Estate and Gift Taxation
Fall 2012
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 this set of essay questions in the original envelope in which this
set came. If you are using a computer,
you must submit your answers using SofTest. If you are writing answers by hand, you must
write them all in the bluebook(s) you have been provided, and return the
bluebook(s) along with this set of questions in the envelope.
No credit will be given for anything
written on this set of questions. Only
your electronic answer file or bluebook(s) will be graded.
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.
For purposes of this examination,
assume that:
-- all individuals described in the questions
are
-- the laws relating to gift, estate, and
generation-skipping-transfer taxes for transfers made, and decedents dying, in 2012
are made permanent and remain in effect throughout all of the transactions and
events described in these questions.
Any
references to “the Code” mean the Internal Revenue Code of 1986, as
amended.
QUESTION ONE
(One hour)
Winnie and her husband, Hugh, have
previously used up all their gift tax unified credits and their
generation-skipping-transfer (GST) tax exemptions. In 2012, Winnie establishes an irrevocable
trust, the “Marital Trust,” naming her brother as trustee. Under the terms of the trust, all of the
income from the trust corpus is to be paid to Hugh for the rest of Hugh’s
life. Distributions are to be made to
Hugh at the end of each year. When Hugh
dies, the trust will immediately terminate, and the corpus of the trust will be
distributed at that time to the couple’s daughter, Doreen, or to Doreen’s
estate. Any income received by the trust
between the time of the last payment to Hugh and the time of his death is also
to be paid to Doreen or her estate.
Winnie contributes $1,000,000 cash
to fund the trust at its inception.
Based on the valuation tables promulgated under section 7520 of the Code
for that month, Hugh’s life estate has a fair market value of $313,000, and
Doreen’s remainder has a fair market value of $687,000.
In 2013, Hugh establishes an
irrevocable trust, the “Descendants’ Trust,” naming his sister Ursula as
trustee. Under the terms of the trust,
the income from the corpus is to be paid to Doreen’s son, Gary, for the rest of
The Descendants’ Trust instrument
gives the trustee the power to distribute all or any part of the corpus to
Hugh contributes $2,000,000 cash to
fund the trust at its inception. Based
on the valuation tables promulgated under section 7520 of the Code for that
month, Hugh’s future interest in the Descendants’ Trust has a fair market value
of $120,000 at that time.
Hugh dies in 2016, survived by
Winnie, Doreen, and Gary. Hugh’s will
leaves his entire probate estate, valued at $10,000,000, to Winnie. The will, valid under state law, provides
that if Winnie chooses not to accept any asset passing to her from Hugh, the
asset will pass to
What are the federal gift, estate,
and GST tax consequences – to Hugh, Hugh’s estate, and Winnie – 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)
Patty has never been married and has
no children. She has previously used up
half of her gift tax unified credit (the equivalent of claiming a $2,500,000
exemption). Patty owns 80 percent of the
single outstanding class of stock of a closely held corporation, Upco; her nieces, Nell and Norah, each own 10 percent the Upco stock. Upco does not pay dividends on its stock, but all three of
the women are employed there and are paid substantial salaries.
Early in 2012, Patty gives $13,000
cash to each of Nell and Norah. Later
that same year, Patty makes gifts of Upco stock to
each of Nell and Norah. The stock
transfer documents state that Patty is giving each of the nieces “enough Upco stock so that the fair market value of the stock
transferred to Nell and Norah herein is $1,250,000 each, thus exhausting my
remaining unified credit but incurring no federal gift tax.” An appraiser has recently determined that the
Upco shares have a value of $1,000 each, and so Patty
signs over stock certificates for 1,250 shares to each of Nell and Norah. The stock transfer documents, which are
signed by Patty and the nieces, also state that “if the value of Upco shares is finally determined for federal gift tax
purposes to be greater than $1,000 per share, Nell and Norah shall be entitled
to retain only shares with a value of $1,250,000 each; the excess shares shall
be transferred to the American Red Cross, a nonprofit charitable organization.”
