PROBLEM 1
[SML&C refers to the abridged edition of Federal Estate and Gift Taxation (9th ed.). Appendix
begins on page 105 of the Study Problems.]

Assignment

Code: In the final analysis, estate planning must include a

consideration of all taxes, state and federal, since the surprise
exaction of a tax may upset expectations that are otherwise
reasonable. Here, however, consideration is limited to the
federal transfer taxes, the estate tax, the gift tax, and the
generation-skipping transfer tax. This assignment explores
the basic computational relationship of those three taxes. The
Code sections principally to be examined are:

2001(a)2001(c); 2010(a), 2010(c); 2501(a)(1); 2502(a);

2505(a); 2601; 2602; 2611(a); 2622; 2641.

SML&C: Preface; 2.01[1]2.01[2]. Skim 1.011.05.

Appendix: Applicable Credit Amount Table

Questions

(1) T, who never married nor made any prior inter vivos gifts, made
taxable gifts of $6 million in 2013. T dies in the current year, leaving a taxable
estate of $5 million.
In 2002, G created a trust, the income to be paid to Gs child T (our
same good old T) for life, remainder to Ts child R. (Dont worry about G who
is not a part of the problem.) At Ts death in the current year, the remainder
interest of the trust corpus, valued at $4 million, was paid over to R.

(a) Using the proper rate computation provided by Section 2502

and considering the Section 2505 applicable credit amount,
disregarding inflation adjustments to the applicable

 1
 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS

exclusion amount, what is Ts gift tax liability for 2013?

(b) Determine the estate tax payable on Ts death in the current
year, using the Section 2001 computation and the Section
2010 applicable credit amount disregarding inflation
adjustments to the applicable exclusion amount.
(c) Consider the Section 2001(b) statutory method for
computation of estate tax liability: Are the taxable gifts
being taxed twice? What is being taxed? How?
(d) Proper computations in both questions (1)(a) and (1)(b),
above, make use of the applicable credit amount. Is the
credit allowed twice?
(e) Using an inclusion ratio equal to one and a taxable amount
equal to the value of the remainder interest, what is the
amount of tax imposed on the taxable termination
generation-skipping transfer that occurs upon Ts death?


 2
 PROBLEM 2
[SML&C refers to the abridged edition of Federal Estate and Gift Taxation (9th ed.). Appendix
begins on page 105 of the Study Problems.]
Assignment

Code: 2031(a); 2033; 2034. Skim 691(a); 1014(a), 1014(c);

7520.

Regulations: 20.2031-1(a), 20.2031-1(b); 20.2033-1; 20.2034-1. Skim

20.2031-6.

SML&C: 4.01; 4.02[1]4.02[2][a]; 4.05 (omit 4.05[8]); 4.06.

Appendix: Table S.

Suggested
references: Goodman v. Granger, 243 F2d 264 (3d Cir. 1957), 57-1
USTC 11,687, 51 AFTR 67, cert. denied, 355 US 835
(1957).

Rev. Rul. 75-127, 1975-1 CB 297.

Smith v. Shaughnessy, 318 US 176 (1943), 43-1 USTC

10,013, 30 AFTR 388.

Questions

(1) D transferred property to T, as trustee, in trust, the income to be paid

to X for Xs life, remainder to Y if living at Xs death or, if not, remainder to Z
or Zs estate.

(a) If T died, survived by X, would the value of the property be

included in Ts gross estate?
(b) Will the value of the property be included in Xs gross estate
upon Xs death? Is any wealth transfer tax possibly
applicable upon Xs death?

3

 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS

(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 included in Zs
gross estate if Z dies survived by X but not by Y? In the
current year, what amount, if any, would be included in Zs
gross estate if the trust corpus is worth $100,000, X is 60
years old, the Section 7520(a)(2) interest rate is 4 percent,
and Zs estate uses a date-of-death valuation? See Table S in
the Appendix to the Study Problems.
(e) Will a part of the value of the property be included in Zs
gross estate if Z dies survived by X and Y?
(f) Will a part of the value of the property be included in Zs
gross estate under the circumstances of question (1)(d),
above, if the trust was an inter vivos trust created by D,
subject to Ds power of revocation, and Z was also survived
by D?
(g) If D had made the transfer in question (1)(a), above, but had
provided for a reversion to D or Ds estate (rather than a
remainder to Z or Zs estate) if Y was not living at Xs death,
will anything be included in Ds estate if D predeceases X
and Y?

