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, your answers to these questions will be collected. 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.

References to "the Code" mean the Internal Revenue Code of 1986, as amended.
 
 

In 1991, Don, a widower, transfers $1,100,000 cash to an irrevocable trust, with a bank as trustee. Any and all income from the trust is to be paid to Don annually for 10 years. At the end of the 10 years, income from the trust is to be accumulated for five more years and then distributed to Don's granddaughter, Gwen, or her estate.

The bank trustee has the power to substitute Don's son, Sid, as remainderman of the trust at any time, if necessary for Sid's "health, maintenance or well-being." Don has the right to remove the trustee and name a new trustee, but under the trust, the replacement trustee must also be a bank.

In 1992, Sid spends an enormous sum of his own money on graduate school tuition. Don reimburses Sid for these amounts.

In 1994, Don buys a whole-life life insurance policy on his own life. He names Gwen as the beneficiary, but himself (Don) as the owner. Don pays all the premiums on the policy. On September 1, 1999, he transfers all of the attributes of ownership of the policy to Sid; by that time, the policy is "paid up" and requires no further premiums.

On December 15, 1996, Don delivers to his long-time companion, Clarice, a promissory note for $50,000, to be paid, along with accrued interest, on December 15, 2002. A letter enclosed with the I.O.U. explains that the money is "in return for business and household services" provided by Clarice to Don over the years, as well as "out of love and affection." Under local law, the promissory note is enforceable according to its terms.

On August 1, 2002, Don dies, survived by Sid, Clarice and Gwen. The insurance company pays the proceeds of the policy to Gwen. On December 15, 2002, Don's estate pays Clarice the amounts due under the promissory note. In 2006, the corpus of the trust is distributed to Gwen.

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

Explain.

Winnie and Hollis, wife and husband, have no children. They are, however, fond of their niece and nephew, Iris and Eddie.

Winnie owns, as her separate property, 550 shares of the stock of a corporation, Famco; this represents 55 percent of the outstanding stock of Famco. Hollis owns the other 450 shares (45 percent) as his separate property. Throughout 1991 and 1992, all of the outstanding stock of Famco has an aggregate fair market value of $1,000,000.

In June 1991, Winnie creates a trust, naming Hollis as trustee, and transfers to the trust 100 shares of the Famco stock plus $250,000 cash. By its terms, the trust is revocable by Winnie, if she obtains consent to the revocation from Ned, who is Iris and Eddie's father.

The terms of the trust call for all of the income to be distributed each year to Hollis for the duration of his life. When Hollis dies, the corpus of the trust is to revert to Winnie if she is then alive; if Winnie predeceases Hollis, the corpus is to be distributed upon Hollis's death in equal parts to Iris and Eddie or their estates.

The trust gives Hollis the power to invade corpus at any time for the "support or happiness" of Iris, Eddie or both. It also gives each of Iris and Eddie the power to withdraw up to $100,000 cash at any time on or before December 31, 1991. Iris and Eddie do not exercise this power.

On January 15, 1992, Winnie terminates her right to revoke the trust; the revocation is legally binding under local law. On July 1, 1992, Hollis has the trust distribute $50,000 to each of Iris and Eddie. Thereafter, the corpus of the trust includes the 100 shares of Famco stock and $150,000 cash.

Winnie dies on March 1, 1995. On that date, all of the outstanding Famco stock is worth $2,000,000 in the aggregate.

Hollis dies on May 1, 1995. On that date, all of the outstanding Famco stock is worth $1,200,000 in the aggregate. The trust then terminates and the corpus is distributed half to Iris and half to Eddie.

What are the federal estate, gift and generation-skipping-transfer tax consequences -- to Winnie, Hollis, Iris, Eddie, and Winnie's and Hollis's estates -- of each of these transactions, with and without available elections? Be sure to discuss the amount and timing of each item.

Discuss.

In 1991, Beth, a widow, sets up an irrevocable trust and transfers $1,000,000 to it. The trustee is to pay income to Beth for life, with the remainder to be distributed at Beth's death to her sister-in-law, Sharon, or to Sharon's estate.

In 1992, Beth and Sharon purchase Blackacre, a parcel of real estate, as joint tenants with right of survivorship. Of the $500,000 purchase price, Beth pays $375,000, using funds she has inherited from her parents; Sharon pays the other $125,000, using money she has received as gifts from her brother, Beth's spouse, over the years.

Later that year, Beth opens a checking account in the names of Beth and Sharon, as joint tenants with right of survivorship. Under local law, either Beth or Sharon may withdraw any and all funds in the account throughout their lives. In actual practice, however, only Beth makes deposits and withdrawals to and from the account during her lifetime.

In 1993, Beth decides she no longer needs the income from the trust. She sells her interest in the trust to Sharon for $200,000, which is the actuarial value of Beth's life estate based on Beth's life expectancy and the applicable rate then in effect under section 7520 of the Code.

In 1994, Sharon is starting a business, and Beth guarantees Sharon's start-up loan from a bank. The interest rate on the loan is measurably lower than it would have been without the guarantee.

In 1995, Beth dies, survived by Sharon. The fair market value of Blackacre in 1995 is $1,000,000, and the corpus of the trust has a fair market value in 1995 of $1,500,000. At Beth's death, there is $75,000 in the joint checking account.

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

Discuss.

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Update:  21 Aug 00
Expires:  31 Aug 03