4. Gross Estate

Question 1

Value of gross estate

Answer 1

total of all property in which the decedent possessed an interest at the time of death

Question 2

Property Owned Outright (IRC 2033)

Answer 2

-value of all property in which the decedent had an interest on the date of death will be included in the decedent’s gross estate, unless a specific exclusion for the property exists
-State law determines the character of a property interest:
-specific property such as stock, real estate
-property in which decedent held sufficient interest
-vested remainder interest

Question 3

Types of Property Included

Answer 3

-All types of property including real and personal property, tangible and intangible (stocks, notes, amounts payable), must possess more than bare legal title to be included in estate
-IRD: Income in respect of decedent (recipient must pay income tax)- right to future income earned but not received prior to decedent’s death, eg bonus, rents, dividends, royalties, unpaid salary, IRA accts over basis, business A/R, vested amounts in qualified plans, interest payments, decedent’s share of any post-death partnership profits earned but not yet paid at death (if estate tax is paid on the income portion, then recipient may use this as income tax deduction).

Question 4

Excluded property

Answer 4

-If trustee of property/strawman owner and had no beneficial interest in property
-Terminable interest /an interest that terminated at the decedent’s death and that the decedent had no right to transmit at death. Unless qualified

Question 5

Jointly owned property

Answer 5

With spouses:
-jointly held property (JTWROS/Tenancy by Entirety)- only half receives step up in basis
- Community property- both halves receive step up on basis

With non-spouses/if one of spouses is not US citizen:
-JTWROs- percentage of contribution/consideration-furnished rule applies
-Tenancy in Common- deceased’s fractional share

Question 6

Dower and Curtesy Interest (IRC 2034)

Answer 6

Under common law,
-dower is the surviving wife’s property rights under state law.
-Curtesy is the surviving husband’s property rights under state law.

Gross estate is not reduced by the value of any dower or curtesy interest.

Question 7

Certain Property Transferred (IRC 2035)

Answer 7

Certain property that has been transferred within 3 years of decedent’s death may be included/excluded from decedent’s estate

Question 8

Types of transfers requiring return to gross estate

Answer 8

• donor created life estate and gifted remainder interest (FMV of life estate included in tenant’s estate b/c decedent had too much control over property and chose remainder beneficiary of property
• donor kept reversionary interest in property gifted (>5% of property value)
• grantor creates revocable trust and transfers property to trust

Question 9

3 year rule for transfers

Answer 9

-interest in property that would be included in the gross estate under IRC Sections 2036, 2037, and 2038
-transfer of a life insurance policy to which IRC Section 2042 would apply
- gift tax liability paid

Question 10

Retained Life Estate (IRC 2036)

Answer 10

Included in gross estate if rights to use/possess/enjoy/receive income or to designate beneficiary have been retained/reserved for life/period not ascertainable without reference to death or that does not end before decedent’s death

Question 11

The Rationale (IRC 2036)

Answer 11

the right to enjoy or control property or designate who will receive the property or its income is characteristic of ownership

Question 12

Transfer at Death (IRC 2037)

Answer 12

Value of transferred property is included in gross estate if
-the donee must survive the decedent.
-the decedent retained a reversionary interest in the property worth > 5% of the value of the transferred property immediately before death.

Question 13

Reversionary Interest

Answer 13

actuarial value of the transferor’s reversionary interest must be >5% of property’s value

Question 14

When Sharon was 68, she was diagnosed as having terminal cancer. Doctors gave her a life expectancy of just eight months, with little hope of a cure. She had four children to whom she gifted the property that she owned outright. She died a year later. Which of her properties that she gifted as follows would be includable in the gross estate?

Answer 14

-Her villa to Stephanie, retaining life estate
-The country house as life estate falls under Section 2037 because it is contingent that Martha be alive to enjoy the gift, with Sharon still retaining a right to regain the property personally.
-Her shares in Oracle Corp., fall under Section 2038 because Sharon retained the power to revoke.

Question 15

Revocable Transfer (IRC 2038)

Answer 15

transfer of property in which the decedent retained the right to alter, amend, revoke or terminate the gift:

-When a grantor creates an irrevocable trust but can decide whether to accumulate trust income/distribute to trust beneficiaries, the grantor retains a right to alter/amend a transfer.
-When a grantor establishes a revocable trust, the grantor retains a right to revoke or terminate a transfer.

Question 16

Exceptions to gross estate inclusions

Answer 16

-If the decedent’s power can only be exercised with the consent of all of the parties having an interest in the transferred property, and
-If the power retained by the decedent adds nothing to the rights of the parties under local law, or
-If the prohibited power is retained, it is subject to an ascertainable standard.

Question 17

ascertainable standard

Answer 17

external standard that limits the decedent’s exercise of a power for the health, education, maintenance, or support (HEMS) of a beneficiary

Question 18

Annuities (IRC 2039)

Answer 18

present value of an annuity or other payment receivable by a beneficiary as a result of surviving the decedent; includes the decedent’s right to receive future benefits.

