By Pedro Smith,2014-07-10 22:06
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    1. Formula

    a. Form 706

    b. Gross Estate (GE): 2033, 2034-38, 2040-46

    c. Subtract deductions

    d. [this is taxable estate]

    e. Add adjusted taxable gifts (total taxable gifts under ? 2503 minus gifts already included in

    GE under ? 2001(b))

    f. [this is the base for the tentative estate tax]

    g. Compute tentative estate tax (Table A, page 10 of ―Instructions for Form 706‖)

    h. [see peculiarities of Line 7a-c if base for tentative estate tax is over $10,000,000.

    i. [this gives you tentative tax]

    j. subtract total gift tax payable

    k. [this give you gross estate tax]

    l. subtract unified credit

    m. subtract credit for state death taxes (taxable estate minus 60,000 and compute on this amount

    using Table B, page 10 on ―Instructions for Form 706‖)

    n. [any other credits?]

    o. [this should give you tax due]


    1. Section 2033: Property Owned by Decedent a. Generally, the GE includes all property owned by the decedent at death that is transferred to

    another on account of his death.

    b. Includes will substitutes.

    c. Includes all types of property (real, personal, tangible, intangible) and all types of interests

    (as long as inheritable).

    d. Decedent (D) must own the property. Must be beneficial ownership; something more than

    bare legal title.

    e. State law may determine interest, but federal law determines whether that interest is taxable.

    As to the interest, federal courts are bound only by state statutes or decisions of the highest

    court of the state (see Bosch).

    2. Section 2034: Dower or Curtesy Interests a. Statutorily created rights (e.g., spousal elective share) for surviving spouse are included in

    the D’s GE.

    b. D’s property owned at death is included at its full value, w/out a reduction for surviving

    spouse’s interests, except for a surviving spouse’s vested ? interest in community property.

    c. Most of the property included under ? 2034 will be deducted back out as a marital deduction

    under ? 2056.


    3. Section 2035: Gifts Made W/in Three Years of Death a. Now that gift and estate taxes have been unified, most outright inter vivos gifts are excluded

    from D’s GE b/c the gifts are taxed when made and included in the estate tax base to

    compute estate taxes.

    b. However, any taxes paid or payable on gifts or lifetime transfers made w/in three years prior

    to D’s death are included.

    c. Section 2035 interacts w/ other specific taxing sections, Sections 2036, 2037, 2038, and

    2042, to include the full value of property transferred, released, or relinquished w/in three

    years of death. It does not interact w/ ? 2040 (Joint Tenancy).

4. Section 2036: Transfers w/ Retained Life Interests (or Life Estates) (2035 “suck back”)

    a. Rule

    (1) Where D makes an inter vivos transfer but retains either a life interest or a power to

    designate enjoyment of the property, the full value of such property will be included in the


    b. ―Transfer‖

    (1) Must have been transferred by him. However, a reciprocal trust agreement between him and

    another will be treated as a transfer by D..

    (2) Courts are split regarding whether a “transfer” has occurred when D creates a revocable


    c. ―Retained Interest‖

    (1) A subsequent reconveyance does not constitute retention of power unless the reconveyance

    was prearranged.

    (2) An interest constitutes a “retained interest” if it is either “possession or enjoyment of the

    property” or a right to income from the property.” (3) A legally enforceable right is not required, but there must at least be some understanding or

    agreement under which the D has retained a life interest (this can be inferred from the

    circumstances). The mere fact of possession is not enough by itself.

    (4) D does not retain a life interest in the property merely by giving the trustee (TE)

    discretionary power to use trust income for the benefit of the D. d. ―Retained Power to Designate‖

    (1) Besides not being able to retain a life interest in the property, D also cannot retain a power

    “either alone or in conjunction with any person, to designate the persons who shall possess

    or enjoy the property or income therefrom.” (2) Nonbeneficial powers governed by an ascertainable standard are mandatory and thus

    outside the scope of ? 2036.

