest.
2. 2503(c) Trust-- no part of a gift to an individual under 21 on the
date of such transfer in considered a future interest for the
purposes of the annual exclusion if:
a. (1) The donated interest and income therefrom may be
expended by, or for, the benefit of the donee before he
attains age 21
i. Rev. Rul. 69-345--if trustee has to consider beneficiary’s
other resources = violates 2053(c) → destroys ability to
receive trust income.
1. If trust is silent, assumed to not factor in
other resources.
b. (2) Any unexpended balance will pass to the donee when
he attains the age of 21
c. (3) If the donee dies before age 21, any unexpended
balance will be payable to the estate of the donee (or as
the donee may appoint, under a general POA)
d. If parent is custodian and dies, money will be included in
parent’s estate under 2041
3. Crummey Trusts
a. If a kid or guardian has a right to demand the money over
a period of time, that right to withdraw makes it a present
interest
b. Elements:
i. (1) trustee discretion limitation-- cannot subject
withdrawal to the discretion of the trustee
ii. (2) notice and opportunity requirements
1. Need notice that they had a right to demand
(Rev. Rule 81-7)
2. Just need to show it is bona fide (need at
least 15 day notice)
 3. Must give notice every year
4. Beneficiaries can’t waive notice
iii. (3) beneficiary should respond in writing
1. Safe harbor
a. (1) written notice; and
b. (2) 30 days
iv. (4) requirement of availability of liquid assets-- need
to be able to pay withdrawal amount
1. Convertible assets are okay
2. Not convertible is not liquid = real estate or
art
v. (5) substantial economic interest in trust
c. Grandchildren with a contingent remainder is sufficient to
fit in Crummer Trust exclusion. Cristofani
i. Cristofani: Trust gave withdrawal right to
grandchildren. But it was contingent on parents
being alive.
1. Test-- Whether the beneficiary has the right
to withdrawal or whether the trust could
resist the withdrawal amount.
d. Crummey trust can exist past the age of 21, while 2503(c)
trust does not.
e. Crummey trust does not work if it is illusory-- where we can
prove pre-arranged scheme (substance over form)
4. --> Mandatory spray trusts do qualify for the annual exclusion
5. → if Crummey, can have multiple beneficiaries, if 2503(c) trust,
need separate trust for each child
b. Discharge of support obligations, or
i. Any transfer in excess of an amount to provide for a reasonable
allowance of support for children is considered taxable. Sprawnce
1. Reasonableness = status in life rule
ii. Ends when the child is 18.
c. § 2516 in settlement of marital or property rights (or child settlement)
1. To qualify- (a) written agreement between parties and (b) division
must occur within the year before the agreement is signed two
years afterwards
d. § 2503-4 -- transfer to the benefit -- not a gift, I think this is a 2503(c) trust
i. (1) donee not 21
ii. (2) Property itself + income may be expended before 21
iii. (3) Anything left under #2 will pass to donee at 21
iv. (4) If minor dies, it goes into estate
e. Spouses must support each other
f. Business Transactions safe harbor § 2512-8
i. (1) ordinary course of business
 1. Estate of Anderson-- transfer of stock from Sr. to Jr. executive is
in the ordinary course if that was the traditional practice.
