Estate Tax Outline- Ascher, Fall 2015
Ascher doesn’t care about policy questions, or what should happen in a perfect world. His class and his tests are very cut and dried, statute-based exams. KNOW THE I.R.C.! I have made this outline with that in mind. I tried not to add a ton of examples in interest of brevity. The book does a pretty good job of providing illustrative examples.
Good rule of thumb- any time a special arrangement has been made that looks and feels like it’s just to escape taxes, then it’s probably a sham and it won’t be valid. If it quacks like a duck, it’s probably a duck. There are some exceptions though, so remember those.
Transfers by Gift
General Principles
§2501 taxes transfers of property by gift
Valuation- §2512(b) states that where property is transferred for less than money or money’s worth, a gift has been made (you transfer something to someone else, and they don’t pay you enough for it)
The gift is the value of property transferred, minus consideration received
§2505 says that you get a lifetime exemption of $5M (adjusted for inflation, now $5.43M)
2503(b) says that you get an annual exclusion, now equal to $14,000
Business Transactions
§2512(b)- a gift takes place when the transferor receives less than full consideration in money or money’s worth
Estate of Anderson- case about selling stock pursuant to buy-sell agreements to transfer ownership to new management; if transaction is arm’s length, in the ordinary course of business then it won’t be taxed as a gift
I’m fairly sure if it’s simply arm’s length then it will not be treated like a gift
§2703 now governs buy-sell agreements in stock
The transaction must be:
Bona fide business arrangement
Not a device to transfer property to members of transferor’s family at less than full consideration
Resemble arm’s length transaction
Adequate and Full Consideration
§2512(b)- a gift takes place when the transferor receives less than full and adequate consideration (FAC) in money or money’s worth; but how do we value consideration that is not money?
Wemyss- lady had a trust set up where if she married, then she lost income from the trust, but she wants to marry a new beau. The man gives her some stock to compensate her for her lost income in the trust and for her to marry him. IRS declares the man’s transfer of stock as a gift to the lady.
Marriage does not count as consideration (nor does love and affection), and neither does the money she gave up in the trust since the money did not benefit the transferor
The consideration must benefit the transferor, and the lady’s legal detriment of marriage and lost income is not consideration in money or money’s worth
Merrill- in a prenuptial agreement, a lady released husband of her rights to his property in exchange for $300K. The Court said that this was a gift, and release of marital rights was NOT adequate consideration
Now Rev. Rul. 69-347 says that prenups are deemed to transfer property on the date of marriage, so these are still gifts but they are excluded through the marital deduction in §2523(a)
She just gave up her rights to his property.If she gave up her legal rights to support, then she would have tendered full and adequate consideration
Discharge of Support Obligations
Parents owe a legal obligation to their children to support them.This means that most small gifts from parents to children in support of the child are NOT gifts.Food, clothes, etc. fall into this category.However, make sure the “gifts” aren’t too extreme
Spouses also owe a legal obligation to support one another (usually the husband’s obligation to support the wife).If a wife discharges a husband from his obligation to support her in a prenuptial agreement, then she has given full and adequate consideration to the husband for his property.
Divorces- these transfers are NOT sheltered by marital deduction, even if made before divorce final, but they are sheltered by §2516 (important to cite to correct section on exam).
§2516 excludes from the gift tax transfers made:
In settlement of marital or property rights OR
To provide reasonable child support
The transfers are considered to be given for FAC in money or money’s worth
Must be a written agreement between the parties, and divorce must occur within the year before the agreement is signed or two years afterward
The divorce must be an official divorce, the timing issues must be met, and the divorce can’t be a sham to transfer property (you can’t just get divorced then keep living together)
The child must in fact be a child.State law governs the age of majority and support obligations, but if you transfer property for the benefit of an adult you will be taxed.
The support obligations only extend to minor children and spouses, but §2503(e) says that payments made for tuition or medical expenses, for anyone’s benefit, are excluded from gift taxation
However, these payments must be made directly to the medical or educational institution; you can prepay tuition, but again must be made directly to institution (trusts don’t count)
Room and board do NOT count as tuition, and will be taxed
Taxable Transfers
Basically a gift is a transfer of property that diminishes a donor’s estate.
Interest-free Loans, §7872 (usually there is a repayment of principal, but no interest charged)
Courts and the IRS view this not as a gift of the funds, but as a gift of the right to use the funds (kind of like letting someone stay in your house rent-free)
The initial loan is not taxed, but the “interest payments” are.They are treated as a gift from the lender to the borrower equal to the amount of the interest, then a transfer back to the lender for payment of the interest
Lender gets fucked, they have to pay gift tax on the deemed gift to the borrower then pay income tax on the interest income.
De minimus exclusion equal to principal of $10,000
Also, it is important to note that there must actually be a transfer
HYPO: Let’s say that Father establishes a trust to benefit his kids, and he relinquishes all rights and benefits in
wing year. Also called the relation-back doctrine.
Promissory Notes
If a promissory note is a mere promise to pay, it is not a gift.However, if it creates a legally enforceable obligation with a determinable value, then it is completed on the date the note is signed.
However, the note cannot be a sham or a façade (see Bradford); the donee of the note must be the one actually intending to pay the note
Bradford involved a wife assuming her husband’s debt so that the debt wouldn’t be on the husband’s business’s records. The wife had no funds or intention to actually pay the debt, so her promissory note to her husband’s creditors was not a gift to the husband.
Employee Death Benefits
The problem with these is that it’s a payment from an employer to a deceased employee’s beneficiary (usually spouse), and the IRS tries to tax the decedent employee on making a gift to his spouse.
These will not be seen as gifts unless the decedent had some sort of right to change bens that he exercised before his death.Gifts cannot be made complete by death.These benefits may be in estate, but usually not seen as gifts.
Revocable Trusts and Retained Interests- look at the powers the grantor has after creation
If someone establishes a trust and retains the power to revoke or amend it, then the gift is not complete.This includes adding or deleting bens, adding or deleting remaindermen, or the ability to revoke the trust entirely.If a trust includes multiple interests, then each interest must be analyzed separately.
Revocable trusts are always incomplete because the creator still has ultimate power over the assets, but the gifts become complete as the trust disburses income to the bens.
If the grantor retains only the ability to change remaindermen, then the gift of income is complete, and vice versa.
If a trust creator retains an interest, then relinquishes it, he has made a completed gift on the date of relinquishment
HYPO: A establishes an irrevocable trust- income to B remainder to C, and makes herself (A) trustee.The trust gives Trustee discretion to distribute income as she sees fit.The gift of the income interest is not complete since A still has control over timing of disbursements and who can receive the income.If A relinquishes this right, then the gift will be complete.The gift of the remainder, however, IS complete, even though the remainder can be increased or not by distributing or accumulating income.
