Chapter 12 - Federal Estate Taxation: The Gross Estate - Part II

Question 1

Sec. 2039 of the Internal Revenue Code concerns the federal estate taxation of

Answer 1

Annuity products

Question 2

Characteristics of Joint Tenancies

Answer 2

Characteristics of Joint Tenancies
• nonprobate property
• passage of property by operation of law
• partial basis step up at first death
• uninterrupted ownership for survivor
• full control and ownership for survivor

Question 3

Power of Appointment Terminology

Answer 3

Power of Appointment Terminology
• donor—grantor of power over property
• donee—holder of power
• permissible appointee—individuals, class, or group of possible recipients of property
• appointee—recipient of property
• taker in default—recipient of property as a result of a lapse or release

Question 4

In an appointment of power situation what is a release?

Answer 4

A release takes place when the donee affirmatively gives up the right to exercise the power. The power then passes to the taker by default.

Question 5

In an appointment of power situation what is a lapse?

Answer 5

A lapse occurs when the powerholder merely

does not exercise the power, in which case it also passes to whoever is the taker by default.

Question 6

General Power of Appointment

Answer 6

A general power is a power over property so
broad that it approaches actual ownership or control over the property subject to the power.

You have an unlimited right to appoint property to
• yourself
• your creditors
• your estate
• your estate creditors

Question 7

Special Powers

- special (limited) power of appointment

Answer 7

Property may not be appointed to
• yourself
• your creditors
• your estate
• your estate creditors

Question 8

Ascertainable Standard

Answer 8

If the decedent possesses the power to consume or invade for his or her own benefit, but the
power is limited by an ascertainable standard, the power of appointment is considered a special, not a general, power. Ascertainable standard is attained by allowing discretion in trust for:
• health
• education
• maintenance
• support

Question 9

5-and-5 power

Answer 9

Although the decedent is given what is otherwise a general power of appointment, it is not included in the gross estate if the decedent’s power is limited to a noncumulative right to withdraw the greater of $5,000 or 5 percent of the aggregate value of the property each year. This power is sometimes referred to as a 5-and-5 power.

Question 10

A disadvantage of property held jointly with right of survivorship is that the decedent loses control over future disposition of the property because a surviving joint tenant can dispose of the property in any way he or she wishes?

Answer 10

True

Question 11

The death benefit payable under a nonqualified retirement plan receivable by a beneficiary of an employee who died after reaching retirement age will be excluded from the employee’s gross estate if it is received in the form of an annuity?

Answer 11

False
If the employee dies after reaching retirement age, the death benefit from a nonqualified retirement plan will be treated under the general annuity rules and will be included in the decedent’s gross estate.

Question 12

If a husband and wife own property jointly with right of survivorship or as tenants by the entirety in a common law state, the surviving spouse will receive a stepped-up basis for the entire value of the property?

Answer 12

False
Since only one-half of the spousal joint tenancy is includible in the decedent’s estate, only one-half of the property receives a stepped-up basis. The surviving spouse’s interest retains the original cost basis from the time the property was acquired. However, in a community property state the surviving spouse receives a step up in basis equal to the full property’s FMV.

Question 13

If the decedent was a recipient of a power to appoint property only to and among any of his children in any proportion, the value of the property subject to the power will be includible in his gross estate?

Answer 13

False
A general power of appointment is one in which the decedent can appoint property to himself, his estate, his creditors, or his estate’s creditors. If he is limited in any way with regard to the persons to whom he can appoint the property, it will not be considered a general power of appointment that will cause the property to be includible in his gross estate.

Question 14

A person possessing a general power of appointment at death must have been legally competent to exercise the power at the time of death for its value to be included in his or her gross estate?

Answer 14

False
If a person possesses a general power of appointment at death, it is irrelevant that he or she was legally incompetent to exercise it. Mere possession of the power is sufficient to cause the inclusion of the value of the property subject to the power.

Question 15

If a person releases a general power of appointment (retaining no other rights over the property subject to the power) and dies 2 years later, the value of the property subject to the power will be included in his or her gross estate?

Answer 15

False
The release of a general power of appointment with no retained rights in the property subject to the released power is a completed gift for gift tax purposes and is not included in the decedent’s (releasing powerholder’s) gross estate. The Sec. 2035 3-year rule does not apply in this situation.

Question 16

An annuity is includible in a decedent’s gross estate if there is a survivorship feature?

Answer 16

True

Question 17

The value of a survivor’s benefit in an annuity contract is includible in the decedent’s gross estate, whether paid to his estate or to a named beneficiary, if the decedent had an enforceable right to receive payments during his lifetime or if his estate had a right to receive future payments after his death?

Answer 17

True

Question 18

As a general rule, death benefits from qualified plans are fully includible in the gross estate?

Answer 18

True

Question 19

One-half of property held by unrelated parties as joint tenants with right of survivorship is includible in the gross estate of the first joint tenant to die, regardless of the respective contributions?

Answer 19

False
Fifty percent of all jointly held property with right of survivorship is includible in the estate of the first joint tenant to die only when the joint tenants are married. The percentage-of-contribution rule applies to all other joint tenancies.

Question 20

Sam and Don are best friends and agreed to purchase a beach house as tenants in common. When Don was unable to help pay for the purchase, Sam paid the entire price. Tragically, Don passed away soon after. While Sam paid for everything, their nonspousal joint tenancy means half the house is included in Don’s estate?

Answer 20

False
If the contribution to acquire an interest in a jointly held tenancy has been received by gift from the donor-joint tenant, it will be considered a contribution of the donor-joint tenant.

Question 21

One-half of property held by spouses as tenants by the entirety is automatically includible in the estate of the first spouse to die regardless of the respective contributions?

Answer 21

True

Question 22

Annuities includible in the estate may be valued either at the date-of-death value or the alternate valuation date?

Answer 22

False
Since annuities diminish in value with the mere passage of time, annuities are always valued as of the date of death regardless of whether the alternate valuation date has been chosen by the executor.

Question 23

If a decedent was a cotrustee of a life insurance trust that contained a policy on his or her life, the proceeds will be includible in his or her estate regardless of what rights as trustee only he or she may have had over the policy?

Answer 23

False
While there are a few cases that have held that the value of policy proceeds will be includible in a decedent’s gross estate, even though the decedent could have exercised any incidents of ownership only in the role of trustee, there have been other cases in which the proceeds were not taxable in the estate if the decedent was given certain discretionary powers that were merely administrative in the role as trustee.

Question 24

Life insurance proceeds payable to an irrevocable trust that requires the trustee to use the proceeds to pay estate taxes on a settlor-decedent’s estate will be includible in the decedent’s estate?

Answer 24

True