ii. (2) at arm’s length, and
1. Compare FMV
iii. (3) free from donative intent
g. § 2503, 2503-6 --
i. → neither concerns relationship--don’t need to be a parent
ii. → No cap
iii. (1) Tuition to qualify educational expenses
1. Needs to be at a qualifying education expenses
2. Needs to be paid directly to the educational institution (no trust)
3. Pre-payment qualifies so long as not refundable PLR 200602002
iv. (2) Medical expenses
1. Need to be qualifying medical expenses § 213(d)
2. Does not apply to amounts paid for medical care that are
reimbursed by the donee’s medical insurance
→ Disclaimer-- 2518
1. Disclaimer occurs when the recipient of the property refuses to accept it or relinquishes
the right
a. If disclaimer is effective, it is not a transfer of property for estate and gift tax
purposes
2. 5 elements of disclaim,
a. (1) Irrevocable + unqualified
b. (2) Written
c. (3) Timing -- disclaim no later than 9 months after-- whichever is later a (1)
transfer that creates interest (trust), or (2) person attain age 21
i. So--could be beneficiary of trust you don’t know about--and could never
have opportunity to disclaim
d. (4) Person disclaiming cannot be accepted property interest or any benefits
e. (5) Person disclaiming must have no discretion on how it will pass
3. Must also satisfy state law [note: change #3]
4. Can disclaim individual portion of property
5. Separable Interests
a. 2518-3(d)-- Requires vertical division of property
b. Separable Interests-- can accept one part of a separable interest
i. Can disclaim part of a gift in stock. E.g., disclaim 100 shares, accept 100
shares
c. 2518-3(d) ex. 8-- can disclaim present interest while keeping future interest
i. Except-- if state law merges the two automatically when a beneficiary
receives both present and future interests
d. Any type of property interest can be disclaimed-- but can’t carve out a lesser
interest
i. Can’t turn fee simple into life estate
 e. Severable property is property which can be divided into separate parts, each of
which, after severance, maintains a complete and independent existence. 2518-
3(a)(ii)
f. Cannot disclaim an interest in stock in a trust that holds multiple different stocks,
but rather can only disclaim the entire income interest of the trust or the corpus.
(ex. 5 and 8)
6. Disclaimer must be clear and unequivocal
7. 2518-2(d)-- cannot accept any benefits impliedly or expressly
a. Acceptance is manifested by an affirmative act which is consistent with
ownership of the interest in property
b. Taking delivery of an instrument of title-- without more-- does not constitute
acceptance
8. 2518-2(d)(2)-- actions taken to preserve or maintain the disclaimed property shall not be
treated as an acceptance of such property or any of its benefits
a. Merely paying the property taxes does not constitute an acceptance even if
personal funds were used to pay the taxes. Reg §25182(d) ex. 3
9. 2518-2(d)(3)-- Under age 21
a. If under 21, beneficiary has until 9 months after his 21st birthday in which to
make a qualified disclaimer
b. Any actions by a custodian on behalf of a beneficiary prior to the beneficiary’s
21st birthday will not be an acceptance by the beneficiary of the interest
10. Cannot direct where it goes after disclaimed
a. Relation Back Doctrine-- upon disclaimer, title relates back to the instant when
transfer was initiated, i.e., it is as if the interest has never been offered to the
disclaimant
B. Estate Tax
1. Estate tax is imposed on “taxable estate.” § 2001
a. Taxable estate = gross estate less deductions. § 2051
2. Gross estate = value at time of death of all property (real or personal) wherever situated.
§ 2031
a. Can tax property located in foriegn jurisdiction
3. Rule of construction-- go with the highest yielding code provision
4. § 2033 Broad rule--The value of the gross estate is the value of all property to the extent
of the interest therein of the decedent at the time of his death. § 2033.
a. Test--As long as D
i. (1) owns an interest in property at death, and
1. The interest must be a “beneficial interest” as defined by state law.
2033-1
a. Once state law determines the extent of the interest,
federal law may tax the interest
ii. (2) which is transferred to another on account of D’s death
b. Cemetery lot = included 2033-1
i. Value limited to the salable value of the part of the lot which is not
designed for the interment of the decedent and the members of his family
 c. Notes or other claims held by decedent, even if they are canceled by the
decedent’s will = included 2033-1(b)
d. Interests and rents accrued as of the date of the decedent’s death = includable
2033-1(b)
i. Income producing property
1. Value of property = included
2. Income before death = included
3. Income after death = not included
e. Business
i. Determine if “de facto” partner in business
1. Person needs to (1) intend to be the owner and (2) took action to
follow though an ownership
ii. Proceeds of buy-sell agreement exercised by partner = included
iii. Dividends which are payable to the decedent, as a stockholder of record,
before the date of the decedent’s death = included 2033-1(b)
iv. Employee benefits
1. Voluntary payments (by employer to deceased employer to
deceased employee’s surviving family) = not included
2. Benefits pursuant to contract = included
f. Tenants in common = 2033 included
g. Life Insurance
i. Contract of insurance owned by the decedent on the life of another =
included 2033
ii. Proceeds of insurance owned by decedent himself = included 2042 (NOT
2033)
h. Interests Terminating at Death
i. Life estate for life of decedent = not included, because interest is
extinguished at death
ii. Joint tenancies = not included, because no transfer has occurred (see
2040)
iii. Wrongful death claims = not included, because interest did not exist until
after D’s death. Rev. Rul. 75-127
i. Stolen art = included→ if have beneficial ownership right only to exclusion of real owner
than it should be included. TAM 9152005.
