Estate & Gift
Tax
Bogdanski
Fall 2012
Sample Answers to Question 1
Exam No. 3271
2012, Marital Trust
W setup a marital trust, income to H for life, paid annually, remainder to D. The stub income also goes to D.
W has made a completed gift of 1mil in trust b/c she parted w/ dominion and control as to leave her no power to change its disposition. 25.2511-2(b). Since she used up her unified credit, she has to pay gift tax = 350,000. The value of H's income interest is 0 since he is a family member named in 2701(e)(2) (spouse) and the income interest is not quantified in a set dollar amount as an annuity or a unitrust. 2702. So she can't take any annual exclusion for her gift to H. 2702. She also can't take an annual exclusion for the gift to D since she gave D a future interest. 2503(b). (Also, D is a family member under 2701(e)(2), and her interest is not a qualified interest under 2702(b).)
When H dies in 2016, his interest dies w/ him and no part of the trust would be included in his estate.
Alternatively, W can make a QTIP election for the trust. H has the right to income annually for life, even if he remarries (I assume). Therefore, H can be treated as owning the whole trust and W can take a marital deduction of 1mil to zero out her gift tax due. 2056(b)(7). The stub income won't flunk the QTIP election.
With the QTIP election, H's estate will be stuck with the trust when H dies. 2044. Therefore, the full value of the marital trust of 1.8mil will go into H's GE in 2016.
2013, Descendant's Trust
H setup an irr trust, U is the T, income to G for life, reversion to H if alive, if not, remainder to G.
When H setup the trust, he might have reserved too much power for it to be a completed gift and might have made it so it's subject to inclusion under 2036 or 2038.
U has the power to accelerate G's interest subject to "maintenance in health and reasonable comfort." Since those words are an ascertainable standard then, this provision doesn't flunk the gift completion, 2036, or 2038. 25.2511-1(g)(2).
U also has the power to do regular admin T tasks like
invest the $ and allocate btwn income and principal.
Even though those owers are not normal under state
law, those powers probably also do not flunk the gift completion or 2036 since
they're regular admin powers and the T's power is subject to fiduciary
standards. 25.2511-2; Old Colony Trust v
H is also allowed to buy assets or sell assets to the trust. This might flunk the completion and 2036 or 38. If H can only exercise this power subject to fiduciary duties to protect the trust, then the power doesn't flunk. But if H can reach back into the trust and take stuff for less than FMV, then this power makes the gift incomplete as well as included under 2036. However, since it looks like we're talking about buying and selling, I'll assume they're bona fide purchases. Therefore, this power probably doesn't flunk completion, 2036, or 2038.
H also retained the power to remove U and replace
himself as U. Under
Therefore, the gift of the Descendants' Trust is complete and not includible in H's GE under 2036 or 2038.
H owes gift tax on the whole trust amount. H can split the present interest gift of income to G w/ W so that they can take two annual exclusions. 2513. The gift splitting will also cause 1/2 the tax burden to be shouldered by W.
H cannot subtract his retained interest from the gift b/c it's not a qualifying interest, 2702(b)(3). Since G's interest isn't a set dollar amount or set %age of the corpus, neither is H's reversion, so H doesn't get to subtract 120k from the gift.
H also owes GST tax for setting up the trust. The trust is a skip person. G is a skip person, 2613(a). G is a lineal descendant of H's grandparent, and is two generations below H. 2651 Also, the orphan rule doesn't apply since D is still alive. 2651(e). G is the only present interest holder. 2613. Therefore, the trust is a skip person and when H puts 2 mil in it, he's subject to paying gift tax, GST tax, and gift tax on the GST tax paid.
H already used up all of his GST exemptions.
H kept a 2037 interest in the trust. He kept a reversionary interest after G dies. The value of that interest equals the value of G's remainder considering the length of G's life at H's DOD. If the value is less than 5% of the value of the property, then the interest is ignored. However, if the value is greater than 5%, then the G's remainder interest goes into H's GE at death.
Also when H dies, G gets the remainder of the trust. The termination of H's reversion, the trust, and the subsequent transfer of the remainder to G is a taxable termination. 2612(a). But since H has already paid GST tax on the entire setup of the trust, he won't be taxed twice for the same GST. However, the taxable termination GST tax will capture appreciation. The tax is paid by the trustee.
