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Estate and Gift Tax
University of Mississippi School of Law
Green, Karen O.

FALL 2004
Gross Estate
+ Adjusted Taxable Gifts
x Rate
 I.            Introduction
A.         Adjusted Taxable Gifts à all gifts made since 1976
B.         The Unified Credit à only get to use once. While there is a gift tax credit, it reduces the “gift tax previously paid” by the amount of the credit. Therefore, the estate only gets the b’fit of the Unified credit for purposes of the estate tax.
1.          Can be used effectively only once.
II.            Definition of Gross Estate
A.         Introduction
1.          In general, the Gross Estate (GE) is determined by
a.          Identifying interests in ppty that must be taken into account;
b.          Ascertaining the time at which the interests must be valued; and
c.          Employing an accepted method of valuation to determine the FMV of the identified assets at the specified time
2.          Thus each of the following sections will focus on what interests must be included w/in the GE, the timing of the valuation and the method of valuation
a.          Timing of Valuation is invariably the date of death (DOD) of Δ, unless the alternative valuation date is elected
i.           The alternative valuation date is six months after Δ’s DOD à § 2032
3.          § 2031 à value of the GE of Δ shall be determined by including to the extent provided for in this part, the value at the time of his death of all ppty, real or personal, tangible or intangible, wherever situated
B.         Fair Market Value
1.          The value in § 2031 is the FMV of the ppty interest
2.          FMV à the price at which the ppty would change hands b/n a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts
3.          Unless otherwise elected, assets are generally valued at the moment of Δ’s death
a.          This moment of death valuation can create problems.
i.           Therefore, any restrictions that apply solely to Δ’s ability to t’fer or enjoy any beneficial interest in an asset should be ignored à they lapse at death
ii.         Also, an value added to an asset by Δ’s presence should also be ignored
b.          Valuation should not be effected by after-death occurrences unless such occurrences are known or reasonably foreseeable at the moment of death
4.          There are certain pptys which give rise to the most disputes
a.          2032A à valuation of certain real estate
i.           Elect to value certain real estate at its current usage, rather than at its highest and best use
A.         If Δ was a farmer and owns farm land that has been rezoned commercial à highest and best use is commercial, but current use was farmland
ii.         Fractional Interest in Real Estate à discounts may be used in valuation à difficult to market partial ownership
b.          Valuation of Closely held business entities
i.           Family Ltd P/S & Family LLC à used to avoid estate tax à must have business purpose
ii.         Estate Tax Planning Tools
A.         Plan unified credit well
B.         Plan marital deduction well
C.         Put real estate or certain other ppty in business entities to reduce older family member’s interests
iii.       Example à if Δ owns 40% of 10M Corporation à how do you value
A.         You want to argue for a separate valuation of each interest à it may be that Δ’s 40% interest is more valuable, not because of the fact that he owns 40%, but als

      2033 only taxes b’ficial interest in a trust, merely being trustee is insufficient
D.         Income Items
1.          Income rights of Δ at death must be treated as ppty in which Δ had an interest under 2033
2.          Salary due at death is a classic example of an item of “income in respect of a Δ that under § 691 is taxed as income to Δ’s estate or other recipient when rec’d à comp due for svcs other than as an emp’ee (atty, accy, etc) are treated as salary
a.          This is included in GE under 2033
b.          Also is an item of income.
c.          § 691 authorizes a deduction for the estate tax paid on the amount of the income w/ respect of Δ
d.          If accrual method, the salary may have already have been repored, so it is not included in estate b/c it is not income in respect of Δ
3.          Bonuses à estate, even if subject to contingencies until the time of death à unless Δ had no interest in the bonus b/c it was payable at emp’ers discretion
4.          Deferred Comp arrangements à included in GE
5.          Rent accrued at death, accrued interest, dividends payable to Δ at time of death (Δ must die after record date)
6.          What if an emp’er pays a b’fit which is not required to be paid
a.          Is the pymt a mere expectancy (2033 DNA)
i.           Difficult to argue clear ppty interest
ii.         § 2039 may require inclusion
iii.       Is there a right to receive b/f death
b.          Con