(2) Consider the extent to which state law may affect federal tax liability.

(a) D died owning a residence that is protected from the claims

of creditors by the states homestead law. Is the residence
includable under Section 2033?
(b) Under state community property law, Ds spouse is the
owner of one half of their community property during their
lives and at the death of D. Is spouses interest in such
property a part of Ds gross estate? Note, however, IRC
1014(b)(6).
(c) Under the law of a state that uses common law property
concepts, Ds spouse became entitled at Ds death to one
third of Ds realty and one third of Ds personalty outright.
Are these interests a part of Ds gross estate?
(d) D and Ds spouse own property as equal tenants in common,
which, under state law, involves no right of survivorship. Is
any part of Ds interest included in Ds gross estate under

 4
 PROBLEM 2

Section 2033 if D dies survived by Ds spouse?

(e) What is the result in question (2)(d), above, under Section
2033, if D and Ds spouse own the property as joint tenants
or as tenants by the entirety and, under a decision by the state
supreme court, the tenants enjoy rights of survivorship?
What is the result if state courts disagree as to whether there
is a right of survivorship and the state supreme court has not
yet resolved the issue?

(3) Ds employer owed D $15,000 in salary that had not been paid at time
of death.

(a) Is Ds right to that amount includable in Ds gross estate?

(b) For the estates or beneficiarys income tax purposes, what
difference may it make whether D was an accrual or a
cash-method taxpayer? See IRC 691, especially IRC
691(c).
(c) What if the $15,000 is a benefit that Ds employer agreed to
pay to D or Ds estate only if D continued to work for the
employer until Ds retirement or death, and D works until the
day D dies?
(d) If the $15,000 is a benefit that Ds employer is not required
by contract to pay, but that the employer decides to pay all
employees at the end of the year, and if D dies during the
year and the amount is paid to Ds estate, is the benefit
included in Ds gross estate under Section 2033?
(e) Are Social Security benefits paid to Ds family at Ds death
includable in Ds gross estate under Section 2033?

(4) D dies owning a real estate business.

(a) What is included in Ds gross estate under Section 2033 if the

business is unincorporated?
(b) What is included if the business is incorporated?
(c) What if D owns a one-fourth interest in the business, which is
a partnership?

(5) At Ds death, which of the following are included in Ds gross estate

under Section 2033?

 5
 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS

(a) A life insurance policy owned by D on Bs life. B survives

D.
(b) Bs survivorship rights in a joint and survivorship annuity
policy for D and Bs lives purchased by D.
(c) An installment sales obligation from the sale of property that
D sold a few years ago.


 6
 

PROBLEM 3
[SML&C refers to the abridged edition of Federal Estate and Gift Taxation (9th ed.).]

Assignment

Code: 2035; 2043(a). Skim 2042.

Regulations: 20.2043-1(a).

SML&C: 4.07 (omit 4.07[2][b][ii], 4.07[2][d], 4.07[4]); 4.15[2].

Suggested
reference: Rev. Rul. 72-282, 1972-1 CB 306.

Questions

(1) Two years ago, Decedent gave Child $750,000 in cash. Decedent dies
in the current year.

(a) What is included in Decedents gross estate?

(b) What is the result in question (1)(a), above, if Decedent gave
Child a life insurance policy on Decedents life worth
$100,000, with a face value of $750,000, instead of cash?
(c) What is the result in question (1)(b), above, if, after the gift,
Child made annual premium payments totaling $30,000?
Assume that Decedents total pre-gift premium payments
were $120,000.
(d) What is the result in question (1)(b), above, if, during the
time between the gift and Decedents death, the insurance
policy paid dividends to Child totaling $10,000?
(e) What amount is included in Decedents gross estate if,
between the gift and Decedents death, Child cashes in the
policy and receives $120,000?
(f) What amount is included in Decedents gross estate if Child
paid Decedent $100,000 for the policy when the policy was
worth $100,000?