    (3) Prohibited power includes the power to affect the time and manner of a beneficiary’s

    possession and enjoyment, and the power to remove the TE, but does not include purely

    administrative powers.

    (4) Period of retention must be one of three time periods: (i) for transferor’s (TR’s) life; (ii) for

    a period not ascertainable w/out reference to the TR’s life; or (iii) for a period of time that

    does not in fact end at the TR’s death.

    e. Amount Included

    (1) The amount included in the GE is the full value of the property subject to the retained

    interest or power, determined as of the date of D’s death. Where the retained right relates

    only to a portion of the property, only that portion is taxed.


(2) If D relinquishes or transfers his retained interest or power w/in three years of death, the

    entire property is included under ? 2035.

5. Section 2037: Transfers Taking Effect at Death (2035 “suck back”)

    a. A lifetime gift is included in the donor’s gross estate if (1) the transferee’s possession and

    enjoyment of the property is contingent upon surviving the transferor and (2) the transferor

    retained a reversionary interest in the property valued at more than five percent of the value

    of the property at the time of the transferor’s death. b. But, ? 2037 won’t apply if, at the time of the D’s death, a beneficiary could have obtained

    possession or enjoyment through the exercise of a general power of appointment held by

    someone other than D.

    6. Section 2038: Revocable Transfers (2035 suck back) a. Lifetime transfers by D, with which D possesses at death the power to alter, amend, revoke,

    or terminate, (or affect the time or manner of the beneficiary’s interest) either alone or in

    conjunction with any other person, are taxable under ? 2038.

    b. Contingent powers will not be taxable under ? 2038 where the contingency is outside of the

    D’s control and has not occurred at death.

    c. Indirect access to power is sufficient; e.g., includes property where D is trustee.

    d. D merely needs to have the power; it need not have been retained by him.

    e. Power must be discretionary and something more than purely administrative.

    f. Only the value of the interest subject to the power is taxable.

    g. Where D’s power is relinquished w/in three years prior to D’s death, it will still be taxed

    under ? 2035.

7. Section 2039: Annuitites

    a. A surviving beneficiary’s interest is taxable to the estate of the D if (1) the interest is

    received by reason of surviving the D and (2) the D was receiving or had the right to receive

    payments under the K or agreement.

    b. If D’s interest is extinguished by his death, nothing is included. c. Survivor’s benefits under a Joint and Survivor (jointly held) annuity are taxable under this


    d. To be taxable under this section, the beneficiary’s interest need not be typical annuity-type

    payments. However, if the payments are essentially life insurance proceeds, they will be

    taxable under ? 2042, not ? 2039.

    e. The K need not expressly be an ―annuity.‖

    f. D must have been receiving or have had the right to receive payments for life (or any of the

    ―life‖ loop-hole closers).

    g. Multiple documents can be viewed together to determine whether D was receiving an


    h. If D’s interest had terminated, there is no survivor benefit, and there is nothing to tax under

    this section.

    i. The amount included is the value of the survivor’s benefit that was contributed by D or D’s



8. Section 2040: Joint Interests (See Gallenstein v. U.S. at iv, as noted below)

    a. Joint Tenancies with Rights of Survivorship (JTWROS) are included in the GE of the first

    joint tenant to die.

    b. Tenancies in Common (TIC) and community property are not included here.

    c. Amount included: Full value of the property (rebuttable presumption of 100% contribution)

    except that an amount proportionate to the surviving JT’s contribution is excluded. d. Section 2035 (―suck back‖) does not reach property includible under this section. e. Exception: If the JTs are husband and wife and are Tenancies by the Entireity (TBEs) or

    JTWROSs, only ? of the value of the property is included in the GE of the first to die w/out

    regard to who contributed what. Inclusion (which is deductible as a marital deduction)

    results in stepped up basis unless spouse is not a U.S. citizen (see QDOT). See Gallenstein.

