Estate and Gift Taxation
Fall 2004
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 an approved
type of computer 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:
C at all
times, the interest rate described in section 7520(a) of the Code is 7.2
percent per annum,
C all
individuals described in the questions are
C no changes
are made to the federal estate, gift, or generation-skipping-transfer tax
provisions of the Code after the date of this examination.
QUESTION ONE
(One hour)
Tom is a wealthy
retiree who has previously exhausted his entire gift tax unified credit. He is married to Wilma, who has also
previously exhausted her entire gift tax unified credit.
On October 20,
2004, Tom establishes an irrevocable trust, and on that day he contributes to
it publicly traded securities with a fair market value of $3,000,000. The terms of the trust require the trustee to
distribute all of the income from the trust on a quarterly basis to Tom=s
granddaughter, Greta, until she reaches age 25.
When Greta reaches that age, or upon her death if she dies before
reaching that age, the trust is to terminate and the corpus is to be
distributed to Greta=s father, Steve, who is Tom=s
son (or if Steve is dead, to Steve=s estate).
Tom names his
sister, Rita, the trustee of the trust.
In the trust instrument, Tom expressly grants Rita the right to invade
the corpus of the trust for herself at any time Ato support her [Rita=s]
ongoing needs and sensible desires.@
Rita never exercises this right.
In the trust
instrument, Tom grants Steve the right to withdraw $11,000 of corpus from the
trust. To exercise this right, Steve
must give notice to the trustee no later than October 28, 2004. The trust grants an identical right to
withdraw $11,000 to each of Steve=s three siblings. The trust instrument
makes all the $11,000 withdrawal rights superior to Rita=s
right to invade the corpus for herself.
The day he
establishes the trust, Tom sends e-mail messages to Steve and his siblings to
inform them of their withdrawal rights. ABut
I don=t want any of you to take this money,@
he writes in the message. None of them
exercise their rights.
Greta reaches
age 25 in 2008, at which point the trust terminates and the corpus is
distributed to Steve. At the time the
trust terminates, its corpus has a fair market value of $3,800,000. Rita dies in 2009, at which point the assets
that had been in the trust have a fair market value of $4,150,000. Rita is survived by Tom, Wilma, Greta, Steve,
and Steve=s siblings.
What are the
federal gift, estate, and generation-skipping-transfer tax consequences B
to Tom, Wilma, Greta, Rita, Rita=s
estate, Steve, and Steve=s siblings B 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)
Doris owns three
major categories of assets, all as her separate property: Blackacre, a parcel of
income-producing real estate with a fair market value of $1,000,000; cash and
cash equivalents, which together have a face amount and fair market value of
$3,200,000; and 80 percent of the outstanding common stock of Closeco, a family
owned corporation that operates a business.
The other 20 percent of the outstanding Closeco common stock is held by
Doris=s daughter, Zia, who is 30 years
old. Closeco has only a single class of
shares. If sold together, all of the
outstanding stock of Closeco would have a fair market value of $10,000,000.
Doris dies on
December 10, 2004, survived by Zia and by Doris=s husband Henry. In her will, Doris leaves 49 percent of the
outstanding Closeco stock to Henry, and the rest of the stock that she holds
(31 percent of the outstanding stock) to Zia.
Doris=s
will sets up a testamentary trust and instructs her personal representative to
transfer Blackacre to it. The terms of
the trust call for Zia or Zia=s estate to receive annual cash payments
of $60,000 each for 10 years; at the end of the 10-year period, the trust is to
terminate and the corpus is to be distributed to Brown University, a nonprofit
educational institution.
The will calls
for a specific bequest of $1,000,000 cash to Zia, with the rest of the cash and
cash equivalents to pass to Henry. In
September of 2005, Zia signs a document releasing all rights to the
$1,000,000. By virtue of this release,
the $1,000,000 belongs to Henry under state law, and so the personal
representative of Doris=s estate distributes it to Henry along
with the rest of the cash and cash equivalents.
Henry owns a
policy of term life insurance on Doris=s life.
On Doris=s death, the insurance company pays
$750,000 to the policy beneficiary, Zia.
What are the
federal gift, estate, and generation-skipping-transfer tax consequences B
to Doris=s estate, Henry, and Zia B
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)
Abe, a
55-year-old man, divorced and single, has previously exhausted his entire gift
tax unified credit. Abe owns 60 percent
of the outstanding stock of Holdco, a holding company that owns marketable
stocks and bonds. The other 40 percent
of the stock is owned by Abe=s son, Brett, age 32. In October 2004, Abe contributes $500,000
cash to Holdco without taking out any additional stock or other consideration;
after the contribution, Abe continues to own 60 percent of the Holdco stock and
Brett the other 40 percent.
In November
2004, Abe transfers $1,000,000 cash to an irrevocable trust, which he labels
Trust No. 1. The terms of the trust
require the trustee to invest in income-producing assets and distribute all of
the income therefrom on a monthly basis to Abe for the rest of Abe=s
life. Upon Abe=s
death, the trust is to terminate and the corpus is to be distributed to Brett
(or if Brett is dead, to Brett=s estate). At the time the trust is funded in November
2004, Brett pays Abe $238,530 cash for Brett=s remainder interest, which is the value
assigned to the remainder under the actuarial tables promulgated under section
7520 of the Code.
Abe=s
other child is his daughter, Cheryl, age 28.
In December 2004, Abe transfers $3,000,000 cash to an irrevocable trust,
which he labels Trust No. 2. The terms
of the trust require the trustee to invest in income-producing assets and
distribute all of the income from the trust on a monthly basis to Cheryl until
she reaches age 35 . When Cheryl reaches
that age, or upon her death if she dies before reaching that age, the trust is
to terminate and the corpus is to be distributed to Cheryl (or if Cheryl is
dead, to Cheryl=s estate). Abe retains the power, during his lifetime,
to invade the corpus of Trust No. 2 for Brett=s benefit, but only with the consent of
Cheryl.
Abe dies in
2008, survived by Brett and Cheryl.
Prior to his death, Abe does not exercise his retained power over Trust
No. 2. The Holdco stock and the assets
held in each of the trusts appreciate substantially between 2004 and 2008.
What are the
federal gift, estate, and generation-skipping-transfer tax consequences B
to Abe and Abe=s estate B 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)