Bryant - Course 6. Estate Planning. 4. Gross Estate Flashcards

Question

What is the The Rationale for IRC 2036?

Answer 1

The **rationale for including this type of lifetime transfer is that the right to enjoy or control property or designate who will receive the property or its income is characteristic of ownership**.

Answer 2

**The value of property, which has been transferred, must be included in the gross estate if the donee's possession and enjoyment of the property is contingent upon surviving the decedent**. A Section 2037 transfer includes in the decedent's gross estate the value of the property transferred if: * **The donee must survive the decedent**. * **The decedent retained a reversionary interest in the property worth more than 5% of the value of the transferred property immediately before death**.

Answer 3

Albert makes an irrevocable transfer into trust for his spouse. His spouse is to receive income from the trust for life. Upon the spouse's death, the remainder of the trust will pass to Albert, if living, otherwise to Albert's children. Albert dies in the current year. What is included in Albert's estate? * The interest to Albert's children would be included in Albert's estate because it is contingent upon the children surviving Albert. * In other words, if his spouse dies, Albert has a reversionary interest in the property. A * ssuming the value of this reversionary interest satisfies the 5% requirement, the value of the reversionary interest would be included in Albert's estate. * Since the spouse had a life estate in the income from the trust, the value of the spouse's lifetime interest in the property would not be included in Albert's gross estate.

Answer 4

* **Since either the child or the grandchildren could take from the trust without surviving Brandi, the requirements of Section 2037 have not been satisfied.** * Therefore, **regardless of the reversionary interest to Brandi, there is no inclusion of assets in Brandi's gross estate**. This is often called the **"But if...back to..." section** because **it will not be operative unless the transferring document provides wording to the effect of: "But if the donee does not survive the donor, the property comes back to the donor.**"

Answer 5

The **right to regain the property is called a reversionary interest**. * **To cause inclusion, the actuarial value of the transferor's reversionary interest must be significant**. * Stated more precisely, **the right to regain the property, or the right to dispose of it, must be worth actuarially more than 5% of the property's value**.

Answer 6

During his lifetime, Stuart transferred property to his wife, Mona, for her lifetime. Upon Mona’s death, the property was to return to Stuart if he was living. If he was not living, the property was to go to Stuart’s daughter, Ellen. What is the outcome if Stuart dies before Mona? * Stuart’s daughter can obtain possession or enjoyment of the property only if she survives Stuart. * Stuart retained a reversionary interest under the original transfer. If Stuart's reversion is worth more than 5% of the value of the property he placed in a trust, the value of the remainder interest will be includable in Stuart's estate. Such a transfer is includable because it is considered to be, in substance, a substitute for disposing of the property by will.

Answer 7

* **Three-year rule and exceptions**: Certain property transferred as gifts within three years of the death of the decedent are not generally includable in gross estate according to **IRC Section 2035**. **The exceptions to this rule are transfers in which the decedent had retained certain interest or power over the gifted property such as IRC Section 2036 retention of life estate, IRC 2037 transfers taking effect at death, IRC Section 2038 revocable gifts, and IRC Section 2042 life insurance policies**. * **Property with a retained life estate**: Property identified under I**RC Section 2036 is includable in the decedent's gross estate**. When a decedent gives away property during his or her lifetime but **retains some control over or interest in the property, the property is generally included in the gross estate**. The rationale behind the IRC is that the decedent retained the right to enjoy or control property or designate who will receive the property or its income. This right is characteristic of ownership. * **Transfer at death**: **Property specified in IRC Section 2037 is includable in the decedent's gross estate**. The **value of the property transferred** and not the value of the interest retained will be includable. **Property to which this section applies is that which the donee can begin to enjoy only by surviving the decedent**. Since the decedent may have **the right to regain the property during their lifetime**, this right to regain is known as a **reversionary interest**.

Answer 8

Sandra's life estate terminated. Sandra did not own the property. * Under **IRC Section 2033, no inclusion is required for property in which the decedent's interest was obtained from someone else and was limited to lifetime enjoyment**. * Estate tax is a tax on the transfer of property at death. This means that **if an interest terminated at the decedent's death and the decedent had no right to transfer at death, its value will not be included**. * Sandra did not have anything that she could transfer. * **Her life estate, by its terms, terminated with her death so there was nothing to transfer**. * Though Sandra had an interest in the property at the time of her death, it was not a property interest that she could pass to someone else.

Answer 9

Her villa to Stephanie, retaining life estate Her country house to Martha, for life, at Martha's death, it returns to Sharon, unless Sharon is dead, then remainder to Martha's issue Her shares in Oracle Corp., to Winston, retaining power to revoke * As per **IRC Section 2035, gifts made within three years of death are not includable**. * The **exceptions are properties includable under IRC Sections 2036, 2037, 2038 or 2042**. * The villa falls under Section 2036 because Sharon retains life estate. * The country house as life estate falls under Section 2037 because it is contingent that Martha be alive to enjoy the gift, with Sharon still retaining a right to regain the property personally. * Her shares in Oracle Corp., fall under Section 2038 because Sharon retained the power to revoke. * Therefore, these three properties-the villa, country house and Oracle shares-are includable in the gross estate. * The only property that is not includable is the garment factory, which was a complete gift.

Answer 10

The surviving wife to an interest for life in all of the real property owned by her husband during their marriage. * Under the common law system, marriage creates a spousal interest in the real property owned by the decedent. * **Dower is the right of the surviving wife to an interest, for life, in all of her husband's real property**. * **The right of the husband to an interest for life in all of the real property owned by his wife during their marriage is called curtesy**.