j. Future interests
i. Contingent interests do not affect taxability, but do affect value of the
interest Rev. Rul. 67-370
5. Property not owned by decedent
a. § 2034--
i. Common property states
1. Surviving spouse has an interest in D’s common property
2. One half of common property in estate of D
3. Other half is owned by Surviving Spouse
 ii. Value of an elective share is included in estate of Decedent under § 2034
even if spouse has right to take
b. § 2035--
i. General Rule
1. Only two types of gifts pulled back into the gross estate under
2035(a);:
a. (1) D’s gift of life insurance policy on D’s life, or
i. Rev. rule 72-282-- doesnt matter if the life
insurance policy is then sold to a third party
b. (2) gift of an interest in property that would have been
included under 2036-2038
i. Post-gift appreciation is included as well
ii. Rationale-- prevent people from ridding their estates right before death
iii. Value
1. Entire value will be included in the gross estate if it is within
element (2)-- not just income interest, but the remainder in corpus
also
2. Entire life insurance policy is included also
a. Proceeds at time of death (ignore fair market value at time
of transfer to 3P)
iv. Tax Exclusivity v. Inclusivity
1. Gift tax = exclusive
2. Estate tax = inclusive
a. E.g., flat E+G tax of 50%
i. D may give ⅔ of his estate, using remaining ⅓ to
pay the gift tax = effective rate of 33%
ii. C.f. if all was left in estate when died = 50%
v. 2035(b)-- requires inclusion of the gross estate any federal gift tax paid by
the D, attributable to gifts made within three years of death
c. § 2036--(a) Gross estate includes all property D made a life transfer of--but
retained, an interest not ending before his death or is not ascertainable without
reference to his death, in
i. (1) possession or enjoyment, or right to income from, or
ii. (2) the right--along or in conjunction with 3P--to designate persons who
will enjoy income therefrom
iii. Differences between 2036(a)(1) and 2036(a)(2)
1. (a)(1) if settlor is beneficiary with ascertainable standard will
trigger inclusion
2. (a)(2) if settlor is beneficiary with ascertainable standard prevents
inclusion
iv. 2036(a)(1)--possession or enjoyment
1. Value included: value of entire property
a. Exception: if completed gift of a portion of trust, exclude
 i. e.g., life estate A, life estate to Transferor,
remainder to B = exclude A’s life estate; include
transferor’s life estate and B’s remainder
2. Four elements
a. (1) Inter vivos transfer
i. Must be a transfer before death
ii. Not enough that they possess a life estate at time
of death
iii. Remainder does not need to be expressly
reference in an instrument of transfer
1. Collateral documents can show this
iv. Subsequent reconveyance of an interest
1. Not within 2036 if without
prearrangement--the decedent received a
retained interest after initial transfer
b. (2) Retained interest
i. Is an interest retained when there are no
enforceable property rights?