 7
 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS

(g) What amount is included in Decedents gross estate if Child

paid Decedent $50,000 for the policy when the policy was
worth $100,000?

(2) In year one, Deathly Ill made a $300,000 gift of cash to Child, and, in
year two, Deathly paid a $120,000 gift tax on the transfer.

(a) Upon Deathlys death later in year two, what is included in

Deathlys gross estate under Section 2035?
(b) If Deathly had held on and lived for four years after the gift,
what would be included in Deathlys gross estate under
Section 2035?
(c) If Deathly had not made the gift (and, consequently, had not
paid the $120,000 gift tax), what would be included in
Deathlys gross estate?


 8
 PROBLEM 4
[SML&C refers to the abridged edition of Federal Estate and Gift Taxation (9th ed.).]

Assignment

Code: 2035(a); 2036; 2043(a).

Regulations: 20.2036-1.

Proposed
Regulations: 20.2036-2(a), 20.2036-2(c), 20.2036-2(d)(1),
20.2036-2(e)(2).

SML&C: 4.08 (omit 4.08[6], 4.08[7][c], 4.08[9]).

Suggested
references: Estate of Alexander v. Commr, 81 TC 757 (1983),
affd in an unpublished opinion (4th Cir. 1985).

Estate of DAmbrosio v. Commr, 101 F3d 309 (3d

Cir. 1996), 96-2 USTC 60,252, 78 AFTR2d 7347.

Estate of Maxwell v. Commr, 3 F3d 591 (2d Cir.

1993), 93-2 USTC 60,145, 72 AFTR2d 6733.

Rev. Rul. 95-58, 1995-2 CB 191.

United States v. Allen, 293 F2d 916 (10th Cir. 1961),

61-2 USTC 12,032, 8 AFTR2d 6055, cert. denied,
368 US 944 (1962).

United States v. Grace, 395 US 316 (1969), 69-1

USTC 12,609, 23 AFTR2d 1954.

United States v. OMalley, 383 US 627 (1966), 66-1

USTC 12,388, 17 AFTR2d 1393.


 9
 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS


Questions

(1) D transfers securities to a trust, retaining some right to the trust income
for some period described in the subparts of this question. What does Section
2036 require to be included in Ds gross estate in the following alternative
circumstances?

(a) One half of the income is to be paid to D for Ds life,

remainder to Child C or Cs estate.
(b) All the income is to be paid to D annually, generally for Ds
life, but D is entitled to no trust income earned in the
three-month period preceding Ds death. The remainder and
undistributed income is to be paid to Child C or Cs estate at
Ds death.
(c) All the income is to be paid to D for ten years, when the trust
is to terminate and the corpus is to be distributed to Child C or
Cs estate. D dies after nine years have elapsed.

(2) Several years ago, D created a trust under which the income was to be
paid to Ds sibling, S, for Ss life, then to D for Ds life. Upon the death of the
survivor of D and S, the corpus was to be distributed to R or Rs estate. At
Ds death more than three years later, D was survived by S and R. The corpus
of the trust was then worth $300,000, with Ss and Rs interests worth
$100,000 and $200,000, respectively. What amount should be included in Ds
gross estate?

(3) Grantor created a trust naming a bank as trustee. The trust income was
to be expended equally for Grantors two children toward their support during
their minority, which under state law was age 21. As each child came of age,
that child became entitled to receive the childs share of the trust income
directly. Upon the death of each child, that childs share of the trust corpus
was to be distributed equally among the childs children. The trust instrument
contained suitable provisions for distribution of income and corpus in the case
of premature death of a child or the childs death without children. Grantor
died when one of the children was age 15 and the other 22. To what extent, if
any, does Section 2036 apply to the transfer?