Answer 11

Upon completion of this lesson, you should be able to: * Identify a revocable transfer * Define an annuity * Identify types of annuities * List the qualifications that govern the inclusion of annuities in the gross estate. * Describe the 50-50 rule applied to jointly-owned property * Explain the percentage-of-contribution rule and its use * Define power of appointment and its treatment in valuing the gross estate * Specify the conditions under which life insurance is includable in the gross estate * Discuss how a previously utilized marital deduction impacts the gross estate of the surviving spouse

Answer 12

**A revocable transfer is a transfer of property in which the decedent retained the right to alter, amend, revoke or terminate the gift**. * **When a grantor creates an irrevocable trust but can decide whether to accumulate trust income or distribute it to trust beneficiaries, the grantor retains a right to alter or amend a transfer**. * When a grantor establishes a revocable trust, the grantor retains a right to revoke or terminate a transfer. **The gross estate of the decedent will include the value of the property subject to this power**. IRC Section 2038 would apply regardless of whether the decedent retained the said power alone or together with others. **Only the value of property subject to this power will be included in the gross estate, not the entire value of the transferred property**.

Answer 13

The courts have broadly interpreted revocable transfers. For example, **the mere power retained by the donor to vary the timing of when a beneficiary will receive an interest will cause inclusion**, even if the beneficiary cannot forfeit the interest. There are, however, **exceptions for inclusion in the gross estate for transfers that would otherwise qualify as revocable transfers**. These exceptions include the following: * If the **decedent's power can only be exercised with the consent of all of the parties having an interest in the transferred property**, and * If **the power retained by the decedent adds nothing to the rights of the parties under local law**, or * **If the prohibited power is retained, it is subject to an ascertainable standard**. An **ascertainable standard** is an **external standard that limits the decedent's exercise of a power for the health, education, maintenance, or support (HEMS) of a beneficiary**. * Therefore, even if the decedent held a prohibited power, if this power was limited by an ascertainable standard, **the value of the assets over which this power was held would not be included in the decedent's gross estate**.

Answer 14

* the full $1 million of property will be included in Larry's estate.

Answer 15

* Since Larry had the right to remove and appoint a new trustee, including Larry, which may have impacted the beneficiaries' right to enjoy the timing of the trust benefits, **the full $1 million will be included in Larry's estate**.

Answer 16

* Even though Alice has retained the right to affect the timing of Bradley's enjoyment of the property, **since it is limited by an ascertainable standard, the value of the property over which Alice retains the power to revoke will not be included in Alice's gross estate**. There are, however, **exceptions for inclusion in the gross estate for transfers that would otherwise qualify as revocable transfers**. These exceptions include the following: * If the **decedent's power can only be exercised with the consent of all of the parties having an interest in the transferred property**, and * If **the power retained by the decedent adds nothing to the rights of the parties under local law**, or * **If the prohibited power is retained, it is subject to an ascertainable standard**. An **ascertainable standard** is an **external standard that limits the decedent's exercise of a power for the health, education, maintenance, or support (HEMS) of a beneficiary**. * Therefore, even if the decedent held a prohibited power, if this power was limited by an ascertainable standard, **the value of the assets over which this power was held would not be included in the decedent's gross estate**.

Answer 17

The general rule is that **the gross estate includes the present value of an annuity or other payment receivable by a beneficiary as a result of surviving the decedent**. An **annuity is defined as payments, or the decedent's right to receive payments, that do not terminate upon the decedent's death**. * In other words, they **include periodic payments over a specified period of time under an enforceable contract where the decedent had the right to the payment**. * An annuity under IRC Section 2039 **also includes the decedent's right to receive future benefits**.

Answer 18

An annuity is a **contract entered into whereby one party agrees to pay another, the annuitant, a series of payments over a period of time**. * **An annuity is defined as a systematic liquidation of principal and interest**. * It might be a **life annuity** where payments are made for the life of the annuitant, or it might be a **term certain annuity** where payments are made over a period of years. * A very common example of an annuity is pension income.

Answer 19

An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. **Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments**. * While **tax is deferred on earnings growth**, when** withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates**. * If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties. There are **generally three types of annuities — fixed, indexed, and variable**. In a **fixed annuity**, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse. In an **indexed annuity**, the insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. In a **variable annuity**, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you eventually receive, will vary depending on the performance of the investment options you have selected. **Variable annuities are securities regulated by the SEC**. An indexed annuity may or may not be a security; however, **most indexed annuities are not registered with the SEC**. **Fixed annuities are not securities and are not regulated by the SEC**. You can learn more about variable annuities by reading our Updated Investor Bulletin: Variable Annuities.

Answer 20

Annuities are broadly classified into two types: * Commercial annuities * Private annuities **The person or entity who assumes the obligation for a private annuity is not in the business of selling annuities, in contrast to commercial annuities**. * Further, **commercial annuities are usually funded with cash, while private annuities are often funded with various types of property, such as real estate or corporate stock**. * **Commercial annuity companies use standard actuarial tables to determine their payout terms, whereas a private annuity may determine its payout terms according to many other factors**. If the decedent owned a commercial annuity on the date of death, **the gross estate would include the cost of a comparable contract sold by the issuing insurance company on the decedent's date of death**. * (In other words, **the replacement value of the annuity**.) * The **value of the survivorship interest in a commercial annuity is the amount that the same insurance company would charge for a single annuity on the survivor at the time of the first annuitant's death**. * The **value of survivorship in a private annuity is determined using government valuation tables**.

Answer 21

Steve purchased a private annuity that would pay him $20,000 a year for life and, upon his death, would pay his wife, Jayne, $10,000 a year for as long as she lives. * If Steve died before Jayne this year, **the present value of future annuity payments to Jayne would be includable in his gross estate**. * Using the government valuation table called Table S, if Jayne were aged 55 when Steve died, and a 6% rate (as specified in Section 7520) was applicable, the annuity would have a present value at that time of $118,459. This inclusion provision applies not only to commercial, joint and survivor annuities but also to certain other types of payments made under a contract or agreement to the survivor(s) of the decedent.

