c

c





c

c 


c : estate tax is imposed on the taxable estate (§ 2001)

To determine the taxable estate, you need to determine (1) the gross estate, (2) any allowable deductions
A.  c : ˜
 (defined in (a))
a. The value of the gross estate is determined by including the value of all property at the time of death
i. First, determine what is included:
1. Property owned by the decedent: §§ 2033 and 2034
2. Property not owned by decedent: §§ 2035-2038 cover taxable inter vivos transfers
3. Special types of property and transfers: §§ 2039-2042
4. Transfers not for consideration: § 2043
ii. Then, determine the value
1. Fair market value: the price at which the property would change hands as between a
willing buyer and a willing seller, neither having any compulsion to buy or sell, and both
having reasonable knowledge of all relevant facts
a. Someone qualified should value the piece of property
b. Factors to consider in valuing property:
i. Income yield
ii. Appraisals
iii. Sale prices near the date of death
iv. Bids made for the property
v. General economic conditions
b. Types of property included:
i. Tangible personal property
1. Includes furniture, household goods, and clothing
2. Generally all of this is valued together at 2k
3. Exception: nice things are values separately
4. If you value all of these greater than 3k, need a separate appraiser to come in
ii. Marketable securities
1. Value: mean of the highest and lowest value that day (valuation day)
2. If the individual dies on the weekend, you take the mean of Monday and Friday, and
weigh it according to whether they die on Saturday or Sunday, then take the mean
3. If there are dividends, include the value of the dividends as a separate asset
iii. Interests in a closely held company
1. Generally the most difficult to value (value of stock of a company that has never been
sold)
2. If there is real estate, the appraiser will value the real estate, then value the company
based on assets, income flow, and balance sheets
3. Rev. Rule 20.2031-2(f)(1) and (2): determine the fmv using the following factors:
a. corporate or other bonds:
i. soundness of the security
ii. interest yield
iii. date of maturity
iv. other relevant factors
b. shares of stock:
i. company¶s net worth
ii. prospective earning power
iii. dividend-paying capacity
iv. other relevant factors
c. ³other relevant factors´:
i. good will of the business
ii. company¶s position in the industry
iii. company¶s management
 iv. the degree of control of the business represented by the block of stock to
be valued
v. the values of securities of corporations engaged in the same or similar
lines of business which are listed on a stock exchange
4. Discounts for shares:
a. Lack of marketability discount: hard to sell stock in a family-owned company
b. Minority discount: for having less than control of the company

: family of four, each owns 25% of a family business; the father dies; what the father owned was 25% less
a discount

5. Valuation by agreement: 2703

a. Usually done in closely held companies
b. The IRS will disregard the agreement if it does not meet the following
requirements:
i. bona fide business arrangement
ii. not a device to transfer such property to members of the decedent¶s family
for less than full and adequate consideration in money or money¶s worth
iii. terms are comparable to similar arrangements entered into by persons in
an arm¶s length transaction
iv. Promissory notes: Rev. Rule § 20.2031-4: fmv equals the amount of unpaid principle plus
interest accrued to the date of death UNLESS you can establish (i.e. prove) the value is lower or
the note is worthless
v. Partial and temporal property interests:
1. Undivided interest in property as tenants in common: take the full value of the land and
divide by the number of tenants to get your individual value
2. Slight discount in undivided interest in property
3. Remainder interest: § 7520 gives tables to select an appropriate interest rate
vi. Real property
1. Must be valued at what it would be if subdivided (land and house)
2. Exception for farm property: can value as a farm; 2032A special valuation
c. Exclusions
i. Annual gift exclusion of 12k per donee
ii. Lifetime exemption of 2 million
iii. Unlimited exclusion for tuition payments made on behalf of someone else
1. Doesn¶t have to be a relative
2. Make checks directly payable to college or university
3. Only counts toward tuition, doesn¶t include room and board, etc.
iv. Medical expenses: can pay med expenses of another person and no gift tax consequences, no
reporting, and does not offset against AE or lifetime exclusion (does not have to be a relative)

-
B.  !: ˜
˜
a. Value the property at six months from the date of death rather than on the date of death
b. If you choose this option, you must use it for Ô assets, cannot pick and choose
c. In making the election, the estate and estate tax has to go down (example: on the date of death, stock is
worth 5 million, but six months from that date it is worth 1.6 million)
d. Exception: property is sold within the six month period; in that case the property is valued at the amount
of the sale, assuming the sale was made for fmv

C. ÿ  ":
a.  ˜: cost (i.e. what you pay for something when you buy it)
b.  : basis of property acquired from a decedent
 i. Step-up or step-down basis: regardless of what the property was bought for (i.e. cost), the new
basis of the property is the fair market value at the date of death
ii. Exception: this basis does not apply if you transfer the property to a decedent within one year of
the decedent¶s death and you inherit the property back from the decedent; in that case, the basis
does not change

 c 
D. ˜

#$!$!! : the value of the gross estate shall include the value of
all property to the extent of the interest therein at the time of his death
General rule: look at what the decedent owned at death
a. Property owned by the decedent at death that is transferred from the decedent to another
i. Property owned: decedent must have an interest in the property at death
ii. Transferred by decedent: applies to inheritable interests transferred at death, but !
interests that
terminate upon death, like a life estate (i.e. just because an interest in property is transferred
because of the decedent¶s death does not mean that the property must be included in the
decedent¶s gross estate under 2033)
b. Things that are included:
i. Transfers: reaches all property transferred by will or intestacy
ii. Sole ownership of any kind of property (real, personal, stocks and bonds)
iii. Income producing property: rental real estate, stocks, bonds: the value of the property and the
interest accrued is included
iv. Right to future income: present value of that right is included
v. Benefits paid per employment contract: bonuses earned from work or that you are entitled to for
having worked (example: part of agreement is that you receive 50k per year for 10 years; if die
within the 10 years then the estate receives the payment)
vi. Life estate measured by another life: if the decedent enjoys a life estate measured by the life of
Ô!
 person and dies before the termination of the measuring life, then the remaining term of
that life estate is an inheritable interest included under 2033
vii. Tenancies in common: form of concurrent ownership that does not carry survivorship rights;
taxed under 2033 because the undivided interest of a deceased co-tenant is inheritable
viii. Life insurance policies on a life
 than the decedent, with the intent to benefit the decedent
ix. Xudgments for pain and suffering or judgments allocated directly to the decedent
x. Cancelled debts: if a decedent holds a note or has a claim against another, the amount of the note
is taxable even though the obligation is cancelled by the decedent in the will; the cancellation is
treated as if the decedent had bequeathed the amount of the debt to the debtor
xi. REg. 20.2033-11: notes or other claims owned by the decedent, choses in action that survived the
decedent¶s death, accrued salary, rent, interest, dividends, or other accrued rights to income
c. Things that are !
included:
i. Xoint tenancies with right of survivorship: upon the decedent¶s death, his interest is extinguished,
and it passes to the surviving joint tenant
ii. Insurance money paid to someone else upon the decedent¶s death
iii. Wrongful death monies (the right to the money did not exist at the moment of death)
iv. Self-canceling installment notes (bargained-for term within the note itself)
v. Income produced from property after decedent¶s death
vi. Profits accruing after decedent¶s death
vii. Voluntary payments made by employer

E. X 
a. Gift issues when setting up concurrent ownership
i. Issue: when someone dies owning jointly-owned property, what percentage of the jointly-owned
property is contained in their estate?
ii. Depends on who furnishes the consideration and what the terms of the ownership are
1. Example: stock worth $100k is purchased in the names of A and B as joint tenants with
the right of survivorship. If A and B are not spouses, and if state law permits any joint
 tenant acting alone to partition the property, the gift tax consequences in the following
alternative circumstances are:
2. If A provided the full $100k consideration for the purchase, then A has made a gift to B
of $50k
3. There is no gift on creation if A provided $50k of consideration and B provided the other
$50k.
4. If A provides $35k of consideration and B provides $65, B has made a gift to A of $15k,
the difference between actual contributions and equal contributions
iii. If you create joint ownership between spouses, there is no gifting issue because husband and
wife can transfer property freely between each other
1. Not taxable
2. Doesn¶t use up any of the annual exclusion or lifetime exemption
b. Estate Tax Issues
i. Issue: what happens when someone dies and they own property jointly with someone else?
ii. Property without rights of survivorship: included under 2033 (undivided 50%)
iii. Xointly owned with rights of survivorship: 2040