Question 19

annuity

Answer 19

contract entered into whereby one party agrees to pay the annuitant a series of payments (systematic liquidation of principal and interest) over a period of time.

Question 20

Annuity types

Answer 20

-Commercial annuity funded with cash and use actuarial tables to determine payout terms; cost of comparable contract included in estate
-Private annuity funded with various types of property eg real estate/corp stock may determine out payout terms; value for estate is determined using government valuation tables

Question 21

Qualifications for annuities

Answer 21

-Contracts such as a life annuity that provide payments to the decedent and end at death are not subject to this provision because they are not capable of death time transmission, that is, there is no transferable interest.
-If the survivor or anyone other than the decedent furnished part of the original purchase price, then that portion of the survivor’s annuity will not be included in the decedent’s gross estate. So if the survivor paid one-third of the initial premium, only two-thirds of the value of survivor’s income interest would be includable. If the decedent’s employer furnished all or part of the purchase price, that contribution is treated as if it were made by the decedent.
-Where the death proceeds of a life insurance policy are taken under a settlement option, they are considered life insurance proceeds rather than an annuity and are not taxed according to annuity rules.

Question 22

Spouses as JTs

Answer 22

If asset

Question 23

Power of Appointment

Answer 23

right to say who is to receive property in trust.
When extensive to the point of ownership, then considered general power of apptment, and property value is included in gross estate even if not exercised

Question 24

Limited/Special Power of Appointment

Answer 24

enables the individual to appoint anyone other than self to receive property and is not included in holder’s gross estate:
- holder may use trust property for himself but only with the donor’s consent.
- holder may use trust property for himself only with the consent of the remaining trust beneficiaries, who have an adverse interest in the trust. The remaindermen have an adverse or unfavorable interest in the trust because the holder can exercise the power for his own benefit, which reduces the amount available to the remaindermen.
- holder can exercise the power according to an ascertainable standard: trust income and principal can be used for HEMS.
If for health, education and comfort /any wording other than HEMS, then will be considered GPA as opposed to LPOA

Question 25

Exception to GPA Inclusion of property (5x5)

Answer 25

If limited to a power to appoint which does not exceed the greater of $5,000 or 5% of the value of the trust assets on an annual, noncumulative basis, these assets would not be included in the decedent’s gross estate

However, if the power exceeds 5x5, and powers lapse or are released, then the percentage equal to the accumulated amounts that the holder could have exercised each year, that were in excess of 5x5 is included in the estate

Question 26

Incidents of Ownership (IRC 2042)

Answer 26

includes the value of the death benefit proceeds of any life insurance policies in which the decedent held any incidents of ownership:
-right to benefit from policy/decide beneficiary
-also includes proceeds of any policy payable to executor/benefit of decedent’s estate
-if owned by ILITs, and contain provision which requires trustee to use LI proceeds to pay for expenses associated with insured’s death, then proceeds of LI are included

Question 27

Corporate-Owned Life Insurance (COLI)

Answer 27

If owned >50% of corp stock @ death and is insured on the policy to the extent that it is payable to a party other than corporation or its creditors

Question 28

Surviving Spouse’s Estate (IRC 2044)

Answer 28

ensure that property that transfers to a surviving spouse utilizing the marital deduction will be included in the gross estate of the surviving spouse

Question 29

David transferred his estate to his daughter, Jennifer, in 2015 with the condition that she would receive income until age 35, at which age she would receive the principal if she were not married. He retained the power to distribute the income to his son, Stephan if Jennifer should get married. David dies in 2023 when Jennifer is 32 years old and not married.

Which of the following is includable in David’s gross estate?

Answer 29

only the transfer of income is a revocable transfer. Only the value of property subject to this power will be included in the gross estate and not the entire value of the transfer of property. The property for which David retained this power at the time of his death was the remaining income that would be paid to Jennifer until she reaches age 35. David did not retain the right to the transfer of principal because Jennifer would receive it in any case at age 35, and therefore the principal is not includable.

Question 30

General Valuation Rules

Answer 30

assets included in the gross estate are valued @ FMV on the decedent’s date of death: IRC Section 2031 (“the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”)

alternate valuation date (AVD) is six months after death- executor can elect the alternate valuation date only if the value of the decedent’s gross estate has diminished in value in six months and the estate tax liability is also less. If the alternate valuation date is selected and if the property is distributed, sold, exchanged, or otherwise disposed of within six months of the decedent’s death, it will be valued as of that date, not the six month date.

If all of the decedent’s property is transferred to the surviving spouse by will, then the estate tax liability is zero and cannot decline, so the alternate valuation date could not be used.

Question 31

Valuation of Real Property

Answer 31

In the absence of market, higher of :
- highest price available, or
- salvage value.