Answer 22

The general rule regarding annuities, as defined in IRC Section 2039, is subject to three qualifications: * **Contracts such as a life annuity that provide payments to the decedent and end at death are not subject to this provision because they are not capable of death time transmission**, that is, there is **no transferable interest**. * **If the survivor or anyone other than the decedent furnished part of the original purchase price, then that portion of the survivor's annuity will not be included in the decedent's gross estate**. So **if the survivor paid one-third of the initial premium, only two-thirds of the value of survivor's income interest would be includable**. If the **decedent's employer furnished all or part of the purchase price, that contribution is treated as if it were made by the decedent**. * Where the **death proceeds of a life insurance policy are taken under a settlement option, they are considered life insurance proceeds rather than an annuity and are not taxed according to annuity rules**.

Answer 23

**Jointly-Owned Property (IRC 2040)** There are two rules that affect the estate taxation of property held jointly with the right of survivorship: * When the joint tenants are spouses * When the joint tenants are not spouses

Answer 24

If an **asset is owned jointly with rights of survivorship by a married couple, or as a tenancy by the entirety, upon the death of the first spouse only 50% of the value of the jointly-owned property will be included in the first-to-die spouse's gross estate**. * This is **regardless of the size of their contribution**. In fact, even if a contribution of more than 50% can be proven by the survivor, this rule must be used. This **rule applies to both real and personal property regardless of how it was acquired or when it was purchased.**

Answer 25

The **percentage-of-contribution rule**, also known as the **consideration-furnished rule**, affects the estate taxation of property held jointly with the right of survivorship and is **used where the joint owners are not spouses, or if one of the spouses is not a U.S. citizen**. * Essentially, this provision **measures the estate tax includability of jointly-held property with survivorship rights by referring to the portion of the purchase price attributable to the decedent's contribution**. Actually, **the rule is that 100% of jointly-held property is includable in the estate of the first owner to die unless the survivor can prove contribution out of funds other than those acquired by gift from the decedent**. * So, if the survivor can prove a contribution of one-third of the original purchase price, only two-thirds of the value of the jointly-held property will be includable in the decedent's estate. * If the survivor can prove a contribution of two-thirds of the original purchase price, only one-third would be includable in the decedent's estate.

Answer 26

The **gross estate includes the value of property interests over which the decedent had a general power of appointment**. A **power of appointment determines who will own or enjoy the property subject to the power and when they will own or enjoy it**. Power of appointment is the right to say who is to receive property in trust. **When a power of appointment is so extensive that it approaches actual ownership of the affected property, this is known as a general power of appointment**. * In other words, a general power of appointment **allows the decedent to transfer the property to himself, his estate, his creditors or the creditors of his estate**. * Since **this is similar to outright ownership over the property, property subject to a general power will be includable in the gross estate of the person who holds the power**. * Such property will be includable in a decedent's gross estate regardless of whether the power could be exercised at death or only during lifetime or whether the power of appointment was ever exercised by the holder of the power. A **general power of appointment** is a power to appoint property to the powerholder, the powerholder's estate, or the creditors of either. * If a decedent held a general power of appointment over property on his or her death, the value of the property is included in the powerholder's gross estate.

Answer 27

Daniel may be receiving a lifetime income under a trust and have the power to withdraw all or a portion of the trust corpus during his lifetime. **This right to invade the trust corpus is a general power of appointment and will cause the entire value of the trust to be included in Daniel's gross estate on death**, even though he may never have actually exercised the withdrawal right.

Answer 28

While a general power of appointment enables a person to exercise it in favor of self, creditors, his or her estate or creditors of the estate, **a special or limited power of appointment enables the individual to appoint anyone other than self, his or her estate, or creditors to receive property**. However, there are three situations that allow the holder to appoint property to himself or herself, and still have the power of appointment considered a special power of appointment. * The **holder may use trust property for himself but only with the donor's consent**. * The **holder may use trust property for himself only with the consent of the remaining trust beneficiaries, who have an adverse interest in the trust**. The remaindermen have an adverse or unfavorable interest in the trust because the holder can exercise the power for his own benefit, which reduces the amount available to the remaindermen. * **The holder can exercise the power according to an ascertainable standard**. An **ascertainable standard means that trust income and principal can be used for the holder's health, education, maintenance, and support (HEMS)**. * If the trust document says that the holder can use trust property for health, education, **and "comfort," or any wording other than HEMS, the power of appointment will be considered a general power instead of a special power**. **Property over which an individual has such special or limited power of appointment will not be included in the holder's gross estate**.

Answer 29

There are **certain instances where, even if the decedent holds a general power of appointment (also known as a GPA) over property, upon death, there will be no inclusion in the gross estate**. Example (GPA: No Inclusion in the Gross Estate) **If the decedent's GPA were limited to a power to appoint which does not exceed the greater of $5,000 or 5% of the value of the trust assets on an annual, noncumulative basis, these assets would not be included in the decedent's gross estate**. Inclusion in the gross estate of property over which a decedent held a general power of appointment will be required in certain circumstances even if the power is released, meaning formally given up, or in some cases, if the power is allowed to lapse, that is, fail through the lack of use.

Answer 30

Inclusion in the gross estate of property over which a decedent held a general power of appointment will be required in certain circumstances even if the power is released, meaning formally given up, or in some cases, if the power is allowed to lapse, that is, fail through the lack of use.