9. Section 2041: Powers of Appointment (See Finlay v. U.S. at iv)

    a. Property subject to a general power of appointment at the time of D’s death is included in the

    GE of the holder of the power, whether the power is exercised or not (i.e., lapse is

    tantamount to exercise of the power unless 5 and 5; see below).

    b. General powers of appointment are powers that CAN BE exercised in favor of the D, his

    estate, his creditors, or the estate’s creditors.

    c. Exceptions:

    (1) Limited powers of appointment, including powers subject to ascertainable standards (MESH),

    are not includible.

    (2) A holder of a general power of appointment can escape tax under this section by exercising

    during life (but then subject to gift tax), disclaiming w/in nine months of receiving the power

    of appointment, or if the value of the power of appointment is less than 5% (of the death

    value of the assets subject to the power) or $5,000.

    10. Section 2042: Life Insurance (on the Decedent’s Life) (2035 suck back) (See Headrick v. Commr and Perry v. Commr at iv)

    a. Proceeds of life insurance on D’s life are included in the gross estate if (1) payable to, or for

    the benefit of, the estate, or (2) payable to some other beneficiary and D possessed ―incidents

    of ownership‖ in the policy at the time of death.

    b. D holds ―incidents of ownership‖ if he has any right to control the existence of the policy, to

    rearrange the interests therein, or to affect the benefits payable thereunder.

    c. Exception: D can assign these incidents of ownership and escape tax under this section, but

    only if the assignment is not made w/in three years of death, he does not retain a life interest,

    the transfer does not take effect at death, and the transfer is irrevocable.

    d. If a corporation owns the policy and D owns more than 50% of the corporation, then the

    policy may be includible depending on where proceeds went (e.g., includible if to widow).

    e. If D owns life insurance on the life of another, section 2033 brings it into the GE.

11. Section 2043: Transfers for Insufficient Consideration

    a. The estate tax is imposed only upon wholly or partially gratuitous transfers; transfers for

    ―full and adequate consideration in money or money’s worth‖ are not taxed. b. Consideration can be lacking in a business transaction as long as it was done at arm’s length.

    c. Release of marital rights is not sufficient consideration to escape tax under this section (see ?



12. Section 2044: Certain Marital Deduction Property

    a. Property that qualifies for a marital deduction as a Qualified Terminable Interest Property

    (QTIP) is included in the surviving spouse’s estate upon his or her death unless the spouse

    disposed of the life estate before his or her death under circumstances where a gift tax would


13. Section 2045: Prior Interests

    a. An interest or power that is subject to estate tax will be subject to estate tax w/out regard to

    when it was effective unless otherwise specified in the Code.

14. Section 2046: Disclaimers

    a. Section 2046 incorporates the gift tax rule as to when a disclaimer or renunciation will be

    effective for federal tax purposes.

C. VALUATION APPROACHES (generally fair market value (FMV)):

    1. Tangible Property a. Look to retail value.

    b. If property value is in excess of $3K, then must get a qualified individual to appraise; be sure

    that appraiser doesn’t inflate or deflate.

    2. Real Property (pp. 4-12 to 4-13: Factors to be considered) a. Income if there is a lease on the property. Be sure to use it in the valuation of the property.

    b. Value: income stream plus remainder value after termination of lease.

3. Stock

    a. Valuation is FMV.

    b. Pay attention to time of death for securities.

    c. IRS considers date of death in his domicile (problem when one dies in a different State than


    d. Closely held stock: REV. RUL. 59-60. Factors to look at:

    (1) Book value

    (2) Earnings

    (3) Corporation-owned life insurance: Proceeds are asset of a corporation, but loss of a key man

    can be a monetary loss to company.

4. Bonds

    a. Exception to FMV rule for ―flower bonds‖ or federal redeemable bonds: Calculated at par

    value if issued prior to March 3, 1971.