10

 PROBLEM 4

(4) Consider the Section 2036 consequences to Homeowner, H, who, in

the alternative, does the following:

(a) H transfers Hs residence to Child C for no consideration, and

H continues to live in the residence until Hs death.
(b) H transfers the residence to C for no consideration, and H
leases the property from C at its fair market value.
(c) H sells the residence to C for cash in an amount equal to its
fair market value, and H continues to live in the residence
until Hs death.
(d) H sells the residence to C for an interest-only note with a face
value equal to the fair market value of the residence. Shortly
after the sale, H executes a will that provides for forgiveness
of the entire mortgage debt upon Hs death. H also forgives
$14,000 of the principal obligation on an annual basis. H
continues to live in the residence until Hs death pursuant to a
lease entered into with C that provides for the rental of the
residence at its fair rental value. At the time of the transfer the
fair rental value and the interest obligation on the debt are
close in amount.
(e) Same as question (4)(d), above, except that the note provides
for payments that are part interest and part principal.

(5) Grantor transfers $1 million to a trust that provides income to Grantor

for life, with a remainder to Grantors Child. On creation of the trust, the
remainder interest is worth $300,000. Child transfers $300,000 of Childs own
funds to Grantor to purchase the remainder. At Grantors death, the corpus is
worth $2 million. What amount is included in Grantors gross estate?

(6) Grantor creates a trust with income to X or Xs estate for Grantors

life, and a remainder to Y or Ys estate. Grantor predeceases X and Y (and Z,
where Z appears in the subparts below). How, if at all, does Section 2036
apply in the following situations?

(a) Grantor, as trustee, retains a power to invade corpus for Z.

(b) Grantor, as trustee, retains a power to accumulate income and
add it to corpus.
(c) Grantor, as trustee, retains a power to invade the corpus of the
trust for X.

 11
 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS

(d) Grantor names unrelated friend E trustee, and E holds a

power to give income to Z.
(e) The facts are the same as in question (6)(d), above, but
Grantor also retains a power to remove E as trustee at any
time and name Grantor trustee, holding all powers that E
held.
(f) The facts are the same as in question (6)(d), above, but
Grantor names a corporate trustee and retains the right to
remove the trustee without cause and to appoint another
corporate trustee.
(g) Grantor names Grantor trustee and provides that the trustee is
required to give Z as much income as is needed each year for
Zs support and maintenance, with any excess income to go to
X.
(h) Grantor names unrelated friend E trustee and provides that
the trustee is required to give Grantor as much income as is
needed each year for Grantors support and maintenance,
with any excess income to go to X.

(7) Decedent and Spouse each own 10 percent of the voting power of
Corporation A. Decedent transfers $100,000 to a trust with income to X for Xs
life, and a remainder to Y or Ys estate. Decedent is trustee with normal
fiduciary powers, including the right to vote stock. Assuming that both
spouses each retain their 10 percent ownership, to what extent is Section
2036(a)(l) applicable in the following situations, when Decedent dies
survived by Spouse and X:

(a) Decedent, as trustee, purchases $100,000 of As voting

common stock (5 percent of the voting stock) from an
unrelated third party.
(b) Same as question (7)(a), above, except that Decedent and
Spouse each own 7.5 percent of As voting power.
(c) Same as question (7)(a), above, except the stock is nonvoting
stock.
(d) Decedent, as trustee, invests the $100,000, one half in voting
stock of A (2.5 percent of the total voting stock) and one half
in nonvoting stock, again purchased from an unrelated third
party.

12

 PROBLEM 4

(8) Schemer is a person not to be outdone by Congress and the Code.

Aware of Section 2036, Schemer agrees with Sibling that Schemer will
transfer $100,000 in trust, with income to Sibling for Siblings life, and a
remainder to Siblings children or their estates, if Sibling transfers $100,000
to a trust with income to Schemer for life, and a remainder to Schemers
children or their estates.

(a) What is Schemer trying to do, and will the plan succeed?
(b) What is the result to Schemer if Sibling places only $75,000
in the trust that Sibling creates?