Answer 31

The **gross estate includes the value of the death benefit proceeds of any life insurance policies in which the decedent held any incidents of ownership**. The term **incidents of ownership refers to the right to benefit from the policy or decide who is to enjoy the benefit in an economic sense**. For example, if an owner/insured had the right to name a beneficiary, surrender a policy, or borrow its cash value, the owner/insured would be enjoying the economic benefits of a policy. **Almost any meaningful ownership attribute in the policy held by the decedent will cause the entire death benefit proceeds to be includable in the owner/insured's gross estate**. This is true regardless of how the decedent obtained the ownership rights or whether the use of such powers could directly or indirectly benefit the decedent. **Mere possession of the ownership right at death is all that is required to cause inclusion.** The capacity to utilize the power is not required. **A decedent's gross estate will also include the proceeds of any policy payable to his or her executor or for the benefit of the decedent's estate, whether or not the decedent had retained any incidents of ownership in the policy at death**. * **Therefore, naming the insured's estate or executor, as either a direct or indirect beneficiary of the life insurance, will cause proceeds to be included in the gross estate**. In many cases, **life insurance policies are owned by irrevocable trusts, also known as ILITs**. The **objectives of these trusts include: removing the death benefit proceeds from inclusion in the insured's gross estate and providing the cash needed to assist the executor for the estate to pay the estate tax liability**. * However, if the ILIT contains a provision which requires the trustee to use the life insurance proceeds to pay for the expenses associated with the insured's death, the proceeds of this life insurance, even if owned within the trust, will be included in the insured's estate. * **Therefore, with these types of trusts, it is imperative that the trustee be given the discretion to deal with the personal representative of the estate**.

Answer 32

**Corporate-owned life insurance (COLI) is includable in a decedent's estate if he or she owned more than 50% of the corporation's stock at death and is the insured on the policy, but only to the extent that it is payable to a party other than the corporation or its creditors**.

Answer 33

Assume Chuck Heikenen owned 60% of the CH Corporation. The corporation owned a $1 million policy on Chuck's life. * If the $1 million were payable to the corporation, it would push up the value per share of the stock included in Chuck's estate. * However, if the $1 million were payable to Chuck's brother, the entire $1 million would be includable. * The Internal Revenue Service (IRS) may also claim that the distribution constituted either a dividend or deferred compensation and apply income tax to the distribution as well.

Answer 34

In the case of a married couple, **if the first spouse were allowed a marital deduction for a qualifying income interest left to the surviving spouse, upon the death of the surviving spouse the value of the property in which the surviving spouse had a qualifying income interest would have to be included in his or her estate**. The result is the same regardless of when the qualifying income interest was created: during the first spouse's lifetime, or after the first spouse's death. The **key to IRC Section 2044 is to ensure that property that transfers to a surviving spouse utilizing the marital deduction will be included in the gross estate of the surviving spouse**. This section makes sense if we consider that the marital deduction simply postpones the payment of the estate tax until the death of the surviving spouse.

Answer 35

* **Jointly-owned property**: **Includable in the gross estate depending on who are the joint owners**. In the case of **spouses**, upon the death of the first spouse, **one-half of the value of the jointly-owned asset will be included in that spouse's gross estate**. In the case of **nonspouse** joint owners, **100% of the value of the jointly-owned property will be included in the first owner's estate unless the surviving owner can show contribution toward the purchase of the asset**. * **Power of appointment**: A right to determine who will own or enjoy the property and when they will do so. A **general power of appointment enables a person to exercise it in favor of self, creditors, his or her estate or creditors of the estate**. In contrast, a **special or limited power of appointment** enables the individual to **appoint anyone other than self, his or her estate or creditors to receive property**. Under **IRC Section 2041, property subject to a general power of appointment is included in the decedent's gross estate**, while **property over which an individual has special or limited power of appointment is not includable**. * **Life insurance**: Proceeds on a decedent's life payable to the decedent's estate or to any other beneficiaries are included in the gross estate **if the decedent retained incidents of ownership**. This is defined in **IRC Section 2042**. **Incidents of ownership include the right to benefit from the policy or the power to change the beneficiary**. * **Surviving spouse's gross estate**: Includes the **value of any qualifying income interest property for which the first spouse's estate had taken a marital deduction**.

Answer 36

The value of the remaining income term interest for three years from David's date of death to when Jennifer reaches age 35. * According to IRC Section 2038, in David's case **only the transfer of income is a revocable transfer**. * **Only the value of property subject to this power will be included in the gross estate** and not the entire value of the transfer of property. * **The property for which David retained this power at the time of his death was the remaining income that would be paid to Jennifer until she reaches age 35**. * David did not retain the right to the transfer of principal because Jennifer would receive it in any case at age 35, and **therefore the principal is not includable**.

Answer 37

Not includable in Tom's gross estate because he has no beneficial interest in the payments. Not includable in Tom's gross estate because he has no right to payments. * **Both IRC Sections 2039 and 2033 are applicable here**. * Tom does not have any beneficial interest in the payments because they will commence at his death and go to his son. * The annuity is not being transferred at death. Therefore, it is not includable in Tom's gross estate. * According to **IRC Section 2039, it will be includable only if it provided the decedent with a payment or a right to payment for life**.

Answer 38

$37,500 * The **percentage-of-contribution rule will be applied here because the property is held jointly with the right of survivorship**, and the parties are **non-spouses**. * This provision **measures the estate tax by referring to the portion of the purchase price attributable to Benjamin's contribution, which was 75%**. * Therefore, **the value includable in his gross estate is 75% of the market value of the shares when he dies, that is, 75% of $20 x 2,500, which is $37,500**.