1. Yes--it is enough that they have retained (a)
present use, (b) economic benefits, or (c)
income
2. Mere fact of continued occupancy
implicates a complicit understanding
ii. Reservation of the interest must be in the actual
property transferred (but not necessarily in
instrument of transfer)
1. E.g., transfer of property for x to d--and in
exchange, d agrees to pay an annuity for
life to x
2. ^ not within 2036(a)
c. (3) Taxable Interest or powers
i. Possession, enjoyment of, right to income,
designate who may exercise rights with regard to
affected property
1. Interest is retained even when there is no
enforceable property right
a. Present uses economic benefit, or
income is enough
d. (4) Time periods
i. 1) For life
ii. 2) For a period other than life if the period cannot
be determined without reference to T’s death, or
iii. 3) For a period other than life if in fact the D dies
before the end of that period
 1. E.g., Term of 10 years-- if D dies in year 8 =
included/ if D dies in year 12 = not included
3. IF there is a discretionary right to distribute income
a. Not in the estate
4. Who is the transferor?
a. IRS will follow substance over form
i. E.g., D purchase property from A. Directs A to
transfer life estate in property to D, with remainder
to X.
ii. ^actual transferor will be deemed to be A
5. Reciprocal trust doctrine-- Substantially identical trusts are treated
as being created in consideration of each other
a. At A’s death, the value of B’s trust included in A’s estate to
the extent of the lower trust amount
6. Indirect transfers-- can be imputed to the decedent
a. E.g., indirect payment of a debt
7. Collateral documents-- the interest or power need not be
expressly retained in the instrument of transfer,
a. → does have to exist in some form of documentation
b. That document is then used as part of the actual transfer
8. Prearranged Reconveyance-- treated as a retained interest if
there is a lifetime understanding that someone would get
something back
a. = included under 2036(a)(1)
b. Factors of prearrangement:
i. Did value actually change hands (close to FMV)
ii. Mortgage obligation
iii. Rent (enough to pay mortgage?)
iv. Who took care of property
v. Are payments being forgiven as they become due?
9. Retained possession or enjoyment
a. Do not need a legally enforceable right to be retained
under 2036(a)(1)
b. Mere possession is not enough, courts can infer an
understanding if you continue to receive income/use
10. Legal obligation to support: Discretionary trusts
a. D deemed to have retained possession or enjoyment or
the right to income from property if the property, or its
income, is to be used to discharged his legal obligations or
for his pecuniary benefit
i. This includes the legal obligation to support a
dependent during the decedent’s lifetime. Reg.
20.2036-1(b)(2)
 b. As long (1) as transferor is NOT trustee and (2) cannot
compel the use of income for his benefit, then the fact that
trustee has discretionary power to give income to D will
NOT cause the property to be taxed in D’s GE under 2036
v. 2036(a)(2)--designate beneficiaries
1. Invoked in three scenarios;
a. 1) Power to accumulate
b. 2) Power to encroach
c. 3) Power to sprinkle
2. If you retain those rights with 100% of the assets, then all the
assets are includible at death, but if only retain those rights with
60% of the assets, then just the assets 60% reaches
3. Power must be exercisable during D’s life
a. → if a power to designate is exercisable only by will, it is NOT
taxed under 2036
4. Amount includible: amount subject to the retained power
a. i.e., entire value of everything that was transferred but not
value of power that was retained by D (b/c not ever
transferred
i. If it never left the hands of D, it is not includible
under 2036
5. Shifting of economic enjoyment is not required
a. Power to shift possession or enjoyment from a party to
another clearly triggers 2036
b. Time and manner of enjoyment also triggers 2036(a)(2)
6. Discretion--if no ascertainable standard--no included under
2036(a)(2)
7. Power does not need to be exercised in favor of himself (unlike (a)
(1))
8. Does not need to be retained with an adverse party
9. D can avoid 2036 if
a. (1) name himself as co-trustee without inclusion as a
beneficiary, and
b. (2) distributed income in compliance with an ascertainable
standard
10. 2036(a)(2) and 2038 are fellow travellers
a. If both apply, 2036(a)(2)
b. If you retain the power through a will, it is included 2038,
but not 2036(a)(2) (because it has to be during life)

d. § 2037--
i. Include into decedent’s gross estate the value of any property transferred
by him, during his lifetime where--
 1. (1) transferee’s possession & enjoyment of property is contingent
upon surviving the D-transferor, and
2. (2) D-transferor has retained a reversionary interest in the
property valued at more than 5% of the value of the property at
the time of D’s death
ii. Four requirements:
1. (1) condition of survivorship
a. Analysis:
i. Does any beneficiary have a contingent interest?