F. ˜  X  : includes cotenancies with rights of survivorship in the gross estate

a. X# %!: 2040(a)
i. ´ : how much did the owner put into the property?
ii. Consideration issue and you have to trace to see who contributed the property
iii. "$ : 100% is included in that person¶s estate unless you can prove that the
other party contributed to the property when acquired (the percentage the other party included is
excluded from the decedent¶s estate)
1. Example: if own property jointly with ROS and bought it for 100k and A puts whole
100k up and when A dies it¶s worth 500k, whole 500k is included in A¶s estate bc put all
consideration in
2. If A had put only half in, then half is included in A¶s estate
3. Burden is on the executor to show what the other person put in, but if you can¶t show that
the other person contributed then 100% is included in decedent¶s estate
iv. X  $!: only the value of the fractional interest of the deceased joint
tenant is included in the decedent¶s gross estate (unless you contributed more)
v. !&  : when someone dies the basis in the property is stepped up to date of death
values
1. If die and leave someone property, their income tax basis is fair market value at date of
death
2. If give someone property during life, their income tax basis is what you paid for it
vi.  :
1. If the decedent¶s interest and that of the survivor were acquired by gift, bequest, devise,
or inheritance, then the property is treated as if each contributed ½ of the purchase price,
and ½ of the value of the property is included in the gross estate of the first to die
a. Example: C gave A and B a gift of property worth 100k and A dies; the property
goes to B and B owes 100%; suppose the property, at the time of A¶s death, is
worth 200k, 100k is included in A¶s estate
b. Example (continued): C had paid 50k and gave to them when worth 100k; the gift
is 100k, A and B take as their basis 50k, the same thing that C had when he
bought it; now A dies and it¶s worth 200k, 100k is included in A¶s estate; the
100k goes over to B, B has his half worth 100k, B¶s basis in A¶s half is 100k (date
of death basis), B¶s basis in his half is 25k; capital gain is 75k
2. If the decedent created the joint tenancy by his own wealth, then the entire value of the
property is included in his gross estate
3. If the decedent was gifted the interest by the other joint tenant, then none of the property
is included in the decedent¶s gross estate
 4. If wealth of both the decedent and the surviving tenant went into the acquisition price,
then only the decedent¶s pro rata share is to be included in the decedent¶s estate
b. #! !!#"#'# : 2040(b)
i. (: if husband and wife own property jointly and it is silent as to what kind of
ownership, it is considered tenants by the entirety with joint ownership
ii. $ : ½ is included in the estate of the first to die (doesn¶t matter who put the money in)
iii. -: H and W have property that started out at 100K. Total basis is 100K. Each has 50. If it
is worth a million at H¶s death, then wife¶s basis steps up from 50 to 550K
iv. Xoint popular between husband and wife is very popular in Ark
1. Advantage: avoid probate administration on first to die
2. Disadvantage: can have bad estate tax consequences
a. Example: estate worth 4mil and owned jointly between husband and wife
(tenancy by entireties); husband passes away in 2006 and worth 4mil; 2 mil is
included in husband¶s estate; the 2 mil goes to the wife, she has his 2mil and her 2
mil, so she has 4mil; no estate tax, because 2056 (marital deduction) says
anything you leave to surviving spouse, deduct off your estate and not subject to
your estate, so husband¶s taxable estate is zero (no tax, no probate, she gets it
automatically); when she dies, she has it all in her estate; her exemption is 2mil,
taxable estate is 2mil, tax on that is around 745,800
b. Planning: they die, split it up, put 2 mil in husband¶s name and 2 mil in wife¶s
name, tenants in common; goes according to husband¶s will or trust; wants his
wife to have it, but not to be lumped up in wife¶s estate; set up trust with will so
that she gets income and principle for her lifetime, and at the time of her death
whatever is left passes to her kids, and whatever is in there does not go into her
estate; no tax on husband¶s death because there is a 2mil exemption; when she
dies, 2mil is included in her estate but she doesn¶t have to pay tax on it
3. Some joint property is ok, but if it causes you to lose all or part of the exemptions, then
you need to talk to them about breaking it up; in the end, however, it¶s their decision


 "!$!: 2036 or 2038 applies when the decedent transfers something before death but
retains some power over the transferred property
G. ˜

 " #!" 
Imposes a tax when (1) the decedent makes an inter vivos transfer (2) under which the decedent retained a life
interest in income or retained a right to designate who gets the income
a. ()% :
i.
 ": is there a transfer?
1. Direct transfer: decedent conveys property away
2. Indirect: reciprocal trust doctrine (you can¶t do indirectly what you can¶t do directly)
a. Example: A transfers property to a trust for the benefit of B¶s lifetime, then at the
death of B it goes to B¶s children. B then transfers the property in a trust for the
benefit of A¶s lifetime, then to A¶s children. The IRS will flip the grantors and
include the trust in the grantor¶s estate.
b. Only include the lesser of the two amounts if they are not equal
c. Comes up most often with life insurance
d. The trusts must be á!
 Ô
 and the settlers are left in approximately the Ô

 !
á á
á ! as they would have been had they created the trusts naming
themselves as life beneficiaries; if so settlers will be deemed to have retained a
life estate in the trust established by the other (i.e. taxable to respective estates)
e. Uniform transfers to minors act: set up a trust so that the child receives the funds
at 21 if they ask for it; if the child doesn¶t ask for it, child treated as the grantor
3. Life insurance settlement options: if a beneficiary under a life insurance policy on the life
of another is entitled to receive the proceeds upon the death of the insured (the other
person) but elects a settlement option under which the company retains the proceeds,
paying the electing beneficiary interest on the fund for life and distributing the retained
 proceeds to the beneficiary¶s designee upon the beneficiary¶s death, it has been held that
the beneficiary has made a transfer of the proceeds reserving a right to income
4. NOT a transfer IF the decedent receives full and adequate consideration
ii. ("  in the transferred property: did the decedent retain an interest?
1. NO retention of interest: D to X for life, then to X¶s kids
2. Common scenario: parents transfer their home to their kids but continue to live in the
house; if the IRS determines implied circumstances, the house is included in the estate
3. The interest does not need to be expressly retained in the specific instrument of transfer;
sufficient if the retention appears in a collateral document directly related to the transfer
4. Reg. § 20.2036-1(a): an interest or right is treated as having been retained or reserved if
at the time of the transfer there was an understanding, express or implied, that the interest
or right would later be conferred
iii. "!! :
1. For life
2. Period not ascertainable without giving reference to death
a. Example: all of the income in my lifetime to me, except the last quarter before my
death
b. The presence of an intervening life interest between the transfer and the remainder
interest does not prevent inclusion in the estate
i. Decedent retains a secondary life estate but dies before the primary life
tenant (Reg. 20.2036-1(b)(1)(ii))
ii. Example: decedent transfers interest to wife for life, then to decedent for
life, then to the kids; if the decedent died before the spouse, it was not for
his lifetime, but it could not have been determined without reference to
death, and the intervening life interest between the transfer meant it was
still included in the decedent¶s estate
3. Period which does not end before death
a. Example: transfer to a trust with the income retained for a period of years, and at
the end of those years the remainder to the children; if the decedent passes within
the specified number of years, it¶s a prohibited interest and included in the estate
b. ˜
**ÿ"$  : decedent must retain á ! !

!
of or
á 

á!

i.   '%:
1. Example: mom and dad continue to live in their house after the transfer to children
2. Example: transfer a painting to another but keep the painting for your lifetime (value of
the painting is taxable in the decedent¶s estate)
ii. ($%:
1. Support trusts: decedent creates a trust, the income from which is to be used during his
life to fulfill his legal obligation of support, he has retained a right to income
2. Example: parent sets up a trust for minor children and directs the trustee to pay the
income of the trust to the parent for the children¶s support; because the parent is legally
required to support his minor children (until they reach 18), it is included in the estate
3. NOT included if the trustee has the á
á ! to pay the trust income
4. HOWEVER: if the parent is the trustee, then it is included, regardless if it¶s discretionary
5. The only way to set up a trust for your minor children and keep the income payments out
of your estate is to make the income discretionary and the parent not the trustee
6. NOT included: transfers extinguishing any further support obligation (e.g. alimony trust
created by the decedent to discharge alimony owing to ex-wife), because the trust is
treated as a transfer for consideration and thus excluded
c. ˜
*˜*"#(!:
i. Includes any property transferred by the decedent wherein there was retained the right, either
alone or in conjunction with any person, to designate the persons who shall possess or enjoy the
property or the á!
 therefrom
ii. Example: A transfers property to a trust for B, but A decides the conditions upon which B can
receive the income; assets are included in A¶s estate under this section
 iii. Applies if the decedent retained a right to affect the time and manner of a single beneficiary¶s
possession and enjoyment
iv. To be included in this section, power must be exercisable during transferor¶s life (2038 gets the
power to affect post-death enjoyment)
v. If the trustee (someone other than decedent) has complete discretion, then assets are not included
vi. HOWEVER, if the decedent reserves the right to remove the trustee and make himself the
trustee, then the assets are included (if there is not an ascertainable standard)
1. In order to prevent inclusion,

include a clause in the trust prohibiting the grantor¶s
appointment as trustee
2. Allowed to name another trustee who is not you (you