Answer 39

To ensure that you have a thorough understanding of valuation planning, the following topics will be covered in this lesson: * Defining Valuation Planning * Valuation of Real Property * Valuation of Life Insurance * Valuation of Annuities Upon completion of this lesson, you should be able to: * Define valuation of estate assets * List the requirements and tax implications of valuation * List the general valuation rules * Describe how value is determined and its related problems * Explain the significance of the valuation date * Identify the factors that affect the valuation of real property * Define special valuation and its qualification requirements * Specify the method for valuation of life insurance * Explain the valuation of various types of annuities

Answer 40

**Valuing property for federal gift, estate, and generation-skipping transfer tax purposes is a complex process.** * Frequently, taxpayers arrive at valuations that differ widely from the values established by the IRS. * Courts will then be asked to resolve the valuation question. Thus, **value is a variable upon which reasonable minds can, and will, continue to differ**. The use of careful and thorough appraisals by qualified experts, documentation of sales of similar property recently sold, and well-drawn arm's length restrictive agreements, such as buy-sell arrangements, have proved effective tools in substantiating favorable values. * **An appraisal is not needed for all estate assets**. * You do not need an appraiser for publicly traded securities unless the decedent owned a significant portion of the outstanding shares. * You do not need appraisals for cash or even for lump sum values of retirement plan assets.

Answer 41

According to the general rules, **assets included in the gross estate are valued on the decedent's date of death**. **IRC Section 2031** deals with the **factors which must be recognized in order to value items includable in the gross estate for federal estate tax purposes**. Not only must all the factors affecting value be considered, but there must be sound reasoning for the relative weight given to each one.

Answer 42

Under the IRC Regulations, **value is the fair market value (FMV), "the price at which the property would change hands between a willing buyer and a willing seller**, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." Thus, the value a particular person would place on property **may vary greatly from the measure of worth placed on that same item by the government**. In fact, it is neither necessary that there be an established market for an item, nor that there be the "willing buyer and seller" spoken of in the IRC Regulations. **In the absence of an actual sale, the value is based on a hypothetical sale**. Generally, when an organized market does in fact exist, the market price will prevail. The ignorance of a material fact by the buying public or its inability to properly assess the significance of certain events does not form a basis for reducing the price indicated on the organized market. * **The contrary result applies in the absence of an established market**. * A purchase or sale is not regarded as determinative of value in situations in which one of the parties was ignorant of a material fact.

Answer 43

The IRS would most likely consider all the facts and circumstances that a hypothetical buyer and seller would consider. **The derived price at which the property would have changed hands between two parties thus determines the IRS's valuation**. By this rule, a forced sale or a sale outside of regular business channels would not be determinative of the value. Thus, generally, **the IRS's position is that the price at which the item or a comparable item would have been sold at retail is determinative**.

Answer 44

Value is basically a question of fact in those situations where there is an established market for identical property. However, **valuation problems become essentially problems of evidentiary proof, and often of opinion**, where: * **There are different markets for the same property**. Example: A property with both wholesale and retail markets. * **The appraisal of the worth must be made on the basis of comparison with somewhat similar property**. For instance, the properties that must be selected and the comparability of the properties are some matters that must be considered. What is derived is at best an opinion based upon fact. * **The property in question is unique, such as a patent or copyright**. Here, the data must be analyzed and an opinion must be formulated as to how much the potential anticipated benefits are worth. It **requires the examiner to be capable of making an adequate analysis**. In practice, the **IRS and the courts frequently view valuation problems as problems of negotiation and compromise**. Hence, the appraiser's objective must be to derive a fair and sound value. If litigated, this value should be sustained by the court. **Evidence and proof secured in the form of expert advice through appraisal, promptly after death, would likely have a greater probative value than evidence obtained at a later date**. As to the valuation of specific types of property, one must turn to the regulations, rulings, and court decisions.

Answer 45

The **alternate valuation date (AVD) is six months after death**. * The executor can elect the alternate valuation date **only if the value of the decedent's gross estate has diminished in value in six months and the estate tax liability is also less**. * **If all of the decedent's property is transferred to the surviving spouse by will, then the estate tax liability is zero and cannot decline, so the alternate valuation date could not be used**. * Once the date of death or alternate valuation is selected for valuation purposes, such date applies to all assets in the estate. **If the alternate valuation date is selected and if the property is distributed, sold, exchanged, or otherwise disposed of within six months of the decedent's death, it will be valued as of that date, not the six month date**. * Certain types of property diminish in value as time goes on. For instance, the present value of an annuity reduces each time a payment is made. * **Any such property interest or estate whose value is affected by the mere passing of time is valued as of the date the decedent died**.

Answer 46

$920,000 * By making an alternate valuation date election, the estate will be valued based on the FMV of the assets 6 months from the date of death. * **If an asset is sold or distributed within the 6-month window, the sale price is used for valuation**. * Therefore, the sale price of the residence on 6/15/2023 [$715,000] is added to the value of the investment portfolio on 9/15/2023 of [$205,000] for a total of $920,000.

Answer 47

Due to the uniqueness of land, the value of any real property as of a given date may be subject to widely differing opinions. In the absence of a market for such property, **the greater of the following will control the valuation**: * **The highest price available**, or * **The salvage value.** Where there is a market for real property, however, there are several factors that affect valuation.