1. E.g., D transfers property to a trust. Income
to A for life, remand to G. D reserves the
right to revoke the trust.
2. ^All of trust is included in 2037 as long as D
is alive, their interests are contingent on
revocation
ii. If yes, is it contingent on surviving the transferor?
iii. If yes, is it contingent solely on surviving the
transferor?
1. If alternative way to receive gift, it is not
valid
iv. If yes, then it meets the survivorship requirement
b. If alternative event (to solely surviving the transferor) is so
unreal as to actually occur, it will not destroy the
survivorship requirement. 2037-1(b)
2. (2) reversionary interest
3. (3) 5% rule
a. Value of reversionary interest exceeds 5% of the entire
interest at time of death. 2037-1(a)(3)
b. AVD does not apply. 2037-1(c)(3).
4. (4) the “negative” requirement (not on exam)
iii. Must be a transfer by decedent during his lifetime
iv. Valuation
1. Amount included in gross estate is the value of the interest that is
dependent on survivorship
e. § 2038--
i. 2038(a)-- decedent has made a transfer within the past 3 years where
enjoyment thereof was subject at the date of his death to change through
an exercise of a power to (a) alter, (b) amend, and (c) revoke or terminate
1. This does not apply if:
a. (1) was for full and adequate consideration (i.e., has to be
a gift)
b. (2) decedent could only exercise power with consent of all
parties
c. (3) power held solely by person other than decedent
 i. But ok if exercised by decedent + third party
ii. if decedent has power to discharge trustee +
appoint himself, viewed as retaining powers trustee
has
2. If power to change is subject to some type of contingency before
exercise, it is not revocable if; 2038-1(b)
a. (1) contingency not in control of D, and
i. → has to not at all be within control. E.g., “earthquake
in california”
b. (2) the contingency has not occurred at the time of D’s
death
3. Nature of power
a. Does not matter if this power was created inter vivos or
through a will
b. Purely administrative functions do not qualify for 2038(a)
c. The power does not need to be beneficial to decedent
d. discretionary/non-discretionary
i. only discretionary powers render the transfer
taxable
ii. If power is fixed by ascertainable standard, it is not
discretionary and not taxable
e. Does not have to retain power. Cf. 2036/2037
i. Only issue is if power in D at time of death, no
difference if retained or received from 3P.
4. Power to affect time and manner of enjoyment
a. Taxable -- even if there is no power to change the
economic substance of the transfer
i. E.g., D creates a trust, income to A for 20 years,
the corpus to A. D receives the right to terminate
the trust, with corpus and income, immediately by
paid to A.
ii. ^ Taxable
5. Power to terminate
a. E.g., If D creates a trust, income to B for life, remainder to
C, and Reserves right to terminate trust at any time,
causing distribution of Corpus to C.
b. Both taxable
i. B--termination = taxable
ii. C--can be accelerated = taxable because of time of
enjoyment
6. Power to alter + amend
a. Power to change share of income or corpus = taxable
b. Substituting beneficiaries or adding = taxable
c. Must be exercisable by decedent--not a 3P
 i. But--if decedent has power to discharge trustee +
appoint himself, viewed as retaining powers trustee
has
7. Overlap with 2036
a. Most-- if taxable under 2038 will be taxable under 2036
b. Different!
i. (1) 2036--limited to powers that affect enjoyment
during decedent's lifetime
ii. (2) 2038 will not apply if power is subject to
contingency beyond control (while 2036 will)
iii. (3) 2038--only specific interest subject to the power
is taxed (entire thing in 2036 is taxed)
ii. 2038(b)-- the date of existence of power
1. Date of death -- even if the exercise of power requires notice and
it would only take effect certain time after notice
f. §2042-- insurance
i. General rules of inclusion
1. 2042-- deals only with insurance on D’s life
a. Insurance on 3P is excluded (but probably included under
2033)
2. Includes property in two ways-- proceeds of insurance on D’s life
are includable in gross estate if they are;
a. (1) receivable by the executor, or
b. (2) (a) receivable by the beneficiary and (b) the D had any
incidents of ownership in a policy at death
ii. What is life insurance?