5. Notes

    a. Balance due on note: principal value

    b. But IRS might add a premium for advantageous % rate on the note

    c. If % rate is lower than going rate can argue that should get a discount


6. Miscellaneous

    a. Patents, royalties

    b. Works of an artist: If estate tried to sell the remaining works, then would flood the market.

    Therefore the estate should be entitled to a discount on that property

7. ? 2032: Alternative Valuation Date

    a. Date of death is usually valuation date for assets in the estate

    b. This section allows you to choose the date 6 months from date of death as the valuation date.

    c. Can’t pick and choose among the assets – it’s all or nothing.

    d. If you sell something between date of death & alternative date, then valuation is as of date of

    that sale.

    e. For late returns, can elect this provision so long as this is the first return (but can’t be more

    than 1 year late).

    f. Requirements:

    (1) Must lower your tax bill (can only be elected if tax goes down).

    (2) Must also reduce the gross estate

    g. Any accumulations due to passage of time from date of death are not includible in the estate.

    8. ? 2032A: Special Use Valuation: an election on return to lower value of closely held

    business or family firm

    a. Enacted to keep family farm or business from being sold to pay for estate taxes.

    b. Requirements:

    (1) Qualified heir who keeps the land to farm and gets to pay the tax over time

    (2) Can’t reduce taxes by more than $750K


1. Section 2053: Expenses, Indebtedness, and Taxes

    a. A deduction is allowed for expenses of the estate and for various claims against the estate

    (BUT only to the extent of debts/claims), including debts and taxes owed by the decedent.

    b. The amount of any unpaid mortgage is deductible to the extent that the value of the property

    (undiminished by the mortgage liability) is included in the GE (i.e., can’t have it both ways).

    If full value of the property is included, full mortgage is deductible (or if 50%, then 50%).

    c. Claims and expenses are deductible only if ―allowable by the laws of the jurisdiction under

    which the estate is being administered.‖ d. If an item or expense could be allowed either as an (estate) income or estate tax deduction,

    the executor must choose pursuant to I.R.C. ? 642(g); BUT certain expenses are deductible

    against the gross estate and the estate’s taxable income (e.g., salaries due employees).

2. Section 2054: Losses

    a. Deduction for losses is limited to casualty or theft losses that are not compensated by

    insurance or otherwise.

    b. A loss that might be deductible for income tax and estate tax purposes may be claimed

    against one or the other tax, but not both.


3. Section 2055: The Charitable Deduction

    a. A deduction is allowed for the value of all property transferred by decedent to certain

    organizations operated exclusively for religious, scientific, literary, educational, or other

    charitable purposes (qualified charities under Section 503(c)).

    b. Deductible Amount: the deduction is limited to the value of the property that passes to the

    charitable object and that was included in D’s gross estate. If the property is burdened with

    an obligation to pay any debt taxes, the deduction is reduced by that amount. c. Split Interest Gifts: charitable remainder gifts or charitable lead gifts must be in the form of a

    statutorily defined annuity trust or unitrust, or must be made to a pooled income fund for the

    interest of the charitable object to be deductible. These requirements were enacted to

    eliminate any uncertainty in valuing the charitable remainder interest, and to ensure that the

    remainder interest would pass to the charity without diminution by the exercise of the

    invasion powers.

    (1) CRAT: a CRAT is a charitable remainder trust under which a fixed sum, which is no less

    than five percent of the initial value of the trust corpus, is paid at least annually to the

    noncharitable beneficiary.

    (2) CRUT: a CRUT is a charitable remainder trust under which a fixed percentage, which is no

    less than five percent of the trust corpus, valued annually, is paid to the beneficiary.

    (3) Pooled Income Fund Trust: a pooled income fund is a fund set up by a charitable

    organization to be a recipient of gifts that will qualify for a charitable remainder deduction.

    (4) Limitations: no deduction is allowed if another noncharitable remainder precedes the

    charitable remainder or the income interest is for a term of years that exceeds 20 years (for

    a corporation). However, a life estate can still be granted to individuals.