The IRS conducts a gift tax audit of
Patty for 2012, and in that proceeding the IRS and Patty agree that the Upco shares actually had a fair market value at the time of
the gifts of $1,250 per share. Thus,
pursuant to the stock transfer documents, Nell and Norah each are required to,
and do, transfer 250 shares, with an agreed total value of $625,000, to the
American Red Cross. In 2014, Upco buys the shares back from the charity for cash.
Later, Upco
needs additional capital, and neither Nell nor Norah have funds available for
that purpose. In 2016, Patty transfers
$500,000 to Upco as a contribution to capital,
receiving no additional stock, nor any other consideration, in return. At the time of the contribution, Patty owns
60 percent of the Upco shares, and Nell and Norah
each own 20 percent of the shares.
Over the holidays in 2016, Patty
transfers to each of Nell and Norah as a gift Patty’s promissory note for
$100,000, payable, along with interest at a market rate, at the beginning of
2018. Patty dies in 2017, leaving her 60
percent of the Upco stock to Nell and Norah in equal
shares (30 percent each), and the rest of her probate estate, after payment of
Patty’s debts and estate expenses, to the American Red Cross. The executor of the estate pays Nell and
Norah in cash the amounts due to them under the promissory notes.
What are the federal gift, estate,
and GST tax consequences – to Patty, Patty’s estate, Nell, and Norah –
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)
Jim’s wife, Xaviera,
dies in 2012. During her lifetime, Xaviera did not use any of her gift tax unified
credit. However, Xaviera’s
executor uses the estate tax unified credit to offset $4,000,000 of value in Xaviera’s taxable estate.
Prior to Xaviera’s death, Jim had already used
up all of his own gift tax unified credit and all of his own GST tax exemption.
In 2013, Jim marries a woman named
Terri. Terri, like Jim, comes from an
affluent background, and she previously used up all of her gift tax unified
credit and GST tax exemption as well.
Terri’s marriage to Jim is her first marriage.
Prior to the wedding, Jim and Terri
enter into a pre-nuptial agreement. In
the agreement, Jim promises to transfer to Terri publicly traded stock with a
fair market value of $2,000,000; Terri agrees to marry Jim and release all
claims she may have to Jim’s property in the future. Jim transfers the stock to Terri shortly
before the wedding.
In 2014, Jim establishes a trust for
the benefit of his and Xaviera’s sons, Sam and
Tim. Jim names himself the trustee of
the trust. Under the trust instrument,
income from the trust corpus is payable annually in equal shares to Sam and
Tim, or in such amounts and at such times as Jim may determine. When the younger of the two sons reaches age
25, the trust will terminate, and the corpus and any accumulated income will be
distributed equally to Sam and Tim. Jim
also retains the right to revoke the entire trust, but only with the written
consent of Sam.
To fund the trust at its inception,
Jim contributes to it $100,000 cash and shares of a holding company. The shares of the holding company have a fair
market value of $2,900,000 at the time they are contributed. Jim grants to each of Sam and Tim the right
to withdraw $8,000 cash within 30 days of Jim’s funding of the trust. Neither son exercises his withdrawal right.
In 2015, Sam asks Jim for a
$1,000,000 loan to start up a business.
Jim lends the $1,000,000 to Sam under a promissory note that is payable
in full on Jim’s demand. The note bears
no interest, but it is genuine indebtedness – Sam intends to pay back the
principal, and Jim intends to enforce the terms of the note. Throughout 2015 and 2016, the short-term rate
in effect under section 1274(d) of the Code is 2 percent per year.
Jim dies in 2016, survived by Terri,
Sam, and Tim. Jim leaves $2,000,000 cash
and Sam’s promissory note to Terri, and the rest of his probate estate to Sam
and Tim in equal shares. At the time of
Jim’s death, the corpus of the trust has a fair market value of $4,000,000.
What are the federal gift, estate,
and GST tax consequences – to Jim and Jim’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)
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