be prohibited as trustee)
vii.  $ !!:
1. Allows the grantor to retain the power to make himself the trustee if included in the trust;
grantor can be trustee or reserve the right to be trustee as long as there is an ascertainable
standard; ascertainable standard trumps everything (except minor child trust)
2. Examples that DON¶T work: comfort, welfare, happiness
3. Examples that work: health, maintenance, support, education (also include keeping up
with your standard of living)
4. Exception: the grantor can¶t be the trustee for his minor children¶s trust
viii. X# $!!: it doesn¶t matter that the power is exercisable only jointly or with the
consent of another; the circumstances of getting the conjuncture don¶t matter, only the fact of the
power to control (still included)
ix. ($%:
1. Settlor retains the power to direct the accumulation of trust income during the settlor¶s
lifetime; such a power diverts the income from the income beneficiary to the owner of the
remainder, and the accumulation enlarges the remainder interest (life and remainder
beneficiaries are different)
2. Example: A sets up a trust for B for B¶s lifetime, the remainder to B¶s children; if A
retains the power to control where the income goes, then 2036(a)(2) makes it taxable
3. Power to sprinkle: if the settlor retains the power to direct the allocation of trust income
to various beneficiaries, property transferred is taxable to settlor¶s estate
4. If the life beneficiary and the remainder beneficiaries are the Ô
, then this section
doesn¶t apply because the beneficiary gets the same amount of income regardless of what
the settlor does with the income (note: another section may grab the property)
5. Nonexercise of right is immaterial: the mere retention of the power makes the transfer
taxable, regardless of whether any accumulation was ever directed by the settlor
6. Ascertainable standard on the right to accumulate or direct income excludes from tax
x. Important: if you, as a person in control of the property, have the right to distribute the á!á 
out to the beneficiary, then 2036(a)(2) does not apply; 2036(a)(2) only applies to á!

d. ˜
*("-( 
 "! $+
i. Must be a $!$
1. ³Controlled corporation´: decedent owns, either directly or indirectly, 20% or more of the
voting stock of the issuing corporation
2. Direct ownership: in the name of the decedent
3. Indirect ownership: determined by the attribution rules of 318 (if the decedent¶s spouse
and family owns 20%, then it¶s attributable; also includes stock owned by trusts, etc.)
ii. Transferor must have !  with respect to stock
1. Included in the estate only if the right to vote the stock transferred is retained (example: if
a 100% shareholder transfers away 49%, he retains control of the corporation with 51%
of the stock but avoids estate tax on the stock transferred away if the power to vote that
stock was not retained)
2. D Ô  of an ascertainable standard, if the grantor retains a right to vote the stock
then it is included in the grantor¶s estate
3. Trustee generally has the right to vote on stock within the trust, so the grantor cannot be
the trustee and must give someone else the voting rights to prevent inclusion
 e. %$!!# :
i. Full control over the income of the trust: value of the trust at death
ii. Transfer property to trust and keep half of the income: include half of the trust in your estate
iii. If you violate 2036, then the amount included is the percent of trust by which you violated
iv. Comparison to 2038: whereas with 2036 all of the property is included in the decedent¶s estate
(i.e. the percentage), with 2038 only the portion affected by the power is included

H. ˜
( $ " : (alter, amend, revoke, or terminate)

Include the value of any property that the decedent transferred during his lifetime where at the date of death the
transfer was subject to a power to Ô
Ô
!  

á!Ô
, exercisable by the decedent alone or in
conjecture with another person; include the portion of the property affected by the power
a. ()%" ": decedent must have made a transfer of the property (threshold issue)
b. #% $ !:
i. Contingent powers: a power subject to a contingency before it can be exercised is NOT a taxable
power under 2038 if (1) the contingency is not within control of the decedent and (2) the
contingency has not occurred at the time of the decedent¶s death
ii. However, a contingent power to designate additional income beneficiaries or remaindermen is
taxable under 2036(a)(2)
c.
 "!#  '$$ by the power of the decedent alone or in conjecture
i. ³Change´ = alter, amend, revoke, or terminate
ii. Immaterial whether the powers are exercisable by will or inter vivos or both
iii. Immaterial whether the power was ever exercised
iv. Administrative v. dispositive or distributive powers
1. To be taxable the power must affect enjoyment, i.e. affect the disposition or distribution
2. Administrative powers (power to add to the trust estate, direct trust investments) which
do not affect the enjoyment of any beneficial interest are not taxable
v. Beneficial power is not essential for taxation, the ability to affect the enjoyment of others
through exercise of the power is sufficient
vi. Only discretional powers will render the transfer taxable; where distribution is mandated by the
document or an ascertainable standard, the power is not discretionary and not taxable
d. The $!! in the estate is the value of the interest retained
e. c$ :
i. Bona fide sales for adequate consideration
ii. The power or the discretion on how to exercise the power is subject to an ascertainable standard
iii. The power that exists is subject to a contingency beyond the decedent¶s control which has not
occurred at the decedent¶s death (example: D to trust, income paid to W for life, then to D¶s
children as D may direct; if D dies while W is still alive, 2038 would not apply because D did
not have the power to alter or amend at the time of death; 2036 would apply, however, because
the power to designate or affect enjoyment did not end before death, because the contingent
power to affect enjoyment does not end until W dies)

I. *%!* ˜
!˜
:

a. 2036
i. At the time of transfer the power is retained by the decedent or the transferor
ii. Inclusion in the estate generally includes the entire property subject to the power
iii. Only applies to power over income interest (not income remainder)
iv. Does not apply when there is the ability to accelerate the remainder interest
v. Applies to contingent powers (would grab the wife example)
b. 2038
i. No reference to retaining power; the only requirement is that the power exists at the date of death
ii. Only includes that portion of the property subject to the power
iii. Applies to any property interest where you have four abilities: alter, amend, revoke, terminate
iv. Ability to accelerate the remainder interest renders it includible
v. Does not apply to contingent powers so long as the contingency is beyond the decedent¶s control
X. ˜
(    : includes in the gross estate the value of any property transferred during lifetime
where (1) the transferee¶s possession and enjoyment of the property is contingent upon surviving the decedent-
transferor AND (2) the decedent-transferor has retained a reversionary interest in the property valued at more
than 5% of the value of the property at the time of decedent¶s death
a. ()% :
i. Transfer of property by the decedent
ii. Property can be obtained ! by surviving the decedent
iii. Retention must either be express or implied by law
1. Insufficient if the decedent transferred the entire interest in the property and later
reacquired a reversionary interest in the form of a remainder from the owner of the
remainder
2. The á
á á
 of reversion is enough
iv. Retention must be of a reversionary interest Ô
 than 5% of the value of the property on the
date of death (if it¶s exactly 5% then it doesn¶t count)
b. c$ :
i. General power of appointment by another (transferred interest not included if possession or
enjoyment of the property could have been obtained by any beneficiary during the decedent's life
through the exercise of a general power of appointment)
ii. If only income reverts and not the principal (falls under 2036)
iii. Transfer for full and adequate consideration
c. % : did the transferee have to survive the decedent to get possession or enjoyment?
d. - : if the reversionary interest is not greater than 5%, doesn¶t matter if primary test gets it
e. c""$"  : if a condition other than survival applies as an alternative condition to
survival, the 2037 does NOT apply because the beneficiary¶s possession or enjoyment must be
dependent    on surviving the transferor (e.g. trust terminates in 10 years or upon D¶s death)
i. Reg. 20.2037-1(b): if the alternative contingency is unrealistic then you can ignore it
ii. Example: if termination was to occur upon death of settlor or 20 years after death of X,
whichever first, and settlor is 90 and X is 50, unrealistic that settlor will outlive X and 20 years
f. $ : the value of what will be received by someone else by virtue of surviving the decedent (i.e.
the value of the interest that is dependent upon survivorship)
g. HYPO: D transfers property to trust, income to A for life, then to B if living, but if B predeceases A,
corpus reverts to D if living; and if D and B predecease A, then to R.
i. R had to survive D in order to get the property, therefore 2037 applies
ii. Retention because D retains the right to á
 get the property back
iii. If B dies and then A dies and it goes back to D, D gets it under 2033 (owns it outright)
iv. NOTE: if A included all of grantor¶s children and B included all of grantor¶s grandchildren, there
is a possibility of reversion but it is very unlikely
h. HYPO: same example, except B has a power of appointment but if he doesn¶t appoint then it reverts
back to D.
i. NOT included under 2037 if B didn¶t exercise the power of appointment
ii. If D gets it back, included under 2033
i. Have to i
   



 , could be more than one interest:

i. Example: A to B for life, then reversion to A, but if A predeceases B then B takes in fee simple.
ii. B¶s life estate does not fall under 2037, but his contingent remainder does
j. ( of 2037 to other tax sections:
i. ˜