    (5) Addition: Lifetime transfers that come back into the estate later go back out if the remainder

    goes to charity (BUT must follow the rules for CRAT or CRUT).

    4. Section 2056: Marital Deduction (mandatory, not elective)

a. General Scope of Deduction

    (1) The deductible amount is limited to that net value of the property that passes to the surviving

    spouse the value of the property reduced by any mortgages or other debts, expenses, and

    taxes that burden or encumber the property.

    (2) The amount deductible is UNLIMITED.

b. Five Basic Requirements for Marital Deduction

    (1) Decedent and surviving spouse (SS) must be a U.S. citizen or resident (a) Exception: For non-U.S. residents, may establish a Qualified Domestic Trust (QDOT) under

    section 2056A.

    (b) QDOT Requirements: managed by U.S. trustee, annual income interest for SS, principal

    appointed only for SS and no one else, and executor must elect on return. (2) The property passing to the surviving spouse must have been included in the D’s GE. (3) D must have been married at the time of death and the spouse must survive the decedent.

    (4) The property must pass from the D to the surviving spouse (includes non-probate property,


    (5) The interest must be a deductible interest



    c. Four Ways to Get Marital Deduction (i.e., all included in SS’s estate): (1) Outright

    (2) Life Estate with Power of Appointment

    (3) Life Estate Trust (income to spouse for life w/ remainder to estate) (4) QTIP (spouse gets all income for life no matter what; D decides who gets remainder)

d. Non-deductible

    (1) Interests not included in decedent’s gross estate

    (2) Interests that would be deductible under section 2053 (expenses)

    (3) Interests that would be deductible under section 2054 (losses)

    (4) Nondeductible terminable interests

e. Nondeductible Terminable Interest Rule

    (1) Definition: a terminable interest is an interest in property that will terminate or fail upon

    lapse of time or the happening of some event.

    (2) Not all terminable interests are nondeductible: terminable interests are deductible, except in

    two situations:

    (a) Where an interest in the same property has passed from decedent to another person for less

    than adequate and full consideration if, by reasonable ownership of that interest, the other

    person will possess and enjoy the property after the surviving spouse’s interest terminates.

    (b) If D’s will directs the executor to use estate property to acquire that interest for the surviving


f. Five Exceptions to the Terminable Interest Rule (i.e., Deductible Interests)

    (1) Survivorship Exception

    (a) Allowed even if the interest of the surviving spouse is conditioned upon the spouse surviving

    the decedent for a period of up to six months (or not dying from a common disaster), as long

    as the spouse does, in fact, survive the conditional period (or does not perish as a result of a

    common disaster).

    (2) Life Estate with Power of Appointment Exception: allowed if: (a) The surviving spouse is entitled to all income from the property (or a specific portion of it)

    for life, payable at least annully,

    (b) If the SS is granted a power to appoint the property (or a specific portion of it) to himself or

    his estate, and

    (c) If this power is exercisable by the surviving spouse alone and in all events.

    (3) Insurance Settlement Exception

    (a) Allowed as to certain interests passing to the surviving spouse in the proceeds of life

    insurance, endowment, and annuity contracts where conditions similar to the life estate with

    power of appointment exception are satisfied.

    (4) Qualified Terminable Interest Property (QTIP)

    (a) This is property that passes from decedent, in which the surviving spouse has a qualifying

    income interest for life, and with respect to which decedent’s executor makes an election to

    have the property qualify as a QTIP interest.

    (b) The surviving spouse has a qualifying income interest for life if she is entitled to all of the

    income from the property (or specific portion of it) payable at least annually; and has no

    power to appoint any part of the property to anyone other than the surviving spouse (except


    that the surviving spouse or some other person may be granted a power of appointment if this

    power is exercisable at or after the surviving spouse’s death).