Answer 48

The basic factors that affect the valuation of real property, where there is a market for the property, are listed below: * The nature and condition of the property, its physical qualities and defects, and the adequacy or inadequacy of its improvements. * The size, shape, and location of the property. * The actual and potential use of the property and how the trends of development and economic conditions, such as population growth, affect it. * How suitable the property is for its actual or intended use. * Zoning restrictions. * Size, age, and condition of the buildings, including the degree of deterioration and obsolescence. * The market value of other properties in the area in which the property is located. * The value of net income received from the property. **Rentals are often capitalized and then adjusted for depreciation. The same principle can be applied to gross rents. This method, however, must be adjusted to account for operating costs**. * The value accepted by state probate courts for purposes of state death taxes, if based on appraisals made by qualified real estate experts. * Prices at which comparable property in the same area was sold at a time near the applicable valuation date, provided it was an arm's length transaction for the best price obtainable. Usually, more than one comparable property sale will be used, especially where the property to be valued is a personal residence or undeveloped acreage. * Cost to duplicate the property, taking depreciation into account. The cost or value of land would have to be separated from the total value. The cost of reproducing the building, using present cost figures, would have to be estimated, and then the loss in value due to depreciation would have to be subtracted from the total of the other two figures. * Unusual facts.

Answer 49

In the event of a sale of real property within a reasonable period of time after the decedent's death, in such a manner as to ensure the highest possible price, **the amount received will usually be accepted as its value**. **Unaccepted offers to purchase the property will also be considered**. The price of a sale at auction will be accepted only if it appears that there was no other method that would have obtained a higher price. **Land does not have to produce income or have an active market to attain substantial value**. Where lands are in or adjacent to a settled community, owners frequently hold such lands in anticipation of realizing their true value from future sales. For example, a home at the edge of an expanding shopping center might be worth far more to the shopping center developer than it would be to a potential buyer in the residential market.

Answer 50

**An executor may elect to value qualifying real property on the basis of its actual special use rather than its highest and best use**. * This rule is **especially useful where the price of farmland is artificially increased by, or has not kept up with, the price per acre of encroaching housing developments or more lucrative commercial businesses**. * **Electing a valuation based on special use enables the executor to value the farmland for farming purposes by applying the inflation-adjusted reduction amount**. The **maximum reduction** of the decedent's gross estate under this provision in 2023 is **$1,310,000**.

Answer 51

The following are the requirements for a property to qualify for the special valuation rule: * On the date of the decedent's death, the property must be involved in a qualified use. The term qualified use is defined by **IRC Section 2032A(b)(2)** as **use of a farm for farming purposes or in a trade or business other than farming**. * The **value of the qualified property in the decedent's estate must equal at least 50% of the decedent's gross estate**. This is after debts or unpaid mortgages are deducted from both the qualified property as well as the gross estate. * **At least 25% of the gross estate, less debts and unpaid mortgages on all property in the gross estate, must be qualified farm or closely held business real property**. * **All gifts made within three years of the donor's death are added back into the gross estate solely for the purpose of calculating the 50% and 25% tests**. * **Such property must pass to a qualified heir**. The term qualified heir is defined at IRC Section 2032A(e) to include the decedent's: * Immediate family, * Ancestors, * Lineal descendants, * Spouse or the spouse of a descendant, or * A grandparent's lineal descendant. * **The real property must have been owned by the decedent or a member of his or her family and used as a farm or in a closely held business for an aggregate of five years or more of the eight-year period ending on the date of the decedent's death**. * During this period the decedent or a member of his or her family must have been a **material participant** in the operation of the farm or other business.

Answer 52

If a farm or a closely held business qualified for the special valuation rules and its value so determined is used for federal estate tax purposes, then **an additional estate tax will be imposed if within 10 years after the decedent's death and before the death of the qualified heir, the qualified heir who receives such property disposes of any interest in that property, other than to a qualified family member, or ceases to use that property in the manner in which it was used to qualify for this special tax treatment**. Generally, **the additional tax imposed shall be the excess of the tax that would have been imposed on the property if it were valued at its best use over the tax imposed because the property was valued at its qualified use value.**

Answer 53

Proceeds of life insurance on the life of the decedent receivable by or for the benefit of the estate **will be included in the insured decedent's estate and will also be subject to probate**. In addition, where the decedent held incidents of ownership in a policy, such ownership will invoke inclusion in the decedent's estate. The amount includable is the amount receivable by the beneficiary. This includes dividends and premium refunds. In determining how much is includable, **no distinction is made between an ordinary life policy, a term policy, group insurance, or an accidental death benefit**. **If a settlement option is elected, the amount that would have been payable as a lump sum is the amount includable**. If the policy did not provide for a lump sum payment, the amount includable is the **commuted amount used by the insurance company to compute the settlement option payments**. **The value of policy where the insured has not died is included in the policy owner's gross estate where he or she predeceases the insured**: * If a new policy is involved, its value will be the **gross premium paid**. * If the policy is paid-up or a single premium policy, **its value is the replacement cost**. This is the single premium which that company would have charged for a comparable contract of equal face value on the life of a person who was the insured's age at the time the decedent-policyholder died. * If the policy is an **established whole life policy, its value is found by adding any unearned portion of the last premium to the interpolated terminal reserve**. * If the policy is a **term policy, its value is the unused premium**.

Answer 54

**Annuities can be commercial or noncommercial**. Where the annuity is **noncommercial**, such as a private annuity, **the present value of future payments determines its fair market value.** * Likewise, for gift and estate tax purposes, the fair market value of life estates, terms for years, remainders, and reversions is their present value. **Annuities, life estates, reversions, remainders, and terms for years are valued according to a discount rate that changes monthly**. They may be based on a life or on the joint lives of two or more people. There are **two steps involved in this process**: * **Convert the length of the lifetime involved, to a life expectancy. This is done by means of a mortality table based on a study of the longevity **of a large number of people over a selected period of time, which indicates the expectancy of life in years for an individual who represents the average experience at each age of life. * **Determine a proper discount interest rate**. When that interest rate is determined, **a valuation table can be constructed that converts the two factors to be applied, life expectancy and the rate of interest, into one factor**. This f**actor is applied to the amount of the periodic payment in order to determine the present worth or value of the property interest**. * **Standard valuation tables are used to conduct term and life computations**. The valuation must be based on an interest rate that is rounded to the nearest 2/10ths of one percent. **The interest rate is equal to 120% of the federal midterm rate in effect for the month in which the valuation date falls**.

