This examination consists of three essay questions, each of which will be given equal weight in determining grades. Three hours will be permitted for this examination. At the end of the three hours, you must turn in both this set of questions and your answers to them in the original envelope in which this set came.

All answers must be entered in the bluebooks you have been provided (or, for those typing or operating computers, on separate sheets of plain white paper). No credit will be given for anything written on this set of questions.

Pay close attention to the final portion, or "call," of each question. Failure to respond to the matters called for will result in a low score for the question. On the other hand, discussion of matters outside the scope of the call of the question will not receive credit.

Be sure to explain as thoroughly as possible your answers to the questions posed. Your reasoning, discussion, and analysis are often as important as any particular conclusion you reach.

The suggested time limit for each question is one hour. Experience has shown that failure to budget one's time according to this limit can result in a drastic lowering of one's overall grade on this examination.

Any references to "the Code" mean the Internal Revenue Code of 1986, as amended. For purposes of this examination, assume that at all times, the interest rate described in section 7520(a) of the Code is 7.0 percent per annum. Unless otherwise expressly instructed, assume that all individuals described in the questions are U.S. citizens and U.S. residents.

Assume that the federal estate, gift, and generation-skipping-transfer tax provisions of the Code, as they exist on the date of this examination, remain in effect in all future years.

On January 3, 2000, Frank, who has previously made several million dollars in gifts to his children and grandchildren during his lifetime, establishes an irrevocable inter vivos trust, with his attorney, Bernie, as trustee. Frank transfers $100,000 to the trust, which is to be invested in stocks. The terms of the trust call for its income to be paid annually to Frank's daughter, Dee, for 10 years; at the end of the 10 years, the trust is to terminate and the entire corpus distributed to Dee's son, Glenn. Bernie, the trustee, is given the power to invade part or all of the corpus of the trust, in his absolute discretion, for the "benefit and happiness" of Glenn. In 2000 and 2001, Bernie pays all of the trust's income ($15,000 a year) to Dee in accordance with the terms of the trust. In 2002, pursuant to his power as trustee, Bernie transfers the entire corpus of the trust, with a fair market value of $150,000, to Glenn for use in Glenn's startup venture.

On March 15, 2003, Frank dies, leaving his home, Homeacre, and all of the stock of his real estate investment company, Dirtco, to Dee. At the time of his death, the assets passing to Dee have a combined fair market value of $3,500,000. Frank's estate also includes other substantial assets.

Among the obligations paid by Frank's estate are: $20,000 of Frank's medical expenses; the equivalent of $2,000 (U.S.) in foreign inheritance taxes; and the full amount of a $50,000 claim by Frank's long-time live-in girlfriend, who alleged that Frank promised to leave her that amount "in loving gratitude for all that you [the girlfriend] have done for me [Frank] and my [Frank's] business."

Dee dies on November 25, 2006, leaving all of her assets to Glenn. At the time of Dee's death, Homeacre and the Dirtco stock, both of which Dee leaves to Glenn, have a combined fair market value of $4,000,000. Dee's other assets have a fair market value well over $1,000,000.

What are the federal gift, estate, and generation-skipping-transfer tax consequences -- to Frank, Frank's estate, Dee, Dee's estate, and Bernie -- of each of the transactions and events just discussed, with and without all available tax elections? Be sure to discuss the amount and timing of each item.

Discuss.

Ethel, a wealthy individual, is in a particularly generous mood. On impulse, she engages in three transactions, all consummated over the course of a single week in December 2000:

1. Ethel gives away her stock in Widgets.com, a corporation. Immediately before the gifts, Ethel owns 100 percent of the outstanding stock of the company. The 100-percent block has a fair market value of $5,000,000. She gives 20 percent of the stock outright to each of her five children on the same day. The children get along well with each other, and with Ethel.

2. Ethel creates an irrevocable trust to which she contributes mutual fund shares with a fair market value of $1,000,000. The trust terms require that all of the income of the trust be distributed not less frequently than annually to Ethel's niece, Nancy, for the rest of Nancy's life. On her death, the trust is to terminate and the corpus distributed to Princeton University, an organization organized and operated exclusively for educational purposes and described in section 501(c)(3) of the Code. On the date on which the trust is established, Nancy is 47 years old.

3. Ethel and her son, Stan, purchase Blackacre, a piece of investment real estate. Title is taken in the name of Ethel and Stan, as joint tenants with right of survivorship; under local law, the joint tenancy is severable. The purchase price for Blackacre is $200,000. Of this amount, Ethel pays $160,000. Stan pays the other $40,000 out of an investment account that Ethel had created and funded for Stan several years previously. The investment account, to which Stan has made no contributions, has had a total of $20,000 income since it was established, and all of that income has been withdrawn from the account, and spent on day-to-day living, by Stan.

On April 10, 2001, Ethel dies suddenly and unexpectedly. At her death, Blackacre has a fair market value of $275,000. On October 10, 2001, the fair market value of Blackacre is $250,000. Ethel's probate estate has a fair market value well over $1,000,000 at her death and throughout 2001; it is distributed to members of Ethel's family early in 2002.

What are the federal gift, estate, and generation-skipping-transfer tax consequences -- to Ethel and her estate -- of each of the 2000 and 2001 transactions and events just discussed, with and without all available tax elections? Be sure to discuss the amount and timing of each item.

Explain.

In 2000, Ralph creates an irrevocable trust, the "Sibling Trust," naming himself as trustee. As trustee, Ralph retains discretion to accumulate the income of the trust or to pay it to his sister, Samantha. At the end of 10 years, however, any accumulated income is to be paid to Samantha, and the corpus is to be distributed to Ralph's brother, Bob. Ralph retains the right, during the 10-year term of the trust, to substitute another remainder beneficiary (including himself) in place of Bob.

Ralph allows the income from the trust to be paid to Samantha each year, and he does not change the remainder beneficiary.

In 2005, Ralph dies. Under the terms of the Sibling Trust, Ralph's wife, Wendy, becomes the trustee; she succeeds to Ralph's powers to accumulate income and change the remainder beneficiary.

Ralph's will creates an irrevocable trust, the "Wendy Trust," of which a bank is trustee. The will assigns $1,000,000 to the Wendy Trust, the income of which is to be paid to Wendy monthly for the rest of her life; upon Wendy's death, the trust is to terminate and the corpus is to be distributed to Ralph's children by another marriage.

Later in 2005, Wendy purchases a commercial annuity from an insurance company. The annuity policy provides that, beginning in 2010, Wendy will receive $10,000 a year for the rest of her life; upon Wendy's death, if her daughter Debbie is still alive, the annual payments will be made (or continue to be made) to Debbie for the rest of Debbie's life. Wendy retains ownership of the policy, which gives her the right to change the payees.

Wendy dies in 2006. She is survived by Debbie, who is 38 years old at Wendy's death; beginning in 2010, the insurance company makes the $10,000 annual payments to Debbie. Debbie succeeds Wendy as the trustee of the Sibling Trust; the Wendy Trust terminates on Wendy's death, in accordance with its terms.

What are the federal gift, estate, and generation-skipping-transfer tax consequences -- to Ralph, Ralph's estate, Wendy, and Wendy's estate -- of each of the transactions and events just discussed, with and without all available tax elections? Be sure to discuss the amount and timing of each item.

Discuss.

Created by: bojack@lclark.edu
Update: 12 Nov 02
Expires: 31 Aug 03