1. Rule: has the economic risk of death been shifted or distributed
2. Included
a. Accidental death policies
b. Group life insurance
c. Death benefits to repay what was paid in by employer =
not taxable
3.
iii. Insurance payable to D’s estate
1. Fully taxable under 2042
2. Rule-- money includible under 2042(1) if;
a. (1) Receivable by an executor, or
b. (2) receivable by or for the benefit of the estate
i. Are proceeds legally committed to discharge
obligations to the estate?
1. Does not have to be payable to executor--
but, 3P must be required to remit an amount
to pay fees of estate
iv. Insurance to payable to other beneficiaries
 1. Only included in gross estate if D retains incidents of ownership in
policy at time of death. 2042(2)
2. What are incidents of ownership?
a. 2042-1(c)(2)-- Extends to any right/interest in policy
whereby insured has the power (directly or indirectly);
i. (1) to control the existence of the policy
ii. (2) to rearrange the economic interests therein, or
iii. (3) to affect the benefits payable thereunder
b. Right to receive dividends ≠ incident of ownership
3. Possession of incidents of ownership
a. D need not own the policy and retain incidents
b. 3P can own the policy and grant them incidents of
ownership
i. Think company providing key man insurance → would
have incidents because he is shareholder
c. Does not matter if D can exercise incidents of ownership
alone or can exercise with someone else
i. Do not need adverse party
d. E.g., life insurance policy paid by company-- if retains right
to shift who is beneficiary-- it is includible under 2042
i. C.f.-- if only one time right to change beneficiary, no
incidents of ownership
v. Assignments of incidents of ownership
1. Normally not includible in gross estate if;
a. (1) D has made a complete and effective gift of all
ownership and beneficial interest in policy, and
b. (2) D has no retained incidents of ownership
2. Exception: if the transfer was made of the policy, in such a way
that the policy proceeds would be includable at death under 2035-
2038
a. E.g., 2035 (within 3 years); 2036 (D retains a remainder)
vi. Amounts includible
1. Entire value of insurance proceeds
a. If installment obligation, FMV of distributions
6. Special types of property and transfers
a. § 2039--
b. § 2040-- Joint Tenancy
i. 2040(a) General Rule of Inclusion-- gross estate includes full value of
joint tenancy with ROS.
1. Except--can reduce by;
a. (1) amount that originally belonged to such other person
(and was never gifted to person by decedent), or
b. (2) amount other person contributed
 i. Gift--If other person received part as gift from
decedent→ that part is included
1. Proportionality-- (consideration paid by D ÷
total consideration) x value of joint property
= amount included
ii. What is a contribution
1. Improvements
2. Mortgage payments
3. Joint liability for a mortgage
4. Services provided in a business context
iii. Gift from D used by donee to buy joint tenancy
1. Money from gift is not considered to be a
contribution for JT. § 2040-1(c)(5)
2. INCOME→ earned from gift is considered to be
a contribution. § 2040-1(c)(5)
2. Gift from 3P;
a. Presumption doesn’t apply if all joint tenants received their
interests by gift, bequest, or inheritance from 3rd party
b. Only the value of the fractional interest belonging to the
decedent is included. 2040-1(a)(1)
3. Tracing Rule of 20401(a)
a. Creates a rebuttable presumption that the first joint tenant
to die provided all of the consideration for the acquisition of
the property
i. Estate has burden of showing either (a) original
ownership OR (b) contribution by joint owner.
