Were a QTIP election allowed, it would put the entire ½ of Andrea’s interest into Harvey’s estate under 2044. He would then be able to get contribution under 2077A from the kids for the extra portion of tax.

Unfortunately the property will stay in Andrea’s estate since the QTIP election can’t be made at the full value.

½ of the stock Andrea held with Zeke will go into her estate. When property held as joint tenants with right of survivorship is acquired by gift from a third party, the owners are considered to own in proportion to the number of owners, here one-half as set out in 2040(a).

Since the value of the 2 properties are going in opposite directions any gain or loss in value is likely to cancel out. However, Andrea’s estate should consider what the values are at 6v mo. after her death. If the values have changed due simply to market changes and will lower the estate tax due, the estate can elect the alternate valuation date under 2032. The election is made for the entire estate, so the impact must be a greater decrease than increase on everything.

Andrea’s estate will be allowed a deduction for the malpractice claim under 2053. Since valuation is done as of the date of death, the deduction should be for the original claim of $525,000. Under O’Neal generally things that happen after death will not be considered so the settlement is irrelevant. However, there is a split in circuits and there is a potential that a court would only allow a deduction for 50,000, the final amount settled on. Considering the difference in values and the short amount of time, it would not be surprising to see the deduction capped at the amount of settlement.

There are no GST tax issues in this problem. No one is a skip person.

Exam # 9441

Land with Harvey:

Andrea purchases the land out of her own separate funds. Thus, if she had not requested that title be issued in H and her names it would have been separate property. Thus, upon issuance of the title a gift of ½ of the property is made to H. Further, because community property is a form of tenancy in common, a shared ownership/concurrent interest discount will be available for the potential expenses involved in shared ownership. Thus, the gross gift will be valued at the one-half value (40,000) less 15% discount (about 6K), for a total of about 34,000. The entire gross gift inclusion will be reduced by the marital deduction.

When A dies, the entire community property will receive a step up (or down) to FMV at the date of death or the alternate valuation date (valuation will be discussed later). The gross estate inclusion will be ½ of the current value of the land less a 15% shared ownership discount. H’s interest is a terminable interest. Thus, even though A transfers property to her surviving spouse who is a U.S. citizen, it appears that a marital deduction may not be available because the interest will terminate and go to her children. Further, the income may not be payable to H for life. Thus, neither the QTIP or 2056b5 (LE + GPOA) are available. If H’s income interest was for life (instead of 15 years), a QTIP election would have been available if nobody could appoint income to anybody other than H. On H’s death (or on the gift of his interest), the entire property would be taxed (2044). However, in this instance no marital deduction is available.

Further, this is a partial transfer to H and a partial transfer to the kids. Since the estate is valued as a whole, this will not affect valuation.

Stock with Zeke!

When A dies, Z will take full ownership of the stock. Usually, under 2040 the entire value of the stock is included less survivor consideration. However, in this case neither co-tenant paid for the stock. Thus A’s proportionate share of the stock goes through her gross estate. Thus, ½ of the value of the stock at death or six months later (altern. val) will be included in A’s estate. No discount applies. The stock value is determined by averaging the high and low trading prices on the date of death or alternate valuation date. Without further information, it is unclear whether minority discounts, control premiums, discounts for lack of marketability (if closely held) or blockage discounts apply.

Checks:

The checks that M writes to her kids and the checks that Z writes to his kids will not be taxed because annual exclusions are available. However, the checks must be at least presented for payment in 2002. Usually, a gift by check is complete when the check is cashed. However, with annual exclusions, if the check is timely presented to the bank in 2002, an annual exclusion should be available even if the checks are cashed in 2003.

In connection with the $5,000 checks A gives Z’s kids and Z gives A’s kids, it is likely that the annual exclusion will not be available based on the reciprocal trust doctrine. While this doctrine was initially applied to trusts in determining if the grantor retained powers, courts are now applying the reciprocal trust doctrine to checks in the Annual Exclusion context. A substance over form evaluation will be undertaken. Because the checks appear to have been written in a single transaction/arrangement and A and Z are in the same economic position after the checks are written, it is likely that the annual exclusion will be disallowed. Thus, a tax will be assessed on $15,000 (5K x 3) worth of gifts made by Z and A.

When A dies the next year, any gift tax paid will be pulled into her gross estate under § 2035(b). Thus the tax on the $15,000 in gifts should be included in her gross estate, as well as any additional tax assessed in the last three years.

Litigation:

A’s estate should be able to take a § 2053 “claim” deduction for the litigation pending against A. Deductions are allowable for “immature” claims if the value is reasonably ascertainable and it appears that some payment will be made. There is a division within the courts on how to value the deduction. However, a majority of courts will value the claim at death or at the alternate valuation date (6 months). Thus, the $50,000 settlement at month 8 will not be considered by the majority of courts (minority of courts will consider). Thus, the proper value is tied to the $525,000 claim. This does not mean that the entire $525,000 is deductible. Instead, experts will analyze what the $525,000 claim was worth at death or alternate valuation based on the likelihood of success/merits of the claim.

Valuation --> § 2053 deduction, stock, land, basis adjustment.