Answer 55

Two qualifications need to be added to this explanation of the law respecting valuation: * **These valuation provisions do not apply to interests valued with respect to qualified plans including tax-sheltered annuities and IRAs or in other situations specified in Treasury regulations**. * If an income, estate, or gift tax charitable contribution is allowable for any part of the property transferred, the taxpayer may elect to use the discount rate for either of the two months preceding the month in which the valuation date falls. However, if a transfer of more than one interest in the same property is made with respect to which the taxpayer could use the same interest rate, such interest rate is to be used with respect to each such interest.

Answer 56

**Commercial annuities are annuities under contracts issued by companies regularly engaged in their sale**. * They are **valued by reference to the price at which the company issues comparable contracts**. * A retirement income policy, from the point in time, that there is no longer an insurance element, is treated as a contract for the payment of an annuity.

Answer 57

Where a stock has an established market and quotations are available to value the stock as of the date in question, **the fair market value per share on the applicable valuation date governs the valuation for both gift and estate tax purposes**. The FMV is based on selling prices when there is a market for the stock or bond. This would be the mean **between the highest and lowest quoted selling price on the valuation date**. If there were no sales on the valuation date, but there were sales on dates within a reasonable period both before and after the valuation date, the FMV is determined by taking a **weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the valuation**. The average is then weighted inversely by the respective number of trading days between the selling date and the valuation date. Where there is a **large block of stock that could not be marketed in an orderly manner, the block might depress the market because it could not be converted to cash as readily as could a few shares**. Therefore, **selling prices and bid and asked prices may not reflect fair market value**. * **Sometimes it may be necessary to value this type of stock as if it were closely held and not actively traded**. If this can be established, a reasonable modification of the normal basis for determining fair market value can be made. As discussed in the previous Module, a **blockage discount is determined by the effect that the block would have had on the market if it were sold over a reasonable period of time and in a prudent manner**. * A similar situation occurs where sales at or near the date of death are few or sales are of a sporadic nature and may not indicate a FMV. **The opposite of the blockage situation above is where the block of stock to be valued represents a controlling interest either actual or effective in a going business**. Here, the price of normally traded shares may have little relation to the true value of the controlling lot. **The large block could have the effect of increasing value because of its element of control.**

Answer 58

* **Valuation of life insurance**: This process **includes proceeds, dividends, and premium refunds from all types of policies such as ordinary life policy, a term policy, group insurance, or accidental death benefits**. The amount payable as a lump sum or the commuted amount used by the insurance company to compute the settlement is the amount includable in the gross estate. * **Valuation of annuities**: Private annuity valuation starts with the **step of converting the length of a lifetime involved into life expectancy using a mortality table**. Next, **the proper discount rate is established**.** Valuation tables based on these two steps are used to do term and life computations.** Commercial annuities are valued by reference to the price at which the company issues comparable contracts.

Answer 59

If the policy is paid up, the policy is valued at its replacement cost * **The value of an unmatured policy owned by a decedent on the life of another is includable in the gross estate where he or she predeceases the insured**. If the policy is paid up, its value is its replacement cost. If the policy is new, the value is the gross premium paid. If the policy is a **term policy, the value is the unused premium**.

Answer 60

The value of net income received from the property The size, shape and location of the property The nature and condition of the property The actual and potential use of the property * Some of the basic factors that affect valuation of real property are the size, shape and location, the nature and condition, the actual and potential use of the property, the value of net income received, and zoning restriction. * However, land does not have to have an active market to attain substantial value.

Answer 61

The block of stock to be sold is too large to be marketed in an orderly manner Selling prices and bid and asked prices may not reflect the fair market value * A blockage discount occurs when a large block of stock that cannot be marketed in an orderly manner results in depressing the market. If this is the case, selling prices and bid and asked prices may not reflect their fair market value. The converse of the blockage situation is where the block of stock to be valued represents a controlling interest either actual or effective in a going business. Here, the large block could have the effect of increasing value because of its element of control.

Answer 62

* **Other IRC Sections**: Gifts wherein the decedent retained the right to alter, amend, revoke, or terminate the gift are revocable transfers and their value is included in the gross estate. **To the extent that the decedent paid for the contract, annuity payments that are receivable by a beneficiary after the death of a decedent are includable in the gross estate**. The 50-50 rule for property jointly-owned by husband and wife and the percentage-of-contribution rule for others are used to determine the value of jointly-owned property included in the gross estate. Property over which the decedent held a general power of appointment is also included in the gross estate unless limited by an ascertainable standard. If the decedent retained incidents of ownership in life insurance policies, these are also included. If the decedent spouse’s estate elected to receive the marital deduction for qualifying income interest property, the remaining value of these assets must be included in the estate of the surviving spouse. * **Valuation**: To calculate the value of the gross estate, **the property is valued at fair market value**. This is the price at which property would change hands between a willing buyer and willing seller. Real property is valued at the highest price available if a market for the property is not available. If a market is available, several factors related to the nature of the property, zoning restrictions, and prices of comparable property must be considered. **The lump-sum amount or the commuted amount is includable in the gross estate**. **Private annuities are valued based on government valuation tables while the value of commercial annuities is determined with reference to the price charged by the company for similar contracts**.

Answer 63

Both I and II * Where a stock has an established market and quotations are available to value the stock as of the date in question, the fair market value per share on the applicable valuation date governs the valuation for both gift and estate tax purposes.

