The value of property that was incompletely transferred during life will be included in the gross estate at death 26 U.S.C.A.. From the gross estate are deducted expenses of administerin
Trang 1representative takes the property as personal
property
A life estate is alienable, and therefore, the
life tenant can convey his or her estate The
grantee of the life tenant would thereby be given
an estate pur autre vie The life tenant is unable,
however, to convey an estate that is greater than
his or her own
Nonfreehold Estates
Nonfreehold estates are interests in real
proper-ty without seisin and which are not inheritable
The four main types of nonfreehold estates are
an estate for years, an estate from year to year, a
tenancy at will, and a tenancy at sufferance
Estate for Years The most significant feature
of an estate for years is that it must be of
definite duration, that is, it is required to have a
definite beginning and a definite ending The
most common example of an estate for years is
the arrangement existing between a landlord
and tenant whereby property is leased or rented
for a specific amount of time In this type of
estate the transferor leases the property to the
transferee for a certain designated period, for
example:“Transferor leasesBLACKACREto
trans-feree for the period of January 1, 1998, to
January 1, 2003, a period of five years.”
During the five-year period, the transferee
has the right to possess Blackacre and use and
enjoy the fruits that stem from it He or she is
required to pay rent according to the terms of
the rental agreement and is not permitted to
commit waste on the premises If the transferee
dies during the term of the lease, the remainder
of such term will pass to the transferee’s
personal representative for distribution pursuant
to a will or the laws ofDESCENT AND DISTRIBUTION,
since a leasehold interest is regarded as personal
property or a chattel real
Estate from Year to Year The essential
distin-guishing characteristic of an estate from year to
year is that it is of indefinite duration For
example, a landlord might lease Blackacre to a
tenant for a two-year period, from January 1,
2003, to January 1, 2005, at a rental of $600 per
month, payable in advance on or before the
ninth day of each month The tenant might
hold possession beyond January 1, 2005, and on
or before January 9, 2005, give the landlord $600
If the landlord accepts the rent, the tenant has
thereby been made a tenant from year to year
An estate of this nature continues indefinitely
until one of the parties gives notice of termina-tion The terms of the original lease are implied
to carry over to the year-to-year lease, except for the term that set forth the period of the lease
Notice of termination is an important component of this type of periodic tenancy In the preceding example, either party would be able to terminate the tenancy by providing notice at least six months preceding the end of the yearly period Statutory provisions often abridge the length of notice required to end periodic tenancies Such tenancies may come within requirements set forth by the STATUTE OF FRAUDS
Tenancy at Will A tenancy at will is a rental relationship between two parties that is of indefinite duration, since either may end the relationship at any time It can be created either
by agreement, or by failure to effectively create a tenancy for years
A tenancy at will is terminated by either individual without notice and ends automati-cally by the death of either party or by the commission of voluntary waste by the lessee It
is not assignable and is categorized as the lowest type of chattel interest in land
Tenancy at Sufferance A tenancy at sufferance
is an estate that ordinarily arises when a tenant for years or a tenant from period to period retains possession of the premises without the landlord’s consent This type of interest is regarded as naked and wrongful possession
In this type of estate, the tenant is essentially
a trespasser except that his or her original entry onto the property was not wrongful If the landlord consents, a tenant at sufferance may be transformed into a tenant from period to period, upon acceptance of rent