It seems that an alternate valuation may be elected. This is an all or nothing election. Thus, we have two choices: the entire estate (and basis determinations) are valued (1) at death or (2) at the alternate valuation date (6 months or prior disposition date). A protective election should be made because alternate valuation only applies if the value of the estate as a whole is reduced. Changes due to mere lapse in time will be ignored but this does not seem to apply here. We are valuing the entire ½ interest in land (i.e. life and remainder interest). If we were just valuing one term interest, we could use the value & interest rate at six months but the term would be determined at death. Finally, no basis only elections are permitted. It is tempting to elect a higher valuation date to increase the basis of the stock and land because the unified credit will offset the first million in property (345,800 tax). This is not permitted. Thus, alternate valuation will only be available if the overall value of the estate is less at six months post death than at death.

Exam # 9921

Andrea purchased real estate with separate funds (80,000). She and Harvey took title to the property as tenants in common (community property). She has made a gift to Harvey of half the value of the property. That half value (40,000) will be reduced by a minority discount because he is not receiving full control over the property - he is only getting an undivided one-half share. This gift will be covered by 2523 marital gift exclusion up to the full value of the gift.

Andrea and Zeke hold stock as joint tenants with right of survivorship. This stock was a gift to them by their mother. Most likely they live in a state where they have severable joint tenancy. If that is the case the FMV of what each sibling has is ½ the value of the stock. If they live in one of the two states with non-severable joint tenancy, you would need to do an actuarial valuation under 7520. The FMV will depend on the relative ages of each sibling and how likely it is that one would outlive the other.

In 2002, Andrea wrote checks of $11,000 to her three children. These are completed, present interest gifts that each qualify for the annual exclusion. Zeke writes similar check s to his children and those would also qualify for the annual exclusion. Andrea then writes $5,000 checks to each of Zeke's children and Zeke wrote similar checks to Andrea's children. This will most likely not pass the "smell test". It looks like Andrea and Zeka are just trying to get more money down to their own kids. They will not get the annual exclusions for the gifts to their nieces and nephews. When Andrea dies in 2003, under 2035 - the three year look back rule, the gift tax she paid would come back into her estate. If she had made any gifts that did not qualify for the annual exclusion, that tax would come back into her gross estate.

Andrea dies. Her ½ interest in the land is left in trust, income to Harvey for life or 15 years, whichever is shorter remainder to their children. The problem is that this is a terminable interest. Under 2056 if there is a terminable interest left to the spouse, then no marital deduction would be allowed. If she had chosen to leave Harvey a life estate with a general power of appointment the marital deduction would have been allowed under 2056(b)(5). She also could have made a QTIP election under 2056(b)(7). This would have allowed her to still leave Harvey a terminable interest with the remainder to their children. However as long as he was allowed to be all the income at least once a year this would have been able to be QTIP'ed. None of the property would be treated as passing to anyone but Harvey and it would have been eligible for the marital deduction. The value of the property would then be included in Harvey's estate even though he had no power to leave it to whomever he wanted. The value of this ½ interest would be ½ the value of the property at the time of death, taking into account a discount for the shared control problem.

The trust created a remainder interest in the children. The value of this remainder is contingent upon whether or not Harvey lives less than 15 years. At the longest, the income interest will last for 15 years. Using the tables it would be possible to figure out the remainder interest. The half interest that the children get through this trust would still be valued with a minority discount. It doesn't matter if they are also going to inherit the other half from Harvey. There is no family attribution so their will be a minority discount on both halves.

When Andrea died, the stock she held in joint tenancy with right of survivorship with Zeke automatically passed to Zeke. Under 2033 she had nothing in her estate when she died because she couldn't just leave it to anyone - it would go to Zeke. Under 2040 the whole property could have gone into Andrea's estate because it was held in joint tenancy. But because Andrea and Zeke received the stock as a gift the whole value of the stock will not go into Andrea's estate. Andrea will only have ½ the value of the stock in her estate when she died. She will be treated as leaving Zeke a ½ interest in the stock.

After Andrea's death the stock steadily increased in value over a one year period and the land steadily decreased in value over the same one year period. The executor of her estate could choose to do an alternate valuation election under 2032. He could choose a date 6 months after the date of death to have the property valued on that date instead of the date of death. This election would be for the whole estate with each asset being valued individually. No adjustment will be made for increases or decreases in value that are due to "mere lapse of time". The only elections that will be allowed are those that lower the gross estate and the estate tax. If, after looking as the values at date of death and the alternate date, the gross estate is lowered by choosing an alternate valuation date, the executor should do so. This would benefit those that receive the land but not the person who receives the stock. The basis will be effected by this election because the value for basis will be the same value that is eventually used for the estate tax purpose.

Andrea, at the time of her death, was facing a possible claim of $525,000. The estate would be allowed a deduction under 2053 for claims against the estate. The value of the deduction will be determined by the value of the claim at the date of death. Following the ruling in the Estate of O'Neal case, the estate should get a deduction for the full value of the potential claim on the date Andrea died - $525,000. The fact that the claim was eventually settled for $50,000 eight months after she died should not be taken into account. Most courts follow this rule.