Estate and Gift Taxation
Fall 2002
Bogdanski
FINAL EXAMINATION
(Three hours)
INSTRUCTIONS
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 or
a computer floppy disk). 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:
Wendy, a wealthy 45-year-old woman, is divorced from her former husband,
Xavier. Xavier has custody of their 10-year-old daughter, Dee. Under the
divorce decree, Wendy and Xavier are equally responsible for Dee's support.
In 2002, Wendy establishes two trusts, referred to in the trust documents as
Trust No. 1 and Trust No. 2. Each trust is funded with a contribution by Wendy
of $1,000,000, which the trustee is instructed to invest in income-producing assets.
The trustee of each trust is Wendy's brother, Ben. If at any time Ben is unable
or unwilling to continue serving as trustee, Wendy has the power to replace
him, including making herself the trustee.
Trust No. 1 provides that all of the income from the trust is to be paid to
Dee annually until Dee reaches the age of 25, at which point the trust is to
terminate and the trust corpus is to be distributed to Dee. If Dee dies before
reaching age 25, the corpus is to be immediately distributed to her estate.
During the term of the trust, the trustee has the power to spend the corpus or
income of the trust at any time for Dee's "education, comfort, or
support."
Trust No. 2 provides that all of the income from the trust is to be paid to
Wendy's twin sister, Sara, for life. Upon Sara's death, the trust is to
terminate; if Wendy is still alive at that time, the corpus is to revert to
Wendy; if Wendy predeceases Sara, upon the trust's termination the corpus is to
be paid to Dee or Dee's estate. During the term of the trust, the trustee has
the power to invade the corpus of the trust at any time for Dee's
"maintenance in the style to which she has become accustomed."
In 2003, Ben resigns as trustee of both trusts. Wendy replaces him with her
father, Frank.
In 2006, Wendy dies, survived by Xavier and all of the family members named
above.
What are the federal gift, estate, and generation-skipping-transfer tax
consequences -- to Wendy and her 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.
(End of Question
1)
QUESTION TWO
(One hour)
Andrea, an attorney, lives in a community property state. In 2002, she buys
a parcel of real estate as an investment. She has title taken in her name and
that of her husband, Harvey, as community property. Andrea pays the entire
$80,000 purchase price for the property out of funds which she received as
gifts from relatives before her marriage. At all times up until the land
purchase, these funds are her separate property.
Andrea is also a co-tenant with her brother, Zeke, of some stock that was
given to her and Zeke by their mother some years ago. The mother gave the stock
to Andrea and Zeke as joint tenants with right of survivorship.
Late in 2002, Andrea writes gift checks of $11,000 to her three children, as
is her annual custom. Zeke, who also has three children, writes gift checks of
$11,000 to each of his children as well, in keeping with his annual custom. For
the first time, however, Andrea also gives $5,000 checks to each of Zeke's
children, and Zeke gives $5,000 checks to each of Andrea's children.
In 2003, Andrea dies. She leaves her half-interest in the land in trust,
with the income to be paid to Harvey for his life or 15 years, whichever is
shorter, and the remainder to go to their three children. Zeke becomes the
outright owner of the stock pursuant to the survivorship feature of the joint
tenancy. After Andrea's death, the stock steadily increases in value over a
one-year period, while the land's value steadily declines.
At the time of her death, Andrea is being sued for malpractice. The
plaintiff is seeking damages of $525,000, and Andrea's insurance carrier is claiming
that Andrea's actions were not covered by her liability policy. Eight months
after Andrea's death, her estate settles the lawsuit by paying $50,000 to the
plaintiff. The insurance carrier pays nothing.
What are the federal gift, estate, and generation-skipping-transfer tax
consequences -- to Andrea and her 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.
Explain.
(End of
Question 2)
QUESTION THREE
(One hour)
Don is a widower who has previously used up his entire unified credit for
federal gift and estate tax purposes. On July 1, 2002, Don and his son Stan
form a limited partnership, which is called DLP. On that date, Don transfers to
DLP a portfolio of publicly traded stocks, with a fair market value of
$500,000, and Stan transfers to DLP only $50 cash -- just enough to make the
partnership agreement a binding contract under state law. The stocks that Don
transfers to DLP are "growth" stocks, which rarely if ever pay any
dividends.
As part of DLP's formation, Don receives a 90 percent capital and profits
interest in the partnership, as the sole limited partner. Stan receives a 10
percent capital and profits interest as the sole general partner. Under state
law and the partnership agreement, the general partner has complete control
over partnership operations.
The partnership agreement provides that distributions may be made to a
partner only if all partners consent. In January 2003, Don needs cash to make a
personal investment in a new business venture. At his request, and with Stan's
approval, DLP sells some of the stock in its portfolio and distributes the
proceeds to Don. The distribution reduces Don's share of DLP's capital by the
amount of money Don receives. After the distribution, Don's interest in the
capital and profits of the partnership is reduced to 55 percent.
In 2004, Don transfers all of his remaining 55 percent limited partner's
interest in DLP to Nell. Nell is Don's grandniece (Don's sister's
granddaughter). At the time of the gift, all of DLP's assets consist of stocks
originally transferred by Don when DLP was being formed, or other stock
purchased with the proceeds of those original contributions; the stocks in the
partnership have a fair market value of $1,000,000.
Neither Stan nor Nell requests or receives any distributions from DLP while
Don is alive. During that time, the partnership conducts little activity, and
the partners discuss partnership matters only occasionally, at dinners at which
other family members are present.
In September 2005, Don dies, survived by Stan, Nell, and Nell's parents.
Don's probate estate includes about $2,000,000 worth of assets, which Don
leaves to Stan. At the time of Don's death, DLP's assets still consist
exclusively of stocks originally transferred by Don, or stock purchased with
the proceeds thereof; the stocks in the partnership have a fair market value of
$1,200,000.
What are the federal gift, estate, and generation-skipping-transfer tax
consequences -- to Don and his 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.
(End of examination)