Estate of Fratini
1. If survivor cannot prove exact amount of
contribution, estate may approximate the
amount. Cohan v. Comm’r
b. Presumption doesn’t apply if all joint tenants received their
interests by gift, bequest, or inheritance from a third party
ii. 2040(b) Spousal Joint Interests
1. Only one-half of the value of a ‘qualified joint tenancy’ is included
in Decedent’s gross estate
a. It does not matter whether account was created with
common property or separate property
b. It does not matter the amount of consideration furnished by
the D
2. Qualified property
a. Needs to be held by decedent + spouse as;
i. (1) tenants by entirety, or
ii. (2) joint tenants ROS as the only joint tenants
 b. After death of one spouse, only half of property will get
step-up basis. 1014(b)(9)
c. Only applies if spouse is resident
c. § 2041--Powers of appointment
i. Possession of substantial control can be a sufficient basis for tax
1. General POA = holder of POA is taxed
2. Non general POA = not taxed under ET or GT
a. Non general power of appointment;
i. (1) does not fit within statutory definition of general
POA, or
ii. (2) it fits a specific statutory exemption
ii. Powers of appointment-- all powers which are in substance and effect
POAs regardless of the nomenclature used in creating the power and
regardless of local property law connotations. 2041-1(b)(1)
iii. General power of appointment 2514(c)
1. Powers exercisable in favor of
a. (1) the holder
b. (2) his estate
c. (3) his creditors, or
d. (4) the creditors of his estate
iv. Three exceptions to general POA
1. (1) power limited by an ascertainable standard
a. Ascertainable standard-- limiting powers to consume,
invade, or appropriate property for use for health,
education, support or maintenance
i. Language to continue standard of living ≠ ascertainable
b. Ascertainable standard makes POA non-general
i. Exception only applies if meet two requirements:
1. Power must be limited by an ascertainable
standard; and
2. Ascertainable standard must related to one
of specified statutory purposes
2. (2) powers exercisable only in conjunction with the creator of the
power
3. (3) powers exercisable only in conjunction with a person
possession a substantial adverse interest
v. Lapse + Release
1. Release of general POA = treated as an exercise and considered
transfer for GT purposes § 2514(b)
2. Lapse of general POA = lapse is a release § 2514(e)--and is thus,
a transfer for GT
a. Exception--lapse treated as a release only to the extent the
value of the property that could have been appointed
exceeds;
 i. (1) $5,000, or
ii. (2) 5% of value of the property
iii. → whichever is larger
b. ^ mere inaction causing lapse can be a taxable transfer
because of this. § 2514-3(c)(4)
vi. Whether they exercise the right is completely irrelevant to the transfer tax
determination
vii. Qualified disclaimer -- 2518 (gift tax issue)
1. Must be in writing and not more than 9 months after general OIA
is created
2. Not considered to be a release
a. A POA can’t be released after it has been accepted
3. Disclaimer must be complete and unqualified refusal to accept
a. However--it is not necessary for one to renounce other
interests in the property
b. ^ e.g., can disclaim POA but keep life interest
viii. State law determines POA rights
7. Misc. Provisions related to gross estate
C. Valuation
1. General
a. 2031-1(b)-- price at which property would change hands between a willing buyer
and a willing seller, neither being under any compulsion to buy or sell and both
having reasonable knowledge of relevant facts.
i. Value is determined in the market where the item is commonly bought
and sold. If sold to general public = retail market. 2031-1(b)
2. Gift
a. Timing
i. 2512(a)-- consider the amount of gift on the date that the gift is complete
ii. Value given by commissioner is considered prima facie correct; Donor
has burden to show different value
b. Method
i. Gift is complete, but incapable of valuation
1. Open transaction method-- wait until subject property is capable of
valuation. RR 69-346
ii. Basic Valuation Approaches
1. Blockage discount
a. TP must show that 2031-2(e)
i. Market is too thin to absorb the shares at the
market price
ii. Time within a reasonable time
iii. Brokers by skilled brokers following prudent
liquidation practice
b. TP has the burden of proving the existence of facts that
justify a blockage discount. 2031-2(e)
 2. Real property (appraisal)
a. Valued at its highest and best uses. § 2032A.
b. Ignorance of facts affecting valuation not enough to
overcome appraisal valuation, unless TP shows actual
change in circumstances since date of appraisal. Estate of
Pillsbury
c. Factors that will be considered:
i. Consider recent attempts to sell the property,
including any offers on the property
ii. Also consider sales of similar property in the area
iii. Consider condition, location, and income
production of the property
iv. Consider any potential zoning changes
v. Are there easements on the property?