    (c) If the QTIP interest qualifies for the marital deduction in decedent’s estate, the QTIP

    property is included in the surviving spouse’s gross estate. (Also, the gift tax will apply if

    the surviving spouse makes a lifetime transfer of his or her income interest in QTIP property.)

    (5) Charitable Remainder Trusts

    (a) Will be allowed for the value of the income interest passing to surviving spouse of the

    decedent if he is the only noncharitable beneficiary of a trust that qualifies as a CRAT or a


g. Disallowance of Marital Deduction under Revenue Procedure 64-19

    (1) Requirements: marital deduction will not be allowed if:

    (a) The bequest to the spouse is in the form of a pecuniary bequest;

    (b) The executor is authorized to distribute assets in kind to satisfy the bequest;

    (c) The executor is authorized to select among estate assets for the purpose of making the

    distribution in kind; and

    (d) The executor is directed to use the estate tax values in effecting distribution.

    (2) Exceptions

    (a) If applicable state law for the governing instrument requires the executor to distribute assets

    at least equal in value to the amount of the marital deduction, or the executor is required to

    take into account the relative appreciation and depreciation into value of all assets available

    for distribution, the marital deduction will be allowed.


    1. Section 2010: Unified Credit (mandatory, not elective): a. Remember a reduction for lifetime gifts made between 9/8/1976 & 1/1/1977 (unified credit

    may be reduced by $6K)

    b. $600K: Benchmark for determining whether a return is filed (if amount on which tentative

    tax is computed is less than $600K, then no filing necessary).

    c. Reasons to file anyway:

    (1) Statute of limitations starts running

    (2) Establish basis

    2. Section 2011: State Death Tax Credit: Credit on federal return on estate taxes paid to any


    a. Calculated on Table C

    b. Reduce taxable estate by $60K; to calculate, must be calculated on taxable estate

    c. In order to take the credit, must have paid the tax

    d. Never will owe less to TN than the allowable federal credit

    e. TN has (1) an inheritance tax & (2) estate tax

    f. Definitions

    (1) ―Pick-up tax‖: Picks up the difference between the state tax & the federal tax credit

    (2) ―Domicile‖ = physical residence & intent to make it your home

    g. Alternative: ? 2043(d) a deduction can be taken instead (sometimes a greater benefit), BUT

    can’t take both.


3. Section 2013: Credit for Tax on Prior Estate Taxes/Transfers: credit for taxes paid on

    inheritance, if transferee also dies within 10 years (mandatory credit)

    0 to 2 years then a credit of 100% of taxes paid in this estate

    2 to 4 - 80%

    4 to 6 - 60%

    6 to 8 - 40%

    8 to 10 - 20%

    more than 10 years - 0%

    a. Requirements for Prior Estate Tax Credit:

    (1) Decedent had to leave it to you

    (2) Estate must be taxed

    (3) Asset must have been included in estate (life ins. trust is not subject to tax, so no credit)

    b. Example: Death prior to transfer: If transferor grants life estate to themselves with remainder

    to son & son predeceases, the value of the remainder is included in his estate to get credit,

    would have to file an amended return when father dies.

4. Section 2014: Credit for Foreign Death Taxes (very rare):

    a. Must be required to pay taxes to a foreign county

    b. Check treaty of other government & check ? 2014 to see which is most beneficial

    c. Requirements:

    (1) Situated in a foreign country

    (2) Taxed in a foreign country

    (3) Includable in decedent’s gross estate

    d. Credit = __ value of property _ * Tax

    value of gross estate

    5. Section 2012: Credit for Gift Taxes (very rare): a. Requirements:

    (1) If decedent made gifts prior to 1977

    (2) That are brought back into his estate (look to see if he made tax payments on those gifts)

    b. Credit for taxes paid

6. Section 2016: Recovery of Taxes Claimed as a Credit:

    a. No statute of limitations provision

    b. Duty to repay credit if state or foreign taxes which have been paid are subsequently refunded


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