: although a reserved reversionary interest may not be taxable under 2037 because the
survivorship requirement is not met or the value of the interest is 5% or less, 2033 could still
include in the decedent¶s gross estate the value of the reversionary interest itself
ii. ˜
: retention of income alone from transferred property will not trigger 2037, but the property
in which such an interest is retained is taxable under 2036
iii. ˜
: a power to revoke, alter or amend constitutes a reversionary interest or power to dispose of
the property, and where such powers are retained, a condition of survivorship necessarily exists.
Consequently, with respect to these powers, 2037 and 2038 overlap
K. ˜
" ,!-
. "
a. 2036(a): only includes property in the estate that would have been included under 2036, 2037, 2038 or
2042 (life insurance) if the transferred or relinquished property had been retained
b. ()% :
i. Transfer of an interest in property OR relinquishment of power with respect to any property
ii. Within 3 years of death
iii. Which would have caused the property to be includable under 2036, 2037, 2038 or 2042 if the
transferred or relinquished property had been retained
c. c$ :
i. 2035(d): bona fide sale (e.g. sells life estate at fair market value)
ii. 2035(e): transfer by a trust which was treated under 676 as owned by the decedent shall be
treated as transfers made directly by the decedent
1. In other words, if the grantor has a revocable trust (which is to avoid probate, and the IRS
doesn¶t recognize revocable trust), if a transfer is made from that trust (amendable and
revocable), treated as made directly from the decedent and it¶s not included
2. Example: transfer everything to revocable trust to get it out of name, want to make gifts
to children each year, write 50k check for Christmas, die on New Years, that¶s not treated
as 2035
d. $ : value to be included is the value of the corpus at the date of death, not the date of transfer or
relinquishment
i. If real estate is transferred and it falls under this section, it¶s the value of the real estate at death
even though the real estate has appreciated since transfer
ii. If it¶s a CD that throws off income each year, the value of the income is not included from the
time of the release (include growth in value but not income)
iii. If the property at the date of death is not the same property that was transferred, include the value
of the original property (example: transfer 1000k of Walmart stock to a trust for daughter, trustee
sells the Walmart stock and buys real estate, include on the date of death the Walmart stock)
e. Examples:
i. Dad writes a check to daughter for 20k and dies the next day. Not included because it does not
fall under any of the listed sections.
ii. Dad creates a trust and puts 100k in the trust for daughter, retains the right to revoke the trust; if
he dies while still retaining the right to revoke, included under 2038
iii. Same as above with the right to revoke except the dad gives up that power and dies two years
later; 2038 doesn¶t catch it because he didn¶t have the power at death, but 2035 does because the
property would have been included under 2038 if he hadn¶t relinquished the power to revoke
f. ˜
*$ "" on gifts made within 3 years by decedent or spouse
i. ³gross up´ of the estate: amount of gross estate increased by the amount of any tax paid under
Chapter 12 by the decedent or his estate on any gift made by the decedent or his spouse during
the three year period ending on the date of the decedent¶s death
1. If you die owning 100k, you pay 45k in tax and recipient gets 55k
2. If you give away 100k, recipient gets 100k and you pay 45k in tax
3. Example: you want to give away 55k
a. Transfer after death: to give away 55k have to have 100k in estate
b. Transfer by gift: if give away 55k then taxed 45% of that
g. EXAM: ð be on the test; if you get through the test without talking about this section, go back

L. ˜ ˜" $: proceeds of life insurance policies !
!
 á are includible in the gross estate
if the proceeds are (1) payable to or for the benefit of !

Ô
, OR (2) payable to any other beneficiary
but ONLY if the !
 á!á!
  !á in the policy at the time of death
a. 2042 only applies if own LI on  life; 2033 covers life insurance you own on someone else¶s life
b. When a person passes away, look at what they owned at death AND what they gave up within 3 years of
death; life insurance you owned on your life but transferred within 3 years is under 2035
c.
 :
 i.
% $: if anything goes wrong while your policy is in effect, insurance policy pays
off, but if you live past the term then you have nothing to show for once the coverage expires,
other than peace of mind that you were covered; buy this to cover a temporary need, spouse can
cover a non-working spouse
1. Specific time period: premium the same for all 5 (however many) years
2. Annually renewable term: renewable at the election of the insured; each year the
premiums go up because each year you are more likely to die
3. Group life insurance: do not have to prove insurability
4. Industrial life: usually very expensive and is for those who need life insurance but can¶t
afford it; borrowers insure they get paid if the person dies; paid weekly or monthly
5. Decreasing term insurance: tied into indebtedness; the policy amount will decrease as the
principal amount of the debt decreases
ii.
!#" $:
1. Two parts:
a. Pure insurance portion (just like term insurance)
b. Investment portion: ³cash surrender value´: if a policy is building up value as it
goes, and you then decide to cash in policy, there is an investment where you can
get some dollars out of the policy
2. Premium cost is more expensive than term life insurance
3. Premium gets higher as the years to by on ordinary life
4. Can buy term life that converts into ordinary life without having to prove insurability
iii.   " $: term insurance with annuity attached
1. Only guarantees you will get a 4% return on what you invest
2. Generally has a lower premium cost than ordinary life because ordinary life guarantees
that someone will get full face value at death
3. If the insurance company doesn¶t get their return, they will make you
a. pay greater premiums or
b. take less coverage
iv. -" $: insurance company shifts the investment decision over to the insured
1. Invest in mutual funds specifically designed for the insurance company
2. Can pick as many or as few mutual funds to invest in as you want
3. Xust like universal life in that if the investment doesn¶t work out, you pay more or take a
lesser payout
v. $!!: pays off when the other person dies
1. Premium generally less that if you buy a second policy on your spouse
2. Buy in order to pass everything to the children other than life insurance, allows insurance
to pay the estate tax of surviving spouse
d. $! "# : the right to change a beneficiary on the policy of insurance
i. Anything were you can effect the beneficial ownership or the economic interest (including those
you had 3 years prior to death)
ii. Control the existence of the policy, rearrange the economic interest in the policy, or affect the
benefits payable under the policy
iii. Ordinary life insurance: the right to borrow against the cash surrender value
iv. Term life insurance with conversion feature
v. Reversionary interest if the value of the interest exceeds 5% of the value of the policy
immediately prior to the insured¶s death
vi. Paying the premium is not an incident of ownership, but if insured continues to pay premiums
and is no longer owner of policy then it is a gift
1. 677(a)(2): you set up a trust and put insurance on the life of grantor or grantor¶s spouse
and the trust is used to pay premiums, then the income is taxed to the grantor
2. Rev. Rule 71-497: IRS conceded that payment of premiums is not an incident of
ownership
e. $ :
i. § 101: life insurance proceeds are generally non-taxable income
 ii. § 101(a)(2): transfer for value rules: some insurance proceeds may fall into income
1. Generally speaking, if you buy life insurance from someone you fall under the transfer
for value rules (some exceptions to the exception, don¶t worry about those)
2. If you buy insurance, your basis is what you paid for the policy premiums, everything
else is ordinary income
f. j
: +´!c$" $$ :
i. Use the case value of one policy to buy another
ii. Has to be a similar type of life insurance policy
iii. Regulations: can¶t switch a single life insurance policy for a second to die policy
g.
#"$: make someone else the owner of the policy to keep it out of your estate
h. ÿ"$"$:
i. Common family situation: name spouse as primary beneficiary and make children secondary
beneficiaries
ii. Minor child beneficiary: insurance company will just pay money to registry to the court and let
the court decide what to do with the money
iii. Downside to naming estate as beneficiary:
1. Creditors of the estate get a shot at the life insurance
2. Generally life insurance is non-probate, but this makes it go through probate
i. HYPOS:
i. Man owns a million dollar life insurance policy on himself and his wife is the beneficiary. What
is included in his estate?
1. Face value of the policy, 1 million, would be includable
2. Under 2056, because the wife is the beneficiary it will qualify for the marital deduction
3. If wife dies first and the husband continues to own, and his children are the secondary
beneficiaries, when the husband dies there is no off-setting deduction and the entire face
value is included in his estate
ii. W owns insurance policy on H¶s life with a cash surrender value of 200k
1. Wife dies: 200k is included in her estate because she had access to it.
2. Wife leaves policy to children who are contingent beneficiaries and husband dies: none
of the policy is included in the husband¶s estate
3. Wife left policy to husband: goes back into husband¶s estate
iii. Note: only way to keep the policy out of H or W¶s estate was to have the wife own the policy on
the husband¶s life and have the kids named as beneficiaries
j.  $" $
 