H dies
When H leaves the 10 mil to W, that's deductible to H's GE as a marital deduction. 2056.
W's disclaimer
So long as W made a valid disclaimer, she didn't make a gift to G. The disclaimer needed to be irrevocable, unqualified, in writing, received by the executor by 9 months after H's DOD, W must not have accepted any benefits from the cars, received any consideration for the disclaimer, and the interest must pass by default. 2518. Since the facts say the disclaimer is valid, I will assume it complies w/ 2518.
However, the disclaimer is treated as a transfer from H to G. Therefore, this is another taxable termination. 2612(a). H's estate must pay estate tax on the 500k as well as GST tax on the 500k.
Any gift tax H paid in the past three years goes back into H's GE. 2035(b). This includes the gift tax paid on the setup of the Descendant's Trust if it was w/in 3 years of H's DOD.
H's estate can choose an alternate valuation date of 6 months after DOD, 2032, if the date will produce a lower estate tax due and the depreciation is not due to the mere lapse of time.
Exam No. 3740
Winnie makes a complete gift when she sets up the irrev trust. A gift is a transfer for less than full & adequate consideration. A gift is complete when the donor relinquishes all dominion & control. W makes a gift to H of income interest in the amount of $313,000. She has a couple of options here. H's gift doesn't qualify for the marital ded'n because it's a terminable interest (he only has a life estate, w/o a GPOA). However, W can make a QTIP election under § 2523. This trust qualifies for QTIP election since H has an income interest for life, no one has the right to appoint income out from under him, and the income is distributed annually. It doesn't matter that H won't receive the stub income from the year of his death. If W makes a QTIP election, there will be no tax consequences from her gift to H. If she chooses not to elect QTIP, she can use her annual ded'n for this gift to H bc this is a gift of a present interest. There can be no gift splitting election under § 2513 since H is a recipient of an interest. Thus, she'll pay gift tax on $300,000.
W also makes a complete gift to Doreen at the time she sets up this trust. the gift is of a remainder interest, so W doesn't have the option to use her $13,000 annual exclusion toward it. She also has no lifetime exclusion left. Doreen will therefore pay gift tax on the $687,000 value of D's remainder interest.
HUGH/HUGH'S ESTATE
The irrev trust H sets
up is a "skip person" as defined in § 2613. The trust is a skip
person bc all
"interests" in the trust are held by skip people.
"Interests" for GST purposes means that the purpose either had the
right to receive income or corpus or the person could receive income or corpus.
This is the case w/
The trustee's power to invade corpus on G's behalf is limited by an ascertainable standard according to Reg. § 20.2041-1(c).
When H dies in 2016, § 2035 will include all gift tax he paid w/in the past three years of his life. The entire FMV of the Descendants' trust is going to be included in H's gross estate. First, § 2037 is going to pull G's secondary remainder interest into H's estate. This is because H retained a reversionary interest in the trust, and G can't possess or enjoy his secondary reversion unless he survives or outlives H. Lastly, H's interest exceeds 5% of the entire value of the property, so the de minimis rule doesn't apply. In addition to § 2037 applying, § 2036 also applies bc H retained the right to appoint a different successor trustee, including himself. It doesn't matter that he never actually exercised this power. It is enough of a string to make § 2036 pull the entire value of the trust into H's estate. Since 2036 pulls more in than 2037, it will control. Thus, H's estate will have to pay estate tax on the full value of the Descendants' trust at the date of his death--$1,800,000.
If W elected to make the trust a QTIP trust under § 2523, we treat the transfer as a transfer of the entire property to H. Thus, we treat it as if H owned the entire property at the time of his death. Thus, when H dies, for estate tax purposes it will be as if H transferred the full $1,800,000 to Doreen. His estate will have to pay tax on that transfer. His estate can ask for a refund from Doreen under § 2207A. If W did not elect to make the trust a QTIP trust under § 2523, there will be no tax consequences to H's estate when he dies because your life estate dies with you when you die (no § 2033 inclusion) & H had no power of appointment (so no § 2041 inclusion).
For all of the property left to W, H's estate can take a marital ded'n under § 2056. Since W executed a valid disclaimer for property in the amount of $500,000, the other $9,500,000 will be deductible under 2056.