(9) T put $100,000 worth of stock in trust with income to X (not a

dependent) for ten years, and a remainder to Y or Ys estate. T retained a power
to accumulate dividends and add them to corpus. At Ts death six years later,
the stock was worth $150,000 and the trust had accumulated $25,000 of
dividend income.

(a) What is included in Ts gross estate under Section 2036?

(b) What is the result in question (9)(a), above, if the remainder
had been to X or Xs estate rather than to Y or Ys estate?

(10) Grantor transfers Grantors principal residence to a trust with income

to Grantor for life, and a remainder to Child or Childs estate.

(a) What is included in Grantors gross estate when, five years

prior to death, Grantor sells the income interest, worth
$25,000 (based on Grantors life expectancy and the rental
value of the property), to Child for $25,000? At all times,
the residence that makes up the corpus of the trust is worth
$150,000.
(b) What would be included in Grantors gross estate if the sale
of the income interest in question (10)(a), above (for its then
fair market value), was made by Grantor two years prior to
Grantors death?


 13
 


PROBLEM 5
[SML&C refers to the abridged edition of Federal Estate and Gift Taxation (9th ed.).]

Assignment

Code: 2035(a); 2037.

Regulations: 20.2037-1(a)20.2037-1(e); 20.7520-3(b)(3)(ii).

SML&C: 1.02[2][b][iii]; 4.09[1], 4.09[6].

Suggested
references: Estate of Roy v. Commr, 54 TC 1317 (1970).

Questions

(1) Grantor creates a trust with income to Spouse for life, remainder to
Child if living and, if not, reversion to Grantor or Grantors estate.

(a) If Grantor predeceases Spouse and Child, is Section 2037

applicable to the transfer?
(b) Is any part of the value of the trust corpus included in
Grantors gross estate?

(2) Grantor creates a trust with income to X or Xs estate for Grantors

life, remainder to Y if Y is then living and, if not, to Z or Zs estate. If Grantor
predeceases X and Y, is anything includable in Grantors gross estate?

(3) What interest or interests, if any, are included in Grantors gross

estate under Section 2037 (assuming the 5 percent test is met) in the following
situations:

 15
 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS

(a) Grantor creates a trust with income to Spouse, S, for life,

reversion to Grantor if living and, if not, to A or As estate.
Grantor predeceases S and A.
(b) What is the result if Grantor gave the reversion to A and died
within two years of the gift?
(c) Grantor creates a trust with income to S for life, remainder to
A if living and, if A is not living, reversion to Grantor if
Grantor is living; if Grantor is not living, remainder to B or
Bs estate. Grantor predeceases S and A.
(d) Same as question (3)(c), above, except that S is also given a
general power of appointment over the property.
(e) Grantor, age 50, creates a trust with income to be
accumulated for twenty years or until Grantors death,
whichever is earlier, then principal and accumulated income
to Child if living. Grantor dies ten years later, survived by
Child. Assume that if Child were not living, principles of
local law would effect a reversion to Grantors estate.
(f) Same as question (3)(e), above, except that Grantor is age 90
at the time of the transfer.
(g) Grantor creates a trust with income to S for Grantors life,
with the remainder to X or Y or their estates in any portions
Grantor determines; if Grantor fails to allocate the
remainder, it is to pass equally to X and Y or their estates.
Grantor predeceases all parties without allocating the
remainder.
(h) Grantor creates a trust with income to S for Ss life, then
income to Grantor for Grantors life, and a remainder to
Children or their estates.


 16
 PROBLEM 6
[SML&C refers to the abridged edition of Federal Estate and Gift Taxation (9th ed.).]

Assignment

Code: 2035(a), 2035(e); 2038.

Regulations: 20.2038-1(a), 20.2038-1(b), 20.2038-1(e).

SML&C: 4.07[2][b][ii]; 4.10 (omit 4.10[10]).

Suggested
references: Jennings v. Smith, 161 F2d 74 (2d Cir. 1947), 47-1
USTC 10,551, 35 AFTR 1203.

Old Colony Trust Co. v. United States, 423 F2d 601

(1st Cir. 1970), 70-1 USTC 12,667, 25 AFTR2d
1549.