Answer 64

III and IV * According to **Section 2034, the gross estate is not reduced by the value of any dower or curtesy interest**. The **value of these assets will be included in the decedent's gross estate**.

Answer 65

$1,310,000 * The **maximum reduction of the decedent's gross estate under Section 2032(A) (special use valuation) in 2023 is $1,310,000**. * This **rule is beneficial when farmland prices fall behind local prices for new homes or commercial property**.

Answer 66

I, II, and IV * **For an asset to be included in the gross estate under 2036, the right must have been retained by the decedent for**: * **Life** * Period not ascertainable without reference to death * Period that does not end before the decedent's death

Answer 67

Both I and II * **A general power of appointment allows the decedent to transfer the property to himself, his estate, his creditors, or the creditors of his estate. Such property will be includable in a decedent's gross estate regardless of whether the power could be exercised at death or only during lifetime**.

Answer 68

Dower * Under the common law system, a surviving spouse has dower or curtesy rights. * **Dower** is defined as the **widow**'s property rights under state law. * **Curtesy** is defined as the **widower**'s property rights under state law.

Answer 69

paid salary * Unpaid salary is considered a future income right.

Answer 70

$250,000 * Only 50% of the value of the beach house, or $250,000 ($500,000 × 0.50), will be included in Louise’s gross estate due to the tenancy by the entirety titling.

Answer 71

50% * Only 50% will be included in Stan’s gross estate due to the JTWROS titling.

Answer 72

Both I and II * In the absence of a market for such property, the greater of the following will control the valuation: * The highest price available, or * The salvage value.

Answer 73

50% * Corporate owned life insurance (COLI) is includable in a decedent's estate if he or she owned more than 50% of the corporation's stock at death and is the insured on the policy, but only to the extent that it is payable to a party other than the corporation or its creditors.

Answer 74

business accounts payable * Business accounts receivable are considered future income rights.

Answer 75

six months * The alternate valuation date (AVD) is six months after death. * The **executor can elect the alternate valuation date only if the value of the decedent's gross estate has diminished in value in six months and the estate tax liability is also less**.

Answer 76

10 years * If a farm or a closely held business qualified for the special valuation rules, then **an additional estate tax will be imposed if within 10 years after the decedent's death a qualified heir disposes of the property or ceases to use that property in the manner in which it was used to qualify for this special tax treatment**.

Answer 77

II only * Holding control over trust income and corpus for health, education, maintenance, and support (HEMS) is a **special power of appointment**. * If the trust document says that the holder can use trust property for health, education, and "comfort," or any wording other than HEMS, the power of appointment will be considered a general power instead of a special power.

Answer 78

The price at which a comparable item would have been sold at retail. * Generally, the IRS position is that the price at which the item or a comparable item would have been sold at retail is determinative.

Answer 79

I, II, and III Valuation problems become essentially problems of evidentiary proof, and often of opinion, where: * There are different markets for the same property. * The appraisal of the worth must be made on the basis of comparison with somewhat similar property. * The property in question is unique, such as a patent or copyright

Answer 80

Property in which the decedent held a contingent remainder interestY Examples of property whose value will be included under IRC Section 2033 include: * Specific property (e.g., stocks, bonds) * Property in which the decedent held a sufficient interest * Property in which the decedent held a vested remainder interest **Property in which the decedent held a contingent remainder interest is not considered includible in the decedent’s gross estate** under **IRC Section 2033**.

Answer 81

decedent's date of death. * According to the general rules, assets included in the gross estate are valued on the decedent's date of death.

Answer 82

Curtesy * Under the common law system, a surviving spouse has dower or curtesy rights. * Dower is defined as the widow's property rights under state law. * Curtesy is defined as the widower's property rights under state law.

Answer 83

making a revocable trust irrevocable and living for at least three-years. * The donor or grantor can relinquish property interests by giving up the life estate or the reversionary interest, or by making the revocable trust irrevocable. This will avoid inclusion in the grantor's gross estate if he outlives that transfer for more than three years.

Answer 84

I, II, III, and IV

Answer 85

Both I and II * A general power of appointment allows the decedent to transfer the property to himself, his estate, his creditors, or the creditors of his estate. * Such property will be includable in a decedent's gross estate regardless of whether the power could be exercised at death or only during lifetime.

Answer 86

The price of a sale at auction. * The price of a sale at auction, will be accepted only if it appears that there was no other method that would have obtained a higher price.

Answer 87

67% * The percentage-of-contribution rule applies to the estate taxation of property held jointly with the right of survivorship where the joint owners are not spouses, or if one of the spouses is not a U.S. citizen. * The estate tax includability of jointly-held property with survivorship rights involving a mother and daughter is the portion of the purchase price attributable to the decedent's contribution. * Since Elizabeth contributed 60% of the original purchase ($60,000 ÷ $90,000 = 0.67), 67% of the value at death will be included in Elizabeth’s estate ($120,000 × 0.67 = $80,000).

Answer 88

$72,000 * The percentage-of-contribution rule applies to the estate taxation of property held jointly with the right of survivorship where the joint owners are not spouses, or if one of the spouses is not a U.S. citizen. * The estate tax includability of jointly-held property with survivorship rights involving a father and son is the portion of the purchase price attributable to the decedent's contribution. * Since McCoy contributed 60% of the original purchase ($60,000 ÷ $100,000 = 0.60), 60% of the value at death will be included in McCoy’s estate ($120,000 × 0.60 = $72,000).

Answer 89

all of these statements are correct. * Under the IRC Regulations, fair market value (FMV) is "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."

Bryant - Course 6. Estate Planning. 4. Gross Estate Flashcards

(114 cards)