When H dies, there is technically a taxable termination, as well. a taxable termination occurs when there's a termination of a non-skip person's interest in the trust, which will result in a transfer to a skip person. H is definitely a non-skip person as to himself. When he dies, the remainder interest transfers to G, resulting in a taxable termination. However, since the trust also a direct skip, there will not be double GST taxation on the trust. In this case, we move G up one generation so that it's effectively not a taxable termination.
Exam No. 3924
NO UNIFIED CREDIT
Even though Winnie and Hugh set up their trusts in close proximity with each other, they will not fall prey to the reciprocal trust doctrine. It's unclear how far apart they were actually created. If one was created in December 2012 and the other in January 2013, that could be close enough to raise eyebrows at the IRS. However, because a Hugh, a spouse, was the beneficiary of one, and Winnie's child was the beneficiary of the other, and because one has twice the assets of the other, the terms of the trusts are not substantially identical enough to count as reciprocal trusts. Also, the parties are not left in approximately the same economic position than if they'd made trusts for themselves, because Winnie is not a beneficiary of either trust. So at least there's no § 2036 because of the reciprocal trust doctrine.
Marital trust:
Even though Winnie named her Brother as trustee, and brother is subordinate within the meaning of § 672(c), she retained no power to change trustees, and she didn't give the trustee any discretionary powers that would cause § 2036(a) inclusion. Winnie hasn't kept any strings, so she has given up dominion and control sufficient to make the gift of the income interest and remainder completed gifts. Because she gave the income interest to her husband, she could make a QTIP election to be able to deduct Hugh's life estate on her gift tax return and only have to pay gift tax on the FMV of the remainder to Doreen. However, because Hugh would then have to include the entire amount of the trust in his estate at death, Winnie might not want to do that if she expects the assets to do anything other than depreciate.
Because Winnie put cash into the trust, the trust counts as income producing sufficient to receive a $13K annual exclusion for Hugh's income interest. And, because Hugh is her spouse, and he has a nonterminable interest, it his life estate will qualify for the marital deduction. However, because Doreen only has a remainder, a future interest, and does not have a Crummey power, she would not qualify for an annual exemption
Doreen is only one generation below Winnie, so any gift to her does not cause GST.
Hugh has a life estate, so any income accruing to the trust during his life belongs to him. If it's not actually paid to him, but instead is paid to Doreen, that seems like IRD, which should be included in his estate and taxed as income.
Hugh's Descendants Trust:
Trustee Ursula is subordinate within the meaning of §672(c).
Trustee's power to let the grantor buy and sell assets to and from the trust, and the power to allocate receipts between income and principal are normal admistrative powers. However the power to invest in assets not normally allowed under state law, which means that the trustee has powers that are not normal administrative power.
Because Hugh has the power to remove the trustee an appoint someone else, and his choice is not limited to someone not a subordinate under § 672(c), Hugh will be considered to have all the powers the trustee has. Because the trustee has powers beyond normal administrative powers, the entire FMV of the trust corpus and any accumulated income will be included in Hugh's estate.
Trustee's
power to invade the corpus for
Gift completion: Because Hugh's/trustee's power to invade the corpus is limited by an ascertainable standard, it also means that the entire FMV of the trust will be subject to gift tax at the time the trust is created minus the $120,000 actuarial value of Hugh's future interest.
Hugh gets a $26K (his plus Winnie's) annual exemption
for
Furthermore, Hugh has transferred the property, but retained a secondary life estate, which means that it will be analogized to Nathan's Estate. The entire FMV will be included in his estate minus the actuarial value of the first life estate. The remainder will not be subtracted, because it doesn't diminish the value of Hugh's life estate.
Also,
Hugh dies three years after the trust is created. Unclear if he made it past the three-year mark or not. If he didn't, all of the gift tax he paid on the Descendants trust would be roped back into his estate.
Because Hugh only had a life estate in Winnie's trust, it will not be included in his estate under 2033. Also, because he did not create the trust, it will not be included in his estate under 2036 or 2038.
If Winnie's
renunciation was within 9 months of Hugh's death, it will count as a qualified
disclaimer, and the $500K car collection will pass to