Rev. Rul. 70-513, 1970-2 CB 194.

Questions

(1) Grantor creates a trust with income to X or Xs estate for Grantors

life, and a remainder to Y or Ys estate. What is the result for Grantor under
Section 2038 when Grantor predeceases all other parties in the following
situations? This problem is similar to question (6) in Problem 4, relating to
Section 2036. Consider the results under Section 2036, as well as Section
2038.

(a) Grantor, as trustee, retains a power to invade corpus for Z.

(b) Grantor, as trustee, retains a power to give the remainder to
Z.
(c) Grantor, as trustee, retains a power to invade the corpus of
the trust for X.
(d) Grantor provides that the trustee shall have power to give
corpus to Z and names friend E trustee.

17
 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS

(e) Grantor creates the trust in question (1)(d), above, but

Grantor retains a power to remove E as trustee at any time
and name Grantor as trustee.
(f) Grantor creates the trust in question (1)(d), above, but
Grantor names a corporate trustee and retains the right to
remove the trustee without cause and to appoint another
corporate trustee.
(g) Grantor names Grantor trustee, and, as the trustee, Grantor is
required to give unrelated Z as much income as is needed
each year for Zs support and maintenance, with any excess
income to go to X. What results if Z is Grantors minor child?
(h) Grantor retains a power to order the third-party trustee to
return all of the trust corpus to Grantor.
(i) Grantor retains the power in question (1)(h), above, but
provides that it shall not become effective until six months
after Grantors notice that Grantor intends to exercise it.
(j) Grantor names X trustee and retains a power in conjunction
with X to direct that all of the trust corpus be returned to
Grantor.
(k) Grantor retains a power subject to Xs and Ys approval to
require the third-party trustee to return the trust corpus to
Grantor.

(2) Grantor creates a trust with income to X (not a dependent) for ten
years, and a remainder to X or Xs estate. Grantor dies after five years, X
surviving.

(a) What inclusion would be required under Sections 2036 and

2038 if Grantor retained a power to accumulate income?
(b) What inclusion would be required under Sections 2036 and
2038 if Grantor retained a power to invade corpus for X?

(3) Settlor transfers some IBM stock to a trust and provides for the
payment of income to A for As life, and a remainder to B or Bs estate. Settlor
is trustee and, as trustee, holds the power to vote the stock, to sell the stock
and reinvest in other stock, even if it is speculative or unproductive of income,
and to allocate receipts other than cash dividends either to income or to

18
 PROBLEM 6

principal. What are the estate tax consequences upon the death of Settlor
under Sections 2036(a)(2) and 2038?

(4) Grantor makes an inter vivos outright gift of some rental property to
Grantors Spouse. Spouse dies and devises the rental property to a trust that
provides income to whichever of their Children the trustee decides for
Childrens lives, and a remainder to Grandchildren. The trustee may also
invade the corpus for any of the Children. Spouse names Grantor as trustee of
the trust. Grantor predeceases all of the beneficiaries. What are the estate tax
consequences to Grantor?

(5) Grantor created a revocable trust several years ago providing for
income to Children and a remainder to Grandchildren. Within three years of
Grantors death, Grantor relinquished the power to revoke the trust.

(a) Is the corpus of the trust included in Grantors gross estate?

(b) What is the result if, instead, the trust provided income to
Grantor for life and a remainder to Children and Grantor
relinquished both the income interest and the power to
revoke the trust within three years of Grantors death?

(6) Having studied Sections 20352038, and assuming your Client wants
to transfer assets to a trust whose corpus will not be included in Clients gross
estate, what suggestions do you have for Client to avoid Sections 20352038
inclusion in Clients gross estate?

19
 PROBLEM 7
[SML&C refers to the abridged edition of Federal Estate and Gift Taxation (9th ed.).]

Assignment

Code: 2039. Skim 72(b)(2), 72(b)(3); 2035; 2505.

Regulations: 20.2039-1(a), 20.2039-1(b)(1), 20.2039-1(c).

