Estate and Gift Taxation
Fall 2008
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 on an
approved type of computer disk or on separate sheets of plain white paper (or
for those writing answers by hand, in the bluebooks you have been provided). 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.
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,
∙ all
individuals described in the questions are
∙ the federal estate, gift, and
generation-skipping-transfer taxes do not expire in 2010; the current laws
relating to those taxes for transactions and events occurring in 2008 are made
permanent and remain in effect throughout all of the transactions and events
described in these questions.
QUESTION
ONE
(One
hour)
On July 15,
2007, Mildred, who has been divorced and single for many years, establishes an
irrevocable trust, of which she appoints her attorney the trustee. Under the terms of the trust, the income from
the trust is to be paid to Mildred or her estate annually for 25 years. At the end of the 25 years, the trust is to
terminate, and all of the assets of the trust are to be distributed to
Mildred’s adult son, Shane.
Mildred
retains the right to invade any and all of the corpus of the trust at any time,
with the consent of the trustee, for Mildred’s own “health, comfort, or
well-being,” or for the benefit of Mildred’s other adult son, Oscar. The corpus of the trust consists of publicly
traded stocks and bonds, including 1,000,000 shares of the common stock of one
corporation, Pubco.
This is the largest block of Pubco stock owned
by any one shareholder, but it does not possess control over Pubco or its management.
On June 1,
2008, Mildred amends the trust, renouncing her rights to invade the corpus for
herself or for Oscar – rights that she never exercised. She retains her income interest.
On August 22,
2010, Mildred suddenly dies, survived by Shane and Oscar. In her will, she leaves her remaining income
interest in the trust to Oscar. The rest
of her estate, which is substantial, is divided between Shane and Oscar.
The personal
representative of Mildred’s estate spends substantial sums of the estate’s
money on the following: brokers’ commissions for selling off Mildred’s real
estate; estate taxes imposed by Mildred’s home state; and attorney’s fees. Part of the attorney’s fees are for defending
a highly publicized defamation claim that had been made against Mildred shortly
before she died; after several months of court-supervised discovery in a
lawsuit over the claim, the estate pays the plaintiff a small sum of money to
settle the case.
What are the
federal gift, estate, and generation-skipping-transfer tax
consequences to Mildred and Mildred’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.
(End
of Question 1)
QUESTION
TWO
(One
hour)
Wendy and Henry are wife and
husband. They are quite wealthy, and
they frequently make gifts to various members of their family. In year 1, Wendy establishes an irrevocable
trust, placing in it a stock portfolio with a fair market value of $3,500,000.
The trust instrument names Wendy’s
sister, Sarah, as trustee. Under the
terms of the trust, all of the income from the trust is to be distributed
annually to Henry for the rest of his life.
The trust also gives Henry a power to appoint by will the entire trust
corpus to his estate or his creditors.
If Henry does not exercise this testamentary power, the trust corpus is
to be distributed at his death to the nonprofit church that the couple attends. The trust documents also require Sarah to pay
out the income or the corpus of the trust to the extent necessary for (a) the
support of Brent, age 11, who is Wendy and Henry’s son, or (b) the education
and medical care of Gwen, age 2, who is Wendy and Henry’s granddaughter. (Gwen’s mother is Peggy, who is Wendy and
Henry’s oldest daughter.)
In year 3, Sarah, acting as trustee,
makes a $120,000 distribution to Gwen.
Peggy, acting as custodian under the Uniform Transfers to Minors Act,
deposits the $120,000 check into Gwen’s custodial bank account. Shortly thereafter, Peggy writes a check
drawn on that account to pay $120,000 for extraordinary medical care that Gwen
needs.
In year 4, Wendy dies. At the time of her death, the trust corpus
has a fair market value of $4,250,000.
In year 10, Henry dies, survived by
Sarah, Peggy, and Gwen. At the time of
Henry’s death, the trust corpus has a fair market value of $5,500,000. Henry does not appoint the trust corpus to
anyone in his will, and so Sarah, in her capacity as trustee, distributes the
corpus to the church.
What are the
federal gift, estate, and generation-skipping-transfer tax consequences – to
Wendy, Henry, their respective estates, and
Sarah – 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)
In 2008,
Frank, a single widower who has previously used up all of his gift tax unified
credit, gives his daughter, Darla,
an undivided one-half interest in a an apartment complex that Frank owns. The undivided interest is as a tenant in
common with Frank, without right of survivorship. On the date of the gift, the apartment
complex has a fair market value of $1,800,000.
Frank owns it free and clear of any mortgages or other encumbrances.
Also in 2008, Frank and Darla form a
family investment partnership, which they have named Famco. Most of the initial assets of Famco are contributed to it by Frank. Famco is a general
partnership, and Frank and Darla are equal partners; they have equal management
and economic rights in the firm. Under
the Famco partnership agreement, when either of the
partners dies, the surviving partner has the option to purchase the deceased partner’s
interest for that interest’s pro rata share of the book value of Famco on the date of the deceased partner’s death.
In 2011, Frank dies, survived by
Darla. At the time of Frank’s death, the
book value of Famco is $2,000,000, of which Frank’s pro
rata share is $1,000,000. At that time,
the fair market value of Famco assets is $10,000,000,
and it has liabilities of $2,000,000.
Thus, the net fair market value of its assets is $8,000,000, of which
Frank’s pro rata share would be $4,000,000.
Frank leaves his entire estate to
Darla. One of the items in the estate is
Frank’s account in a retirement fund established at his place of
employment. Frank died before becoming eligible
to receive any benefits from the account.
Upon his death, the fund commences making monthly payments to Darla for
the rest of her life.
What are
the federal gift, estate, and generation-skipping-transfer tax
consequences to Frank and
Frank’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.
(End
of examination)
Created by: bojack@lclark.edu
Update: 18 Jan 09
Expires: 31 Aug 09