Concurrent Estates
Concurrent estates are those that are either owned or possessed by two or more individuals simultaneously The three most common types
of concurrent estates areJOINT TENANCY,TENANCY
BY THE ENTIRETY, andTENANCY IN COMMON Joint Tenancy A joint tenancy is a type of concurrent ownership whereby property is acquired by two or more persons at the same time and by the same instrument A typical conveyance of such a tenancy would be
“Grantor conveys Blackacre to A, B, and C and their heirs in fee simple absolute.” The
Trang 2main feature of a joint tenancy is the RIGHT OF SURVIVORSHIP If any one of the joint tenants dies, the remainder goes to the survivors, and the entire estate goes to the last survivor
In a joint tenancy, there are four unities, those of interest, time, title, and possession
Unity of interest means that each joint tenant owns an undivided interest in the property as a whole No one joint tenant can have a larger share than any of the others
Unity of time signifies that the estates of each
of the joint tenants is vested for exactly the same period
Unity of title indicates that the joint tenants hold their property under the same title
Unity of possession requires that each of the joint tenants must take the same un-divided possession of the property as a whole and enjoy the same rights until one of the joint tenants dies
Tenancy by the Entirety A tenancy by the entirety is a form of joint tenancy arising between a husband and wife, whereby each spouse owns the undivided whole of the property, with the right of survivorship
A tenancy by the entirety can be created by will or deed but not by descent and distribution
It is distinguishable from a joint tenancy in that neither party can voluntarily dispose of his or her interest in the property There is unity of title, possession, interest, time, and person
Tenancy in Common A tenancy in common
is a form of concurrent ownership that can be created by deed or will, or by operation of law,
in which two or more individuals possess property simultaneously A typical conveyance
of this type of tenancy would be “Grantor, owner of Blackacre in fee simple absolute, grants to A, B, and C, and their heirs—each taking one-third interest in the property.”
In the preceding illustration, A, B, and C are tenants in common There is no right of survivorship in such a tenancy, and each grantee has the right to dispose of his or her share by deed or by will
In a tenancy in common, one of the tenants may have a larger share of the property than the others In addition, the tenants in common may take the same property by several titles The only unity present in a tenancy in common is unity of possession
Future Interests
Future interests are interests in real or personal property, a gift or trust, or other things in which the privilege of possession or of enjoyment is in the future and not the present They are interests that will come into being at a future point in time There are five classes of future interests: reversions; possibilities of reverter; powers of termination, also known as rights of re-entry for condition broken; remainders, and executory interests
Incorporeal Interests
Incorporeal interests in real property are those that cannot be possessed physically, since they consist of rights of a particular user, or the right
to enforce an agreement concerning use The five major types of incorporeal interests are easements; profits; covenantsRUNNING WITH THE LAND; equitable servitudes; and licenses
FURTHER READINGS Abts, Henry W 2002 The Living Trust: The Failproof Way to Pass Along Your Estate to Your Heirs 3d ed New York: McGraw-Hill.
Applegate, E Timothy 2003 “Estate Planning: Who Owns the Family Plot? ” California Lawyer 23 (October).
“Estate Planning FAQs.” ABA Section of Real Property/ Trust & Estate Law American Bar Association Available online at http://www.abanet.org/rpte/public/home html; website home page: http://www.abanet.org (accessed September 2, 2009).
Trusts & Estates Web site Available online at http:// trustsandestates.com/ (accessed September 2, 2009) CROSS REFERENCES
Equity; Servitude.