SML&C: 4.11 (omit 4.11[2], 4.11[6]).

Suggested
references: All v. McCobb, 321 F2d 633 (2d Cir. 1963), 63-2
USTC 12,173, 12 AFTR2d 6250.

Estate of Bergan v. Commr, 1 TC 543 (1943), acq.

1943 CB 2.
Questions

(1) In year 1, D entered into a contract with an insurance company under

which D paid the company $750,000 then and there; they agreed that
beginning in year 10, the company would pay D $9,000 per month for life
and, after Ds death, the company would make like payments to Ds spouse,
S, for as long as S should live. However, D died in year 8, survived by S.

(a) Apply Section 2039 to the facts above.

(b) What is the result in question (1)(a), above, if S had paid
$250,000 of Ss funds toward the $750,000 cost of the
contract?
(c) What is the result in question (1)(a), above, if $375,000 of
the cost had been paid by Ds employer?
(d) Would the results in question (1)(a), above, be different if,
pursuant to a qualified pension plan, Ds employer had
purchased the contract for D and S?

21
 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS

(e) What is Ss income tax basis in the right to receive the future
payments in question (1)(d), above? If D intended to make
charitable donations at death, should D consider leaving
other property to S and the pension proceeds to charity?

(2) In year 1, D sold Ds ranch to Child C. As full consideration for the

transfer, C agreed to pay D $10,000 per month for Ds life, all obligations to
cease upon Ds death. For several years, the net income from the ranch had
been approximately $10,000 per month. D died in year 5, the current year.

(a) If the value of the ranch equals the value of Cs agreement to

pay, of what estate tax significance is this arrangement upon
Ds death?
(b) Would the result be different if the agreement called for
$10,000 payments each month to D for Ds life and thereafter
to Ds spouse for spouses life if spouse should survive D?
(Ds spouse survives.)
(c) Assuming only payments to D and assuming that the ranch
was worth $2 million and the value of Cs agreement to pay
was $1 million, what are the estate tax consequences at Ds
death? Consider generally whether the gift tax makes the
conclusion acceptable.
(d) If, at the time of transfer, the ranch was worth $2 million and
the agreement to pay was worth $1 million, and D died in
year 2 at a time when the ranch was worth $2.5 million, what
are the consequences to Ds estate?
(e) The arrangement in question (2)(a), above, is a sale, a
transfer for adequate and full consideration, although if D
outlives Ds life expectancy, it can be expensive for C.
What alternative sale estate planning techniques are
available to D?

There are also important income tax consequences to private arrangements in

the form of property transfers in exchange for annuities. See IRC 72(b)(2);
Rev. Rul. 69-74, 1969-1 CB 43 (consequences to transferor); Rev. Rul.
55-119, 1955-1 CB 352 (consequences to transferee). But see Prop. Reg.
1.72-6(e), 1.1001-1(j).

22
 PROBLEM 8
[SML&C refers to the abridged edition of Federal Estate and Gift Taxation (9th ed.).]

Assignment

Code: 2040; 2056(d)(1)(B).

Regulations: 20.2040-1.

SML&C: 4.12 (omit 4.12[11]).

Suggested
references: Estate of Peters v. Commr, 386 F2d 404 (4th Cir.
1967), 67-2 USTC 12,497, 20 AFTR2d 6016.

Gallenstein v. United States, 975 F2d 286 (6th Cir.

1992), 92-2 USTC 60,114, 70 AFTR2d 5683.

Tuck v. United States, 282 F2d 405 (9th Cir. 1960),

60-2 USTC 11,968, 6 AFTR2d 6150.

United States v. Heasty, 370 F2d 525 (10th Cir.

1966), 67-1 USTC 12,442, 19 AFTR2d 1767.
Questions

(1) Consider the estate taxation of property owned by the decedent and
another.

(a) How does the Code deal with community property?

