Accounting 815

Taxation of Transfers and Fiduciaries

Week 5: The Gross Estate

Review of Week 4

1. Gift and Estate Tax Unification

given an estate tax, need a gift tax

"in contemplation of death" hopelessly subjective

if they aren't unified, plan under the more favorable

e.g. if gift rules more favorable, then who pays estate tax?

  • those w/o tax planning

  • those dying suddenly
  • those w/too little $ to give it away

Unification makes it a tax on cumulative transfers

mechanics

add each year's taxable transfers to prior
calculate total tax
and subtract prior year taxes paid

Provisions that implement the unification:

2001(b): estate added to prior taxable gifts
  less "aggregate" tax on post-'76 gifts

2012: gift tax Cr for estate tax
  (on gifts included in estate)

2055 and 2056 (charity and spouse) parallel 2522 and 2523

Why its only "semi-unification"

no estate tax equivalent

$10 K per donor/donee/year: Sec. 2503(b)
2503(d) for education and medical

estate tax has administration, funeral expenses
these are hardly "voluntary", tho

Tax Inclusive (Gift) vs. Tax Exclusive (Estate)

Is the tax charged on the assets used to pay the tax?

Example

Assume the $625K credit already used up, in effect
D has $1mm available to transfer

If Gift, tax is 284,965, transfer net is 715,035
  solve for x, where x + tax on x = $1mm

If estate, tax is $410,000, transfer net is $590,000
  tax on 1,625,000 = $410,000

2. The Gross Estate (Chap. 15)

Sec. 2031 definition of The Gross Estate

"Value at time of death of all property, real or personal, tangible or intangible, wherever situated"

This is just the starting point!

General attitude of courts had limited the reach of "all property"

Tp’s tried to control while avoiding legal "ownership"

Result: a number of extending code sections

"all you own and much that you don't"

Estate includes, generally, the value of the potential impairment of the ownership by others that is removed by D's death

The value of the cloud that passes away with D

Value:

Amplifying Regulations 20.2031-0 to -9

 2031(b) for unlisted stock

Consider exchange listed comparables "in addition to all other factors"

Special valuation rules

Sec. 2032 Alternate valuation date
Sec. 2032A Farm use valuation
New Sec. 2033A: CHB valuation

Sec. 2033: All Property "To the Extent of D's interest at time of death"

"Property" rights are a fairly broad item

Estate tax uses accrual concepts for "extent of interest"

Regs. 20.2033-1 eg's

Items protected from creditors: homestead = property
Notes and claims, even if cancelled by will
  eg. I forgive the $50 K son owns me
Interest and rents accrued at death
Dividends declared (X-div) but not received = property

First Victoria Bank case: Regulatory Rights

Rights coming into existence at death

Employee Benefits

in estate if employee had vested rights w/o death
eg. pension w/ survivor benefit
or if employee can designate who gets

Partnership interests: Riegelman case

Wrongful Death claims

Conn. Bank case: a right arising at death is not "property owned at death"

note that life ins. is covered separately

Other Sorts of "Property"

Rights to receive income: IRD items are property

Contingent interests: value as best you can

3. Joint Tenancy Interests: Sec. 2040 and Chap. 16

Distinguish tenants in common and community property

Features of joint tenancy

equal rights of present control, survivorship, right of severance

is a joint account really something else?

What income tax consequences of joint account?

Neel case

Sec. 2040: 4 possibilities

rights of both acquired by gift/inherit: 1/2 (1/3, etc. in estate)

eg./ property to Kids A and B, jointly

H and W are the joint tenants: 1/2 in estate per 2040(b)

includes "tenancy by the entireties" (not exist in CA)

Note income tax interaction: No step-up for survivor's half

Include entire value in first estate

This is the default case

Rationale: B gets all if B survives, 0 if A survives. The Cloud on B's ownership equals the value of all

Unless survivor contributed part of cost

 then allocate value proportionately

gift by D to survivor used to purchase JT: not considered survivor's contribution

Goldsboro case

Problem of proving who paid what, esp principal payments on mortgage

RR 79-302 Joint tenancy w/ mortgage debt
total up down payment and mortgage payment made by each.
Divide mortgage balance at death equally among the JT's

Note that no present value factors allowed, nor is question of who paid the interest

Possibility of double-counting

see. Para. 16,079: simultaneous death
All in 1 estate and half in another estate
Now would only apply to non-HW situations

Planning for joint tenancies

They avoid probate, but cause transfer tax problems
very common in CA

For HW in CA, community property much better

Half still included, but double stepup
H-W comm property: expedited probate procedures

Can you argue that a JT created with community funds is "really" community property?

For non-HW, inclusion can be an avoidable disaster

Eg. P creates JT w/ C in 1970: FMV 100K
FMV now $1mm
P dies: $ 1 mm in estate.
  (Less what C paid w/ C's funds as % of all pmts

Consider effect of severing JT
  ? more gift tax? NO: transfer was completed gift
  C had right to sever all along.

Tenancy in common: $500K included in estate

Price: lose step up on 1/2 the property

    Build Date 2/24/98