*: way to get insurance out of the estate entirely
i. Transferor must survive for three years after transferring to trust
ii. Must be irrevocable
iii. Ideally the trust will own the policy from the outset
iv. Courts have universally held that if the trust is the owner of the policy from day 1 then the
insurance policy is not in the person¶s estate (even if person dies within 3 years)
v. Example: H buys insurance policy with ILIT as the owner and W (if he wants) as the trustee of
the trust. If H passes, then W receives distributions from trust and at W¶s death trust remainder
goes to children. Assuming the three year rule does not apply, the insurance will not be included
in either of H and W¶s estate. Trust would be the owner and beneficiary of the insurance policy.
vi. Wrinkle with ILIT: if husband buys life insurance policy and transfers it to wife for the wife to
put in a trust, have a 2036 issue if wife is entitled to beneficial interest of the trust; in order to fix,
have to transfer it back to husband for him to put in a trust, and this starts the three year period
all over again
k. ,' $+!: Reg. 20.2042-1(c)(2) and (6)
i. If you are a majority stockholder in a corporation that owns a policy on your life, then that
insurance is included in your estate
ii. If the proceeds are payable to the corporation then incidents of ownership are not attributed to
the decedent through his stock ownership
iii. Proceeds payable to a third party for a valid business purpose are deemed payable to the corp
 l. %: if someone is the owner of an insurance policy, other than the insured, that person also
needs to be the beneficiary, otherwise the insurance proceeds will be deemed a gift to the beneficiary by
the owner. If W owns life insurance policy on H, and children are beneficiaries, then W will be deemed
to have gifted money to children if she dies after H
m. ($$
  :
i. Suppose that W and H will each buy insurance on their lives. H buys million on his life that is
put in irrevocable trust and that W can get some proceeds for her life, remainder to children. W
does the same. They have mirror image life insurance trusts. H dies. The assumption is that
nothing is included in H¶s estate because he lived for more than three years, or it was in the trust
from day one of the policy. The IRS comes along and says that technically there was never
ownership, but the wife did something exactly the same. So in effect, each party reserved a life
estate. IRS has been very successful with this argument.
ii. Exception: H buys 3 Million, W buys 1 million. Reciprocal trust rule says that it is includible
only to the extent it is reciprocal (i.e. 1 million)
n.  %$ : Silverman transferred policy to family member who paid premium for 30 months. 3
year rule kicks in. Well they successfully argued that there should be a pro rate proportion included in
estate. So if new owner paid 75% of the policy, then only 25% would be included in the estate of the
deceased. Court bought this.
o. Hypo: Stop to get flight insurance at airport. W says I¶ll pay premium on H¶s life. H gives policy to W
and says it¶s all yours. H gets on airplane and it goes down. W collects. W tells IRS that she¶s the
owner of the policy. But on the face of the policy, it says that only person who is owner is the applicant
to be insured. Court said estate included. Can get around this with proper life insurance forms so that
the insured never has anything to do with the policy.

M.˜ # "%: power granted by a donor of the power to a donee of the power by virtue of
which the donee of the power may dispose of the property subject to the power even though it is ³owned´ by
another; includes in the gross estate of the holder of such a power the value of the property subject to the power
a. 2514: gift tax issues during lifetime when hold power and either exercise or release power or the power
lapses during lifetime
b. "#: taxation under 2041 is limited to !Ô powers of appointment
i. #"%: exercisable in favor of the !
á
Ô
áá

OR the á
 á
Ô
 (2041(b)(1))
ii. Immaterial if the decedent could appoint to others if he can appoint to one of the above
iii. May be exercisable either during lifetime, at death, or both (testamentary more common)
iv. Simply possessing the power is áá!
for includability and it is not necessary that the power
is actually exercised
v. $# "% do not cause includability within the gross estate
1. Example: power to appoint to or among a designated class of persons !
á! á! the
decedent or his estate
2. If you want to give someone a special power then you must make it clear it¶s NOT a
general power
vi. The ability to appoint the power must be exercisable under state law, and if it¶s valid then you
look to see whether the power is general or special
c.  $ !!$: ³power to consume, invade, or appropriate property for the benefit
of the decedent which is limited by an ascertainable standard relating to Ô
Ô
á ! 
 

Ôá!
!Ô! of the decedent´
i. NOT a general power of appointment even though it enables the decedent to appoint the property
to himself or his creditors
ii. If don¶t put this in and someone is the trustee of their own trust, then it¶s includable
iii. Reg. 20.2041-1(c)(2): a power vested in the donee to invade property even for own benefit is not
a general power of appointment if limited by an ascertainable standard relating to the health,
education, support or maintenance of the power holder
iv. Be VERY careful to use the language stated in the regs
 v. Language that WON¶T work: ³to continue a standard of living,´ ³emergency or situations
affecting his or her care, welfare and wellbeing,´ power to request such amounts as they needed
from time to time or might require, ³care, comrfort or enjoyment,´ ³happiness´
vi. If the trust is for an older person, then can leave out the education part, otherwise should include
d. c 
(  : powers cause problems when they are á Ô, or Ô 
i. ˜ *˜*: : the value of an interest in property subject to a power of appointment
is includable in a decedent¶s gross estate under 2041(a)(2) if the decedent has the power at the
time of his death or the descendant exercised or released the power, or the power lapsed
ii. Immaterial that the decedent was under a legal disability effectively to exercise the power or was
otherwise unable to exercise it; section will apply even if the decedent is unaware of the power
iii. c$: if the power was created before Oct 22, 1942, and the power is not exercised, then
the property is not included in the decedent¶s estate (rarer and rarer)
iv. *#: a power subject to a contingency (1) beyond the decedent¶s control, (2)
which has not occurred at the time of death, is not ³exercisable´ at time of death and not taxable
v. ( : property that is subject to a general power of appointment created
after Oct 21, 1942, is includable in the gross estate of a decedent under 2041(a)(2) even though
he does not have the power at the date of his death if, during his life, he exercised or released the
power under circumstances such that if the property subject to the power had been owned and
transferred by the decedent, the property would be includible in the decedent¶s gross estate under
sections 2035-2038
1. If someone dies that had a general power of appointment sometime during life, and they
exercised it or released it so at the time of death they don¶t have it, 2041(a)(2) still
requires it to be includable if it would have been includable in other sections if the person
had been the transferor of the property
2. Example: General power of appointment to appoint property in trust set up by father. If I
don¶t, at time of my death, it passes to kids. Ten years before death, I release general
power of appointment. Is the value includable? Go to 2035-2038
a. Would be includable under 2035 if transfer was within 3 years of death (not)
b. If you are the beneficiary of trust at time of death and are getting the income of
the trust, even if had given up the power, 2036 would cause includibility because
still have the income interest; have retained something to include
vi.  : in the event that a person allows a power to lapse without exercising the
general power of appointment, it will be includable in the person¶s gross estate
1. Terminates because of the passage of time or you die
2. If you could have exercised the power when you died but you didn¶t do anything with it,
the power has lapsed and it¶s included in your estate
3. c$: 2041(a)(2) would only include the value of the property that was subject to
the lapsed power to the extent that the property exceeds the greater of 5k or 5% of the
property
a. Example: if lapse, 100k in trust, the full 100k would not be included, 100k less
the greater of 5k or 5%
e. EXAM: really interested in being able to identify general as opposed to special power and being able to
identify an ascertainable standard, to give a general power but cause it not to be included

N. ˜
 : there is included in the estate of the decedent the value of amounts receivable by a beneficiary
under a contract or agreement where the decedent, during life, was receiving or had a right to receive payments
under the contract or agreement
a. : one or more payments which extend over a period of time that may be equal or unequal,
conditional or unconditional, periodic or sporadic
b. ()% :
i. Must be receivable by another beneficiary
ii. Received by reason of surviving the decedent
1. Like 2037, but 2039 does not require that the beneficiary¶s interest be conditioned   
on surviving the decedent
 a. Example: benefits become payable upon the death of the decedent or upon the
beneficiary obtaining age 70, and the decedent dies before the beneficiary reaches
age 70, the survivor¶s benefits are taxable
b. Payments do not have to have been made prior to decedent¶s death
2. If benefits are payable to a beneficiary at a scheduled time or upon the happening of an
event, irrespective of whether the decedent is then living or dead, they are not taxable
iii. Under any form of contract or agreement
1. Not limited to a formal, commercial annuity
2. With a 401(k) or IRA you have forms that you sign
3. If a company informally pays a death benefit or a retirement benefit to somebody, and
there is no form or contract in place, the payment will be treated as a form of a contract
4. Has to be enforceable (does not mean non-forfeitable)
iv. Must be payable to the decedent at his death OR the decedent has to possess the right to receive
the annuity (sometime, either now or in the future)
c. ˜
*%$!: tax imposed upon the value of the survivor¶s benefit that is proportionate
to contributions made by the decedent
i. Contributions to the purchase price made by the decedent¶s employer are treated as contributions
made by the decedent (so if it¶s a 401(k) it¶s treated as if the employee decedent donated 100%)
ii. Calculation for determining amount proportionate to decedent¶s contribution (only comes into
play if someone else contributed to the purchase price of the annuity): decedent¶s contribution
divided by total contribution times the death value of the annuity