(b) How does the Code deal with a tenancy in common?
(c) How does the Code deal with a joint tenancy with right of
survivorship?
(d) How does the Code deal with a tenancy by the entirety?
(e) Are there good policy reasons (and what are the reasons) for
according different estate tax treatment to property owned by
the decedent and another in various forms of joint
ownership?
(f) How does the Code deal with the estate taxation of property

23
 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS

held in a revocable trust funded by the decedent? Are the

consequences comparable to ownership with a right of
survivorship?

(2) Child contributed $5,000 of Childs funds to a joint savings account

between Parent and Child. Upon Parents death several years later, $20,000
was in the account. The origin of $15,000 of the $20,000 is obscure, but there
had been no withdrawals. How does the savings account affect Parents gross
estate when Parent predeceases Child? See Estate of Drazen v. Commr, 48
TC 1 (1967).

(3) A parcel of joint tenancy real property owned by Parent and Child
was worth $25,000 at its acquisition in 1995 and $50,000 at decedents death.
What is the result under Section 2040 in the following situations?

(a) Parent paid the full $25,000 purchase price; Parent

predeceases Child.
(b) Parent paid the full $25,000 purchase price; Child
predeceases Parent.
(c) Parent and Child each contributed $12,500 of the purchase
price; Parent predeceases Child.
(d) Parent contributed $15,000 of the purchase price and Child
contributed $10,000; Parent predeceases Child.
(e) Grandparent devised the property to Parent and Child as joint
tenants; Parent predeceases Child.
(f) What would the results be in questions (3)(a), (3)(b), and
(3)(d), above, if the joint tenants were spouses, not Parent
and Child?

(4) Discuss the estate tax consequences of the following transactions in

joint tenancy property under Section 2040:

(a) Parent transfers stock outright to Child, who subsequently

transfers the same stock, which has not appreciated, to Parent
and Child as joint tenants. At the time of Childs transfer, the
stock is worth $5,000. Parent predeceases Child when the
stock is worth $10,000.
(b) Same as question (4)(a), above, except that in the current
year, Child predeceases Parent within three years of Childs

24
 PROBLEM 8

transfer. The stock is worth $10,000 at Childs death.

(c) Parent transfers stock outright to Child. Child subsequently
uses ordinary cash dividends paid on the stock to pay the
entire purchase price for the stock in a joint tenancy between
Parent and Child. Parent predeceases Child when the jointly
owned stock is worth $10,000.
(d) Parent transfers stock worth $5,000 outright to Child. When
the stock has appreciated in value to $10,000, Child sells it
and uses the proceeds to purchase other stock worth $10,000
in joint tenancy between Parent and Child. Parent
predeceases Child when the jointly owned stock is worth
$20,000.
(e) Same as question (4)(d), above, except that rather than
selling the original stock, Child transfers it when it is worth
$10,000 to a joint tenancy between Parent and Child.

(5) Parent purchased a piece of commercial property for $40,000 to

which Parent and Child took title as joint tenants. Several years later, when
the property had appreciated in value to $50,000, Parent and Child made a
$25,000 improvement to the property (increasing its value to $75,000), with
Child providing $15,000 and Parent providing $10,000 of the cost of the
improvement. Parent predeceased Child several years later when the property
was worth $125,000. What is included in Parents gross estate under Section
2040?

(6) Grandparent purchased some land in the current year for $20,000 and
contributed it to a joint tenancy with Child. Five years later, Grandparent
became terminally ill and several weeks before Grandparents death,
Grandparent and Child severed the joint tenancy property, then worth
$50,000, and converted it to a tenancy-in-common.

(a) What is the result for Grandparents gross estate when

Grandparent dies with Child surviving?
(b) What is the result for Childs gross estate when Child dies
with Grandparent surviving and the property worth $50,000?
(c) What are the results in questions (6)(a) and (6)(b), above, if,
rather than converting the property to a tenancy-in-common,
Grandparent and Child transfer it retaining a joint life
tenancy?

25
 FEDERAL ESTATE & GIFT TAXATION: STUDY PROBLEMS

(7) Community Property Question: Recently married clients who live

in a community property state ask your advice on whether they should take
title to their newly acquired residence as joint tenants or as community
property. What do you advise?

26