3. Securities
a. The FMV of stocks/bonds is the mean between the highest
& lowest quoted selling prices on the valuation date. 2031-
2(b)(1)
4. Interests in Close Corps (Discounting vs. Control Premiums)
a. RR 59-60 lays out factors to consider:
i. The book value of the stock
ii. The financial condition of corp
iii. The earning capacity of co.
iv. The dividend paying capacity
v. Whether the enterprise has goodwill
vi. Outlook of the specific industry
vii. The market price of stocks in the same line of
business that are listed in the open market. (stock
market over the counter).
b. Minority discount rule--who the shareholders are is
irrelevant for discount
i. Maj. interest premium
c. Burden is on donor to establish valuation
5. Buy Sell Agreements
3. Estate
a. 2032-- value of all property as defined through 2033-2046
b. Value is fixed at date of death unless the state elects (2032) Alternative Valuation
Date
c. Normally cannot include post-death events that effect valuation
d. Estate Tax: Alternate Valuation Date
i. An estate may only elect if it reduces BOTH
1. Value of the gross estate AND
2. Amount of estate tax & GST tax payable. 2032(c)
ii. Two exceptions to valuing “included” property on AVD
 1. Property distributed, sold, echanged, or otherwise disposed of
within 6 months following D’s death is valued on the date of
disposition. 2032(a)(1)
2. Property interests which are affected by mere lapse of time (such
as annuity k’s) valued as of the date of death-- but may be
adjusted as of the AVD for any difference in value not caused by
the mere lapse of time. 2032(a)(3)
a. But--increase in value post-death due to mere lapse of
time is included in AVD
4. Valuation Examples:
a. Notes, debts, promissory notes included into value of estate at face value
i. Unless decedent can show it was worthless or that debtor is insolvent.
Bankruptcy = insolvency
ii. balance sheet test
b. Life insurance 2042
i. Before death = cash-out value
ii. After death = full face value
iii. Policy in hands of third party = replacement value (cash-out)
1. If the third party dies within 6 months and AVD is chosen = face
value
iv. Employment contract valued by terms of employment contract. Goodman
v. Granger
c. Cattle-- Rev Rul 58-436-- Appreciate in value of cattle post death is included in
the value of the estate in AVD
C. Computation
1. Gift Tax
a. Tax exclusive (tax paid on gifts is free from estate tax)
b. Steps
i. (1) calculate aggregate taxable gifts
1. Add together taxable gifts from 6/6/32 to present end of year &
calculate tentative tax on total amount
ii. (2) calculate the tentative tax on this year’s taxable gifts
iii. (3) subtract the tentative tax from the applicable unified credit. This will
give you the net estate tax due.
iv. (4) due date
c. Calculation
Taxable gift, 2503

+ Prior taxable gifts

= Aggregate taxable gifts

Tentative tax on aggregate taxable gifts, 2502

 - Tentative tax on prior taxable gifts

= Tentative tax on current taxable gift

- Credit amount available

= Gift tax payable

2. Estate Tax
a. Tax inclusive
b. Steps:
i. (1) calculate your tax base by adding everything in your estate (2001) to
your adjusted taxable gifts (2501)
ii. (2) calculate the tentative tax on your tax base, using
iii. (3) subtract the tentative tax from the applicable credit. This will give you
the net estate tax due
iv. (4) due date
c. Calculation
Taxable estate, 2501

+ Adjusted taxable gifts, 2001

= Tax base

- Tentative tax on tax base, 2001

- Applicable credit, 2010

= Estate tax payable