!$
O. ˜ 
c  /!! /!
 : deduction allowed for various types of expenses incurred or paid
by the estate and for various claims against the estate, including debts and taxes owed by the decedent;
specifically, this includes (1) funeral expenses, (2) administrative expenses, (3) claims against the estate, and (4)
unpaid mortgages
a.   : limited to the amount Ô
Ô  Ôá for cremation, tombstone, monument or
mausoleum, or for a burial lot, transporting the body to the place of burial
i. Amounts must be reasonable
ii. Includes expenditures for the future care of the lot if the state allows it
b. !%    : limited to expenses Ô
Ô Ô!!Ôá á! in the administration of
the decedent¶s estate (i.e. the collection of assets, payment of debts, and distribution of property to the
person entitled)
i. Executor¶s commissions (limited to estate administration)
ii. Attorney¶s fees (relating to legal counsel to the executor, the collection or settlement of claims
against the estate, and litigation expenses, including litigating estate tax deficiencies)
iii. Miscellaneous expenses
1. Appraiser¶s fees
2. Accountant¶s fees
3. Court costs
4. Costs of storing or maintaining the property of the estate (home with no one living in it,
and you have alarm system, yard maintenance; insurance)
5. Cost of selling estate assets where such sales are necessary for the payment of debts, etc.,
or for the orderly distribution of the estate
c. *%   : personal obligations of the decedent that existed at the time of death
i. Must be legally enforceable
ii. Includes income tax claims, any tort claims against the decedent, real estate taxes, personal
property taxes, and income taxes accrued at the date of death
iii. Claims on which the decedent was only secondarily or contingently liable (i.e. guarantor) are not
deductible !  it is shown that the person primarily liable has defaulted so that the decedent¶s
liability has become fixed and immediate
iv. Taxes that accrue Ô
 the decedent¶s death cannot be deducted (i.e. estate or inheritance taxes)
 d. !% : the amount of any mortgage, trust deed, or other lien against property included in
the decedent¶s gross estate is deductible  the   Ô  
  
 (unreduced by the amount of the
lien) áá! á!
!

Ô
 (2053(a)(4))
e. $% !!$ :
i. Limited to what the probate court would allow in the jurisdiction the estate is being administered
ii. If the total amount that¶s allowable is the sum of all properties subject to claims, and any amount
paid from property not subject to claims paid within the filing period for the estate tax returned
including extensions (??? no idea what this means)
1. Deduct if paid from the property in probate estate OR paid from property that is not
subject to claims within some time period
2. Example: I only have 401k, life insurance, and house with life estate, I have no probate
estate. Everything passes to some beneficiary. Claims against my estate that are paid by
one of the recipients, then on taxes you can deduct all expenses as long as they are paid
within 15 months of death
iii.    : generally, expenses and claims against the decedent's probate estate are
deductible only to the extent of the value of the assets in the probate estate; if such expenses and
claims exceed the value of the probate assets, the excess may be deducted (and the deduction
applied against the value of the non-probate assets included in the decedent¶s gross estate) 

these excess claims are actually paid before the date for filing of the estate tax return
iv. !!!$ : can take á
 the deduction here or on the income tax return, not both
1. 709, estate tax return, or 1041, income tax return for the state
2. Example: you have an estate that is worth 2.1 million. There are hundred and sixty
thousand dollars worth of deductible expenses. If you deduct the entire 160K from the
estate, you¶ve wasted 60K worth of deductions from estate tax. The other 60K you can
deduct from the income tax return for the estate (section 642(g)-which allows you to
choose where you deduct the expenses)

P. ˜ !$ "  : limited to ÔÔ
 

  that are !
compensated for by insurance or
otherwise; i.e. deduct from gross estate losses incurred during the settlement of estates arising from fires,
storms, shipwrecks, or other casualties including theft, unless it¶s compensated by insurance

Q. ˜ *!$: deduction for the value of all property transferred by the decedent for specified
public, religious, educational, or other charitable purposes
a. Bequest to or for the use of a charitable organization or other qualifying recipients
i. ˜ : organization operated exclusively for a recognized religious, scientific, literary,
educational, or other charitable purpose; read this section to see if qualifies
ii. Things that count:
1. For the benefit of an individual (scholarship to a family member)
2. Attempt to influence legislation or get involved in political campaigns
3. Organization must not be discriminatory (BobXonesUniversity)
iii. 501(c)(3): school or foundation is deductible
iv. 170(a)(1): defines what a charity is and what qualifies
v. Foreign charities qualify, need not be organized or created in the United States
b. Cannot occur by virtue of a qualified disclaimer (??); however if you follow the requirements and
disclaim something left to you, and it goes to a charity, it can be deducted from the estate
c. You lose part of your deduction if estate taxes are paid out of the charitable bequest
i. If any estate taxes are assessed against the charitable deduction, the estate taxes paid are not
deductible
ii. If the property transferred to the charity is burdened with an obligation to pay any death taxes
imposed on the decedent¶s estate, the charitable deduction will be reduced by the amount of such
taxes, since the outstanding obligation also reduces the amount that actually passes to the charity
iii. Must choose language carefully and make it clear that the charity does not have to pay any estate
taxes on the property you leave them
iv. If you don¶t state how they will be paid, Arkansas law will dictate
 d. The deduction cannot exceed the value of the property included in the gross estate
i. Property must be included in your gross estate for you to get a deduction
ii. Example: special power of appointment and you appoint it to a charity at your death; there is no
estate tax charitable deduction, because it is not includable in your estate under section 2041
e.   " are deductible in certain instances:
i. Split interest: charitable portion and non-charitable portion (e.g. life interest to an individual with
the remainder to a charity, or term of years to a charity followed by a remainder to an individual)
ii. Generally limited to the value of the interest actually transferred to the charity
iii. Remainder interest must be in a certain form:
1.  : trustee is required to distribute to the noncharity beneficiary a specified
sum that is at least 5% and not more than 50% of the original value of the trust asset
a. Must distribute at least annually
b. Must be paid to one or more persons
c. Must be for a term of years not to exceed twenty years or for the life of the
beneficiary
d. Annuity is determined at the beginning of the crat (??) and stays the same
e. Charitable interest must be worth at least ten percent on the date of death
f. Example: Father creates a crat of which I¶m the income beneficiary and UALR is
the remainder beneficiary. I want sarah to receive five percent annually for her
life time. Whatever is left at her death will be left to UALR. There is a sum
certain, it will be determined at date of death and will not change. Using actuary
values you will determine value of interest Sarah have and subtract that from total
to determine value of remainder interest
2. *(%! : trustee must distribute annually a sum that is either a
fixed percentage (at least 5% and not more than 50%) of the trust estate (determined
annually) or the entire trust income, whichever is less
a. Fixed percentage
b. 5% and 50%
c. Percent limitation
d. Fair market value of the trust valued annually
e. Paid to one or more persons
f. For a term of years or for life
g. Remainder interest must be at least 10%
h. If you have hard to value assets, you don¶t want to use a crut, because you don¶t
want to have to value it every year
3. !$%"!: a public charity is trustee and several donor contribute property to
the trust, each reserving for himself or herself a life estate in proportionate share of the
combined property; public charity must have an irrevocable remainder
iv. % : even if an annuity trust or unitrust otherwise qualifies, no deduction is allowed if
another noncharitable remainder precedes the charitable remainder, or the income interest is for a
term of years (rather than a life estate) and the term exceeds 20
v. c$: special forms do not apply to certain split-interest gifts
1. an undivided interest in the property (e.g. tenancy in common)
2. a remainder interest in a farm or a personal residence following a legal life estate

R. ˜ ,!$: allows deduction for property that passes to the surviving spouse upon the
decedent¶s death (100% deduction, i.e. all property; unlimited and can deduct as much as you want)
a. ()% :
i. Surviving wife or husband has to be a á
á! 
!á

Ô

1. Exception: can qualify a bequest to a noncitizen spouse for the marital deduction if it
qualifies under the provisions of 2056(a), )"!!% $  (QDOT)
a. If have someone married to a noncitizen, that person could leave property to them
in a marital deduction trust that qualifies for marital deduction as long as it
qualifies for a QDOT
 b. Basically provides that you have to have an independent trustee that holds the
property and that any time there is a distribution of property out of the trust to the
spouse (principal), then there would be estate tax owed on that (basically allows
you to defer it until you give control to the noncitizen spouse)
ii. Must be
Ôá (common law marriage not recognized in Ark)
iii. Property has to pass to the surviving spouse in such a way that á

á !á! 
Ô

 
á
  
á! Ô
á!
á
Ô
 (so if leave property to wife in such a way that if
she died the next day it would be includable in her estate, the husband will get a deduction for
that property)
iv. Cannot be a nondeductible terminable interest (i.e. must be a 
á
á!