Factors:
- nature and condition of the property, its physical qualities and defects, and the adequacy or inadequacy of its improvements.
- size, shape, and location of the property.
-actual and potential use of the property and how the trends of development and economic conditions, such as population growth, affect it.
-How suitable the property is for its actual or intended use.
-Zoning restrictions.
-Size, age, and condition of the buildings, including the degree of deterioration and obsolescence.
- market value of other properties in the area in which the property is located.
- value of net income received from the property. Rentals are often capitalized and then adjusted for depreciation. The same principle can be applied to gross rents. This method, however, must be adjusted to account for operating costs.
- value accepted by state probate courts for purposes of state death taxes, if based on appraisals made by qualified real estate experts.
-Prices at which comparable property in the same area was sold at a time near the applicable valuation date, provided it was an arm’s length transaction for the best price obtainable. Usually, more than one comparable property sale will be used, especially where the property to be valued is a personal residence or undeveloped acreage.
-Cost to duplicate the property, taking depreciation into account. The cost or value of land would have to be separated from the total value. -cost of reproducing the building, using present cost figures, would have to be estimated, and then the loss in value due to depreciation would have to be subtracted from the total of the other two figures.
-Unusual facts.

Question 32

Special Use Valuation (Section 2032A)

Answer 32

useful where the price of farmland is artificially increased by, or has not kept up with, the price per acre of encroaching housing developments or more lucrative commercial businesses

The maximum reduction of the decedent’s gross estate under this provision in 2023 is $1,310,000.

Requirements:
- on DoD, the property must be involved in a qualified use ( use of a farm for farming purposes or in a trade or business other than farming)
-value of the qualified property in the decedent’s estate must equal at least 50% of the decedent’s gross estate
-At least 25% of the gross estate, less debts and unpaid mortgages on all property in the gross estate, must be qualified farm or closely held business real property.
-All gifts made within three years of the donor’s death are added back into the gross estate solely for the purpose of calculating the 50% and 25% tests
-property must pass to a qualified heir: Immediate family, ancestors, lineal descendants, spouse or spouse of descendant, grandparent’s lineal descendant
-real property must have been owned by the decedent or a member of his or her family and used as a farm or in a closely held business for an aggregate of five years or more of the eight-year period ending on the date of the decedent’s death.

additional tax imposed shall be the excess of the tax that would have been imposed on the property if it were valued at its best use over the tax imposed because the property was valued at its qualified use value. IRC 2032A

Question 33

Valuation of LI

Answer 33

amount includable is the amount receivable by the beneficiary, including dividends and premium refunds

If owner predeceases insured, then:
-If a new policy is involved, its value will be the gross premium paid.
-If the policy is paid-up or a single premium policy, its value is the replacement cost. This is the single premium which that company would have charged for a comparable contract of equal face value on the life of a person who was the insured’s age at the time the decedent-policyholder died.
-If the policy is an established whole life policy, its value is found by adding any unearned portion of the last premium to the interpolated terminal reserve.
-If the policy is a term policy, its value is the unused premium.

Question 34

Valuation of Annuities

Answer 34

-Noncommercial/private annuity: PV of future payments=FMV, same applies to life estates, reversions, remainders and terms for years- valued according to discount rate that changes monthly
1) convert length of lifetime involved to life expectancy
2) determine proper discount interest rate rounded to nearest 2/10s of 1 percent (=120% federal midterm rate) and combine with life expectancy to come up with valuation factor applied to amount of periodic payment to determine present net worth

*don’t apply to interests valued with respect to qualified plans
*if income, estate or gift tax charitable contribution is allowable for any part of property transferred, taxpayer may use discount rate for either of the 2 months preceding the valuation month

Question 35

Commercial annuities

Answer 35

valued by reference to the price at which the company issues comparable contracts.

A retirement income policy, from the point in time, that there is no longer an insurance element, is treated as a contract for the payment of an annuity.

Question 36

Valuation of Listed Stocks

Answer 36

FMV would be the mean on valuation date, or weighted average of means on nearest date before and after valuation. The average is then weighted inversely by respective number of trading days between the selling date and the valuation date.

a blockage discount is determined by the effect that the block would have had on the market if it were sold over a reasonable period of time and in a prudent manner. A similar situation occurs where sales at or near the date of death are few or sales are of a sporadic nature and may not indicate a FMV.

Question 37

A decedent retained the right to designate who would use, possess, and enjoy a property.

For the value of the property to be included in the decedent’s gross estate, the right to designate must have been retained by the decedent for:

Answer 37

For an asset to be included in the gross estate under 2036, the right must have been retained by the decedent for:

Life
Period not ascertainable without reference to death
Period that does not end before the decedent’s death

Question 38

Property in which the decedent’s interest was obtained from someone else and was limited to lifetime enjoyment is

Answer 38

No inclusion is required for property in which the decedent’s interest was obtained from someone else and was limited to lifetime enjoyment. This means that an interest that terminated at the decedent’s death and that the decedent had no right to transmit at death will not be included.

This is known as having a terminable interest in property.

Question 39

When the owner dies and the insured on the policy is alive, the__________is included in the deceased’s gross estate. This is not the full face value of the policy/death benefit, but an amount that’s based on premiums paid into the policy.

Answer 39

‘interpolated terminal reserve’

Question 40

The alternate valuation date (AVD) election can be made if valuation on the AVD results in:

Answer 40

Election can be made if valuation on the AVD results in:

reduced gross estate value AND
reduced estate tax + GSTT