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Federal Taxation of Gratuitous Transfers
University of Mississippi School of Law
Green, Karen O.



Types of Grantor Trusts

Intentionally defective grantor trusts
Interests and powers retained and those given with other parties

Continuing Introduction

Little revenue is generated from estate tax

In 2015 gov’t received 3.25 Trillion, spent 3.6 Trillion, mostly comes from income taxes: 2.9 Trillion comes from individual income taxes
Gov’t raised a record amount of money last year and still wasn’t enough
Gift and estate tax generated 19 Billion

Generation Skipping Trusts/Foundations (Compliance rules/issues)

Multigenerational Trusts
Marital Deduction

From 1976 on, some important rules and changes: unification of estate and gift tax
1930-1976: System used to be cumulative, as you gave more, you would go up in your bracket. Tax paid on prior gifts
Section 2001: Takes account of prior taxable gifts, but not of gifts (?)

Calculate what the taxable estate is, now have an exemption that adjusts yearly

Unified System of Tax Credit/Exemptions

1976 > Unified gift and estate tax and a tentative tax will be levied
Section 2010 > speaks of the tax credit that is reference to applicable exclusion amount, adjusted for inflation

Marital Deduction > Free to give as much as one wants to spouse

Power of Appointment Trust

Must be exercised by self or estate
Gives surviving spouse complete control, but instead:
QTIP Trust: simple trust in terms of provisions

Marital Deduction can be chosen if all of income will go to spouse and wherever else when they die but they must receive all income distributions while alive
Irrevocable Trust and it protects against others from prevailing on the assets
Trustee can invade corpus for distributions if necessary
Marital Deduction is Tax Deferment, Not a tax haven
QTIP becomes property of surviving spouse’s estate

Medical and Tuition Exclusions > Must be paid directly to institution in order to receive exclusion
GST > When property moves from generation to generation, some form of federal taxation should apply. The way to get around it used to be to create a method of transfer where the beneficiary has no interest in trust after death

MS has 90 year rule
Property transferring generation to generation must be imposed upon, this is known as taxable termination
If wealth transfer is made by child to grandchild while child is still alive, in the interim, this is known as a taxable distribution

Trust pays for taxable termination, Recipient pays for taxable distribution

Direct Skip Trust > Transferor owes the taxes
Never create a partial GST. Always create a fully exempt GST
Still a difference in adjusted basis received by recipient between estate and gift tax. Always do highly appreciated property in estate, lower appreciated property as inter vivos gifts. High basis, low appreciation as Inter Vivos. Thus hold on to property that has appreciated mucho.

Tax Inclusive versus Tax Exclusive

Income Tax is inclusive: you pay taxes even on money spent on taxes.
Estate tax is also inclusive. But we get all types of deductions, including on state estate taxes paid
Gift Tax though, is tax exclusive, imposed on donor, Only on the property transferred

Donor does not pay tax on tax liability portion of gift

Estate tax due 9 months after death

FMV > Section 2031, as is normally, what a willing buyer and a willing seller both apprised of property would pay

Section 2036: Saving the family farm (1976), lengthy statute on valuation, applies to real property used in a business. You can value as is in its current usage. Also for a smaller estate where property used in a business

Procedure in estate and gift tax

If donor exceeds $14K in any given year for any single individual, and it does not qualify for another exclusion/exemption, gift tax due at time of gift tax return
Estate tax returns in excess of annual exclusion, which take account of prior taxable gifts are due nine months after death unless postponement provision, or 6 month automatic delay, you still have to pay for the estimated tax, unless Section 6167 applies where there is a closely held business, or where 6163 applies where there is future interest in the estate that can not be valued (beneficiary to a trust in a life estate which will not vest until their death which has not yet occurred).
GST: transfer/tax made at same time. File and claim against exemption
If there is a taxable distribution > similar to income taxation.
If there is a gift of a partnership interest, often audited, starts statute of auditing limitations if a gift tax return is sent in for determining value, even if it is under the $14K annual exclusion
Penalties for overstating or understating the value of property. When do you overstate the value of property? If it’s exempt then… depends on percentage
Must correctly appraise the assets, get an appraiser if it is standard custom to do so, much of litigation is about valuation

Role of State Law > Bosch case

What is an effective delivery? Does a decedent own an interest? GPOA? Future Interests? Valuation? Property Rights in General?

