PART I.
DISCUSSION QUESTIONS
1. What are the major differences between the Federal estate tax and the typical inheritance tax levied- by some states?
2. What is the intended purpose of the Federal gift tax?
3. Hilda, a U.S. citizen, has established her residence in Costa Rica in order to avoid the U.S. estate tax. Comment on the value of Hilda's planning.
4. Pearl comes to you regarding the making of gifts to family memb-ers in the current year. When you ask her about prior gifts,she resporKK."What difference does it make what I did in the past?" Please clarify matters for Pearl.
5. At a social function, a guest tells you,"1- have made a lot of gifts,but I still have my exemption equivalent." Explain this remark.
6. Distinguish between the following:
a The gross estate and the taxable estate. b. The gross estate and the probate estate.
7 What was the original justification for a § 2035? Does this justification still exist? Explain.
PART 2.
Kirk dies on July 7, 2001, at a time when he owns: stock ih Hawk Corporation and Falcon Corporation. On June 3 of the same year both corporations authorized cash dividends payable on August 4. For Hawk, the dividend was payable to shareholders of record as of July 1, and Falcon's date of record was July 8. After Kirk's death, the executor of the estate received dividends in the, following amounts: $6,000 from Hawk Corporation and $8,000 from Falcon Corporation. Kirk also owned some City of Minneapolis tax-exempt bonds. As of July 7, the accrued interest on the bonds was $7,500. On December 1, the executor of the estate received $10,000 in interest ($2,500 accrued since Kirk's death) from the bonds. Concerning the dividends and interest, how much should be included Kirk's gross estate
• A gift of real estate (basis of $90,000 and fair market value of $400,000) to Chester (Willie's son). The gift was made in 1993 and resulted in a Federal gift tax of $20,000, which Willie paid_ On the date of Willie's death, the property is worth $450,000.
A gift of an insurance policy on Willie's life to Rita (the designated beneficiary). The policy was worth $10,000 but had:a maturity value of $70,000. The gift was made in 1.998 and resulted in no Federal gift tax liability_
• A gift of stock (basis of $40,000 and fair market value of $80,000) to Timothy. The gift was made in 1981 and resulted in no Federal gift tax liability_ On the date of Willie's death, the stock was worth $200,000_ -
Presuming the alternate valuation date is not elected, how much should-be included in Willie's gross estate as to these transfers?
3. Sarah created a trust by transferring income-producing assets to a trust company. Specifics regarding the trust agreement are summarized below.
• Income of the trust inures to the benefit of Sarah's five minor granddaughters. The trustee is accorded the right to accumulate or distribute current income.
• The trust company is a corporation chartered under state law. Sarah owns none of the stock.
• Sarah retains the right to replace the trustee with another independent corporate trust company. This right is never exercised by Sarah during her lifetime.
• At the discretion of the trustee, both income and corpus may be expended on behalf of the beneficiaries before they attain the age of 21.
• At age 21, each beneficiary has the right to withdraw her share of corpus and accumulated income (if any) from the trust. if the right to distribution is not exercised, the trust is to continue until the beneficiary reaches age 35 or dies, whichever occurs first. At this point, a final liquidating distribution will be made to the beneficiary (or her estate) of her interest
• If a beneficiary dies before attaining the age of 21, her interest in the trust is payable to her estate or as she designates under a general power of attorney.
In the year the trust was created, Sarah filed a Form 709 reflecting the gift. In computing the gift tax liability, Sarah claimed five annual exclusions.
Five years after the gift in trust was made, Sarah died. Sarah's executor includes none of the value of the trust in the gross estate. When the estate's Form 706 is audited, the IRS determines that the trust must be included. Because of the retained right to replace trustees, Sarah's transfer was incomplete. Consequently, the IRS maintains that Code §§ 2036(a)(2) and 2038(1)(1) are applicable.
a. Is Sarah correct in claiming five annual exclusions for the gift in trust? Why or why not?
b. Is the IRS correct in including the trust in _Sarah's gross estate? Why or why not?
4. D transferred property to T in trust, the income to be paid to X of X's life, remainder to Y if living at X's death, or, if not, remainder to Z or Zs estate.
a. If T died, survived by X, would the value of theproperty be included in rs gross estate?
b. Will the value-of the property .b©_ -included in ,Vs gross estate upon, X"s death? _
c. Will a part of the value of the property be included in Ys gross estate if Y dies survived by X?
d. Will a part of the value of the property be incidded in Z's gross estate if Z dies survived by X and Y?
e. If D had made the transfer in (a), above, but had provided for a reversion to D or D's estate (rather than a remainder to Z or Z's estate) if Y was not living at X's death, will anything be included in Us-estate' if-D predeceases and Y?
Grantor creates a trust with incOrne tO X for Grantor's life, remainder to Yif Y is' then living and, if not, to Z or Z's estate. If Grantor predeceased X and Y, is anything includable in Grantor's gross estate?