ESTATE AND GIFT TAXES Estate and gift taxes are the combined federal tax
on transfers by gift or death
When property interests are given away during life or at death, taxes are imposed on the transfer These taxes, known as estate and gift taxes, apply to the total transfers that an individual may make over a lifetime
Estate and gift tax law is primarily statutory Although the TREASURY DEPARTMENT issues reg-ulations governing the interpretation of the revenue laws and although state and federal courts contribute their interpretations of statu-tory law, the foundation of the transfer taxes rests in chapters 11 and 12 of the INTERNAL REVENUE CODE To understand the complex statutory framework requires a basic
Trang 3understanding of the concepts underlying the
estate and gift tax system TheTRANSFER TAXlaws
apply to all gratuitous shifts in property
interests But although administered similarly,
the estate tax and gift tax have somewhat
different goals The gift tax reaches the
gratu-itous ABANDONMENT of ownership or control in
favor of another person during life, whereas the
estate tax extends to transfers that take place at
death, or before death, as substitutes for
dispositions at death Both taxes are intended
to limit the concentration of familial or dynastic
wealth
Estate and gift taxes became a source of
political debate in the late 1990s, as many
members of Congress pressed for an end to
these taxes They argued that such death taxes
were unfair and forced small businesses and
family farmers to sell off their assets to pay the
estate taxes Opponents of repeal noted that
even though the potential tax rate was quite
high, at 55 percent, most individuals never paid
any estate or gift tax Under the tax system that
had been in place since 1986, every person
could transfer a combined $600,000 worth of
property during life and at death without paying
tax This tax-free allowance corresponded to
$192,800 worth of federal tax savings and is
known as the unified credit against estate tax
This unified credit was sufficient to satisfy taxes
on transfers by all but the richest 5 percent of
U.S citizens Defenders of estate and gift taxes
maintained that these taxes were guided by an
important government and social policy: the
prevention of large concentrations of dynastic
wealth Moreover, they pointed out that estate
tax collections typically constitute less than
2 percent of total INTERNAL REVENUE SERVICE
collections
The debate on this issue culminated in the
Economic Growth and Tax Relief
Reconcilia-tion Act of 2001 The top estate tax rate was
reduced from 55 percent to 50 percent in 2002
(together with the repeal of the 5 percent surtax
on estates over $10 million), 49 percent in 2003,
48 percent in 2004, 47 percent in 2005, 46
percent in 2006, and to 45 percent in years 2007
through 2009 The credit-level exemption was
raised from $675,000 to $1 million in 2002,
$1.5 million in 2004, $2 million in 2006, and
$3.5 million in 2009 Most importantly, the
estate tax was to be repealed in 2010 However,
the law contains a sunset provision If Congress
does not extend the law beyond 2010, the new
law will end on December 31, 2010, and the previous estate law will be in effect again
The gift tax was not repealed, but it was modified The new law increased the total gift tax exemption from $675,000 in 2001 to
$1,000,000 in 2002 and thereafter After 2009, the gift tax is retained at the top income tax rate for the applicable year, which is currently 35 percent The retention of the gift tax is meant to discourage transfers to lower income benefici-aries to minimize capital gains taxes
With few exceptions, the individual making the transfer is responsible for any transfer tax owed (whereas the individual receiving income
is responsible for any income tax owed) Thus, the executor of an estate, as the estate’s representative, is responsible for paying any estate tax due, and the donor of a gift is responsible for paying any gift tax due
Gifts
The Internal Revenue Code defines a gift as a
“transfer … in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.” Generally, a gift is any completed transfer of an interest in property to the extent that the donor has not received something of
Federal Estate and Gift Tax Receipts, 1970 to 2007
3.6 6.4 11.5 14.8
29.7
0 5 10 15 20 25 30 35
1970 1980 1990 1995 2000 2005 2007
Year
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
SOURCE: U.S Office of Management and Budget,
Historical Tables, annual, and the Internal Revenue
Service, Statistics of Income (SOI) Tax Stats.
Estate and gift tax amounts Amounts as percentage
of total IRS collections
ILLUSTRATION BY GGS CREATIVE RESOURCES REPRODUCED BY PER-MISSION OF GALE, A PART OF CENGAGE LEARNING.
Trang 4value in return, with the exception of a transfer that results from an ordinary business transac-tion or the discharge of legal obligatransac-tions, such as the obligation to support minor children This definition of gifts does not require the intent to make a gift An individual may make gifts of both present interests (such as life estates) and future interests (such as remainders) in pro-perty (26 U.S.C.A § 2503[b])
From a tax standpoint, gifts have two principal advantages over transfers at death
First, gifts allow a donor to transfer property while its value is low, allowing future apprecia-tion in property value to pass to others free of additional gift or estate tax Second, provided that the gift is of a present interest in property, a donor may transfer up to $11,000 exempt from tax to each donee every calendar year, which allows the donor to reduce the size of the estate remaining at death without any transfer tax consequences
To constitute a gift, a transfer must satisfy two basic requirements: It must lack consider-ation, in whole or in part (