You’re looking at state law. But how they should be taxed is a federal question.

“Ascertainable Standard” are determined by state law > in accordance with what’s acceptable
Bosch > Before QTIPs, no ability to get marital deduction if surviving spouse clause written into testamentary instrument

Issue: Is a state trial court decree dispositive in federal court?
Use disclaimers of Section 2518 to make estate planning decisions after death. Think of disclaiming the inheritance to improve tax consequences
“State law is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise.
Will not bind the government to a decision of a lower state court
Is there any interpretation of the state’s highest court? That’s what should be used. Or state statute or private letter rulings.


Section 102: property received by way of gift, bequest, devise, or inheritance is excluded from gross income

Duberstein > 102(b) > But income generated from gift property is income per 61

And where gift is income, gift is taxable
Legal life estate (life interest for specific term)
But usually in Trust with trustee holding title
If you’re distributing something more than is mentioned in will during administration of estate (probate), this is called income for the beneficiary
These distributions are bifurcated between income and gift consequences

Distribution of Excluded Gift vs Distribution of Income

Trusts: generating income, going to terminate, named remainder and income beneficiaries – Distributions of principal or income
102(a) property received is excluded from income but if what you get is a gift of income than this is not excluded from income
Types of distributions

Mandatory distribution of a portion of the principal/income
Discretionary distribution of a portion of the income/principal

It might look like income but if taken from p

ese shares in 3 but for right of representation.

All beneficiaries are Tier II, they will all share DNI equally. (B) Tier II > all. (E) All is taxed. Where does bank exercise discretion?

Maybe not all is taxable. Are we wholly ignoring the existence of the trust or only income derived from certain properties depending on powers the grantor retains? (b) need to know his age and other actuarial accounting details. Also a question of valuation.
Rules of Reversions delineated under 673.
Its permissible to have a reversion without grantor being taxed under 673(b)
Nonadverse or adverse? Person has an interest adverse to the exercise of that retained power of the grantor. (b) this doesn’t effect distribution of income during her lifetime­ – but this is included in estate for estate tax purposes. (c) Tom is a related party and has discretionary power, unfettered discretion by a nonadverse party means that we still tax the grantor under section 674. (d) Nonadverse has power but limited by an ascertainable standard, this is an exception 674(d).
No discretion: distributions out of principal, ascertainable standard: exception under 674(b)(5)
This will be seen as a gift to the beneficiary

This makes him have a GPOA: These powers are conferred onto another, Grantor trusts are concerned with…?


Include all gifts and subtract credit. Gifts have always been taxed cumulatively.
Rates Schedule in section 2001. Gift tax as excise tax has never been repealed.
ATG= Adjusted Taxable Gifts

Three year rule is that gifts made within three years of death will be included in estate, not absolute though. Life insurance without another named beneficiary included.
Same as applicable exclusion amount, $5.45M. ½ x Max Tax Rate = GST Tax
Every time there is a taxable termination, including when property moves from one generation to the next

VALUATION: Why we use entities in Estate Planning

The 2700s, specifically 2702, adopted in response to “abusive” entities
Starting point is 2031

FMV shall be determined at time of death.
Extensive regulations devoted to how we value various assets in estate
There is also an Alternate Valuation Date. 2032 > 6 months after death

But if some assets are sold in which are sold or distributed in between these two dates, choose that date in between.

Cannot use 2032 if no estate tax liability

FMV: The price a willing buyer would pay a willing seller, neither being under compulsion to buy or sell and having a reasonable knowledge of relevant facts and is not to be determined by a forced or related parties sale price
Appraisal: Rules: Real estate, collectibles. (Valuation). (Old Man and 7 Types of Valuation)

Comparable sales within short time period with disposition of appraisal property
Income approach value (net income property is producing)
Replacement value (accounts for depreciation)
Capitalization rate