)
1. % : an interest that would pass to a surviving spouse that would fail
with the passage of time or the occurrence of some contingency or event (doesn¶t
necessarily have to fail, just would fail)
2. *" : terminates upon death or remarriage or requires the surviving spouse to
survive some designated event
a. Example of terminable interest: I give all of my estate to my surviving wife but
only in the event that she survives me for one year
b. Example: unless she remarries within three months/years from my date of death;
gets it out of the deduction even if she wouldn¶t remarry
3. Life estate is !
a terminable interest
b. Defers taxation to the second estate (i.e. it¶s not that the property doesn¶t get taxed at all)
c. -   and qualify for the marital deduction:
i. #: outright bequest to spouse
ii. $: qualified joint interest, 50% goes in the husband¶s estate if husband
dies first, and the other half goes to the surviving wife, and this half qualifies for the marital
deduction
iii.  $ if there is no one else
iv. !$$
v.  +*( if the spouse is the beneficiary
vi. !#0$ 
vii. " $: if own life insurance, included in your estate; if name wife as beneficiary,
proceeds go directly to her (easiest but not the best from a planning standpoint)
d. !$% : 
Ô


á ! under 2056:
i. #"% ˜ **:
1. Transfer in which the surviving spouse is to receive all the income from the property
during her life  is granted an unqualified power to appoint the property to herself or
her estate
2. ()% :
a. Surviving spouse is the sole beneficiary of the trust for her lifetime (can¶t allow it
to be given to the kids if she doesn¶t need it)
b. Surviving spouse has to receive the income from the trust at least annually (if you
don¶t say anything, service has interpreted it to mean at least annually, but don¶t
take the chance)
c. Principal is discretionary
i. Can put a provision in there that the trustee can distribute as the trustee
deems she needs it, if she remarries you can cut off principal, can even say
she only gets the income and gets no principal
ii. *  give the principal to someone else (cut off to her if she remarries
and then goes to kids); she still needs to be the only beneficiary
d. General power of appointment
i. Typically testamentary
ii. Causes it to be included in her estate
iii. If she does not exercise general power of appointment, typically it passes
to whoever is in her will (usually kids)
 3. Don¶t see too many of these trusts because from a practical standpoint the spouse that
dies first wants to make sure everything goes to the kids, and if the wife remarries she
could redo her will and leave everything to her second husband and cut the kids out
ii. V"!
% V
*j˜ **:
1. ": property or an interest in property that i  from the decedent in which the

i has a  


, and with respect to which the
decedent¶s executor makes an  to have the property qualify as a QTIP trust
2. ()% :
a. Surviving spouse is the sole beneficiary for life
b. Surviving spouse has to get the income
c. Principal is discretionary
d. At the death of the surviving spouse the original decedent¶s document controls
i. Surviving spouse has no right to say where it goes at the time of her death,
UNLESS you give her a limited power of appointment (i.e. can
redistribute among descendants)
ii. Surviving spouse Ô!!
divert under general power to anyone else
3. Way of keeping money in the family
4. c$: when the QTIP first came into play, had to make an affirmative election, now
you have to say you don¶t want your trust to qualify for the QTIP
5. HYPO: ³I leave the max amount I can leave to my wife under the marital deduction and
leave in a trust that gives her income for life, annually, she is the sole beneficiary, and at
her death everything goes to her children, but if she remarries she can no longer get any
principal distributions for any reason whatsoever.´
a. Still qualifies because qualifies because the á!á Ô áá
á !Ô
b. However, Ô!!
Ô 
 á!á Ô 
 
á once she remarries and she
is disqualified, because then it wouldn¶t just go to her (not sole beneficiary then)
c. Can mess with the principal and cut her off completely as long as it doesn¶t go to
someone else
e. -"      : limited to the  value of the property interests
passing to the surviving spouse
i. c$%$ : if the property is subject to a mortgage or other encumbrance that is not
released by a payment from the estate,
 Ô  
  
    

Ôá
Ô 

á !á

Ô
!
 
!

Ô!
ii. *!)  : limited to property that the surviving spouse receives   
; if
the decedent¶s will requires the surviving spouse to relinquish some right to property in order to
take under the will, only the excess of the value of the property received under the will over what
the spouse was required to relinquish is deductible
f. "%!!$: can transfer as much between spouses as you want and there is no gift tax
and doesn¶t use exemption amount; so in order to balance estates out you can transfer back and forth and
it does not create any gift tax consequences

"
*˜: excise tax on right to transfer property for less than full and adequate compensation during
one¶s lifetime
(NOTE: Arkansas !
have a gift tax. Your only concern is for federal tax purposes.)

%




2501(a): determines whether gift tax is imposed; 2511-2519: what constitutes a gift
c  c$ /*!$/,!$
§ 2503(b): Annual Exclusion $11K
§ 2522: Charitable Deduction
§ 2523: Marital Deduction

 ÿc
 defined in 2503(a)


 ÿc
(c*(c
Computed by Gift Tax Tables § 2502-2504
c "!*!Sec. 2505


 .ÿc

S.
": the transfer of property by gift

a. Requirements for a gift:
i. Delivery
ii. Acceptance
iii. Intent (not essential for gift tax purposes)
b. Includes any type of real or personal, tangible or intangible interest
c. Gifts of services aren¶t taxable
d. A person can be lying on their deathbed and can make gifts as long as the person has the capacity to do
so; or if the person has given the power of attny specifically authorizing them to make gifts (general
power of attny is probably not sufficient, cautious safe thing is to make it clear that there is gifting
authority being granted to the attny in fact)
e. Includes both direct and indirect gifts
i. Indirect gift: if A transfers property to B on the condition that B transfers the property to C, A is
the actual transferor of the property to C and A has made a gift
ii. Reciprocal trusts: if A transfers 10k to a trust for B¶s children and B creates a similar trust for
A¶s children, A and B will be treated as having made indirect gifts to their own children
iii. Loan forgiveness: treated as a gift of forgiven debt
f. A gift can be measured by a reduction in a person¶s net worth
i. Example: if A has 10 mil in assets and 2 mil in debts, 8 mil net worth; if 8 mil drops to 7.5 mil,
good chance they A has made a .5 mil gift
ii. Reduction in net worth signifies someone has done something or made a transfer for less than
full and adequate consideration
iii. ³Bargain sale´: if h owns Blackacre, worth 1 mil, sells to daughter for 500k, net worth drops by
500k (1 mil out, 500k in), if the IRS argue that h made gift of 500k to daughter
iv. ³Business transaction´ exception: transaction where no family is involved and a piece of
property is sold for less than it¶s fair market value (own a vehicle, worth 10k, but the owner says
wants to sell for 5k, unrelated party comes along and buys car for 5k, not a gift of 5k)
g. Political contributions are excluded
h. Property settlement from litigation:
T. c$ ˜
: exclusion of $12k for gifts made to Ô! ! during a Ô !ÔÔ
a. What this means: you can give up to $12k to Ô person and it will not be taxable; if you give

than $12k to a á!   !, then you have gone  your annual exclusion, and the excess is taxable
b. If you give $10k to one person and $14k to another person, the $4k to the second person is taxable
because you went  your annual exclusion for that individual. In other words, if you want to give
$24k across two people, you need to divide it evenly.
c. " : 2513 allows spouses to treat gifts made to third parties as though each spouse had transferred
one-half of the property, without regard to who the actual transferor was
i. What this means: Husband wants to give gifts to his four children. Alone, i.e. just using his
annual exclusion amount of $12k, he can give Ô child $12k, allowing him to give a total of
$48k tax free. If his wife agrees to split gifts with him (and if you split one gift then you must
split them all), they 

á!

Ô!!Ô  á !of $12k for Ô person, which now means
that both of them can give $24k to Ôchild tax free, meaning they can give a

Ô of $96k and
it will be tax free.
d. - " 1 If you exceed the maximum amount of annual exclusion to a single
donee, that reduces your á

Ô á
á


á ! of 1 million, AND reduces your 
Ô

Ô á
á



á ! of 2 mil
U. "%c%0"!*!: in effect a single credit against transfer taxes, whether the transfers are
made during life or upon death
a. Gift tax credit 1 mil
b. Estate tax exemption: 2 mil
i. Why are they different? The used to be unified until an Act by Congress separated them
ii. Estate and gift tax credits operate together, so if you reduce both at the same time
 c. These are different from deductions because they come in Ô
 you have calculated your taxable estate;
deductions operate to decrease the total amount of the taxable estate before it is calculated; once you get
the amount of the estate that Ô! be taxed, you apply your credits
d. If you use up any of your lifetime exemption for gifting, that also reduces your estate tax exemption
e. Rev Rule 79-398: you cannot pay gift tax rather than using lifetime exemption to offset the gift tax,
mandatory that you use unified credit if you have any available to avoid paying tax
f. Once you use up all your lifetime exemption, you can only give away the amount of the annual
exclusion and be tax free (single person has 12k annual exclusion and 1 mil lifetime exclusion, so can
give away a max total of 1,012,000 in one year and be tax free; after this though, all the lifetime
exclusion has been used up, so the most he can give away in any one year after that to a single person is
12k and still be tax free)
g. Reason for limiting the lifetime exclusion to 1 mil: can be a lot of assets passed back and forth between
family members trying to get property into the lowest tax bracket of the family, and that would take
revenue away
V. 
:
a. File tax on a quarterly basis
b. Cumulative basis (accumulating and calculating tax liability based on a person¶s lifetime gifts, as
opposed to what¶s done on any calendar year)
i. This means when you are computing your total taxable gifts for the year, you add in your prior
taxable gifts
c. Same set of tax rates applies to both estate and gift tax
d. When a person passes away 2501 adjustible taxable gifts are brought back in; for the most part, total
gifts a person makes each year reduced by the annual deduction, marital deduction and any charitable
deductions; whatever the excess is, if any, becomes an adjusted taxable gift which is added in when a
person passes away
i. Estate tax calculated with adjustable taxable gifts brought back in
ii. If any gift tax has been paid, that is taken into account and a credit is allowed for the gift tax that
has been paid, so no doubling up on the gift tax
e. 2010 unified credit
f. Grossing up: if transfers are made subject to gift tax and donor dies within 3 years after paying gift tax,
then grossing up of gift amount and gift tax paid within 3 years is brought back within the estate, treated
as part of the gross estate
g. 2035 amount of gift brought back in if in violation of certain section
W.-,+"1
a. Get assets out of your estate
b. Annual exclusion: use it or lose it
c. No limit on the number of people you can give gifts to
d. Get a future appreciation (appreciable asset) out of your estate
X. %
:
a. Look to see if you have any available annual exclusions
b. If the transfer is to spouse or charity, determine if deduction is available
c. Look to see if unified credit or lifetime exemption is available
d. If after all of this there is something left over, then taxable

 +
 "
*
"*!:

Y. !$
a. Limit on what can be transferred two or more generations from the transferor
b. Imposed on every generation-skipping transfer: 2601
c. Three types of GST transfers: 2611
i. taxable distributions
ii. taxable terminations
iii. direct skips
d. 2602: tells you what the tax will be
. " :
a.
 ": 2652(a)
i. Decedent if direct skip is initiated by bequest and estate tax is imposed
ii. Donor if direct skip is initiated by lifetime gift and gift tax is imposed
iii. NOT a transferor if not subject to estate or gift tax (i.e. limited power of appointment)
iv. Exceptions:
1. Transferor chooses to split gifts with spouse
2. If a QTIP trust is used and the decedent has remaining GST exemption, you can apply it
to that portion of the QTIP, and the decedent remains the transferor
b. + : 2613(a)(1)
i. A person assigned to a generation that is two or more generations below that of the transferor
(grandchild at least)
ii. Can also be a trust with only skip persons as beneficiaries or if no person holds a present interest
in the trust but all future distributions from the trust must be made to skip persons (i.e. no non-
skip person may receive any future distributions)
c. & + : 2613(b): a person who is not a skip person
d.  : 2652(c): aperson has an interest in the property held by a trust if she has a right to receive
distributions of income from the trust, á! á!  
áá
 (discretionary) á
á

á !, but  á!
distributions that cannot be made until some time in the future
i. Comes into play when you are trying to determine if a trust is a skip person by looking at the
trust and seeing who has an interest in the trust
ii. Incidental interests such as being a trustee are  considered
iii. An interest is ! 

á! :
1. Individual with right to receive income or corpus presently and is not a charity
2. Has a permissible current right to current income or corpus and is not a charity
3. Charity and it¶s a CRUT or CRAT
e. Example: if transferor creates a trust for the benefit of child for his lifetime, remainder to grandchild,
child a skip person but the grandchild does not have a present interest in the trust

AA.  % :

a.  for assignment of persons to generations is the transferor
b. % :
i. If the recipient of the property is a lineal decedent of the transferor¶s grandparent, then you
assign them whatever generation they are in the familial tree
ii. Transferor and transferor¶s siblings in the same generation
iii. Any of the transferor¶s or siblings¶ children assigned to first younger generation
iv. Grandchildren assigned to next younger generation (and so on)
v.   of transferors or of lineal descendants of transferors are assigned to the same generation
as the other spouse
c. "% : determined by comparing their ages to that of the transferor
i. ÿ#˜2 " ": transferor¶s generation
ii. ÿ%˜2 
2: first younger generation
iii. ,
2: skip person
iv. c$ $$!˜ : defines new generations
d. c$ to general assignment: !$ !(
i. If, Ô


á
! !Ô
á !ÔÔá ! (i.e. when tax is imposed), a lineal descendant of a
parent of the transferor has a parent who is also a lineal descendant of a parent of the transferor
who is deceased, such individual shall be treated as one generation below the transferor
ii. If you have a lineal descendent who is deceased, then each generation underneath that decedent
moves up (transferor has child who is deceased and grandchild who is living, grandchild moves
into child¶s slot)
iii. Determined  

(grandchild doesn¶t move up if the child was alive at the time
of transfer)
iv. Must be a    
 1. Exception: if the transferor has no lineal descendants, can look to transferor¶s parents¶
lineal descendants (if the transferor has a brother who has a child, who also has a child, if
the brother dies, the generations move up)
v. Example: D bequeaths residue of her estate to her grandchild, G. Subject to the predeceased
parent exception only if D¶s child who is the parent of G is dead.

BB.
 "
c  : 2611

a. $ +: transfer made to a skip person (e.g. direct bequest to grandchild)
i. Distributed outright or to a trust where the only beneficiaries are skip persons
ii. GST tax is paid immediately upon transfer
iii. The transferor pays the tax and the taxable amount is the amount value of the property received
by the transferee
iv. Example: if D transferor transfers 1M to GC, and there is a 45% rate, the transferor will pay
$450K in GST tax
b.
 : any distributions from a trust to a skip person 
a distribution that would be
considered a taxable termination or a direct skip
i. Occurs when a trust is created that has one or more non-skip persons as the beneficiary
ii. Not a direct skip when created
iii. Example: if a trust is created for the benefit of the child and GC there is no direct skip, but
anytime a distribution is made to the GC, they will incur GST tax
iv. Taxable amount is the amount received by the transferee
v. Tax is paid by the transferee (tax inclusive)
c.

%: termination (by death, lapse of time, release of a power, or otherwise) of an
interest in property held in a trust, 
where a non-skip person has an interest in the property
á

áÔ
  after termination, 
if no distribution may thereafter be made by the trust to a skip person
i. Example: if the trust is created for the benefit of the child, for the child¶s life time, and then
payable to GC, when the trust terminates, there would be a GST tax
ii. Tax is due on


Ô Ô
!
 


Ô


á
 

á!Ô
á !
iii. Tax is paid by the transferee (tax inclusive)

CC. %

a. c%: equals the amount of the annual exclusion (1 mil)
i. Get to pick how you allocate your exemption
ii. Example: You create two trusts. A 1M for a child, and a 1M for GC. You pick where the
allocation goes. You would pick the GC, so that GC is not subject to GST tax.
iii. Example: if one trust is to C and GC, and the other trust is only to the GC, you would want to
apply the exemption to both trusts. Total exemption is 2M
iv. - on the date of death OR on the date of gift
1. c$ " : if you make a $
a. Transferor puts 1M in a trust for C and GC. Files an income tax return and does
not make an allocation of GST exemption. Comes back and says meant to make
an allocation. If the trust is worth 1.25, you must allocate all of it.
b. If you make the allocation before the deadline on the gift tax return, you can
choose only 1M. If you do it after the deadline, then you have to use the whole
thing toward your total exemption amount.
b. $!$(: method of determining rate
i. Steps:
1. (GST Exemption Allocated/Total Amount Transferred) = Applicable Fraction
2. (1 ± Applicable Fraction) = Inclusion Ratio
3. Inclusion Ratio x Applicable Rate = Tax Rate
4. Determine tax rate at beginning.
ii. HYPO: You have 1M of exemption remaining. You make a 3M transfer.
1. That gives you a 1/3 applicable fraction
2. 1- (1/3) is a 2/3 inclusion ratio
 3. 2/3 x .45 = Tax Rate = .30 (.45 is the highest estate tax rate)
4. Once you have the rate (30%), and let¶s say the trust is worth 5M at termination, the total
tax on the trust would be 5 x. .3 = 1.5 M.
iii. Planning
1. HYPO: 3M transfer. 1M exemption left. What to do?
a. Create one trust with 1M, and one trust with 2M. Make the 1M trust exempt.
That way, the tax rate would be zero. This can be a dynasty trust.
b. Basically, put the maximum exemption in one trust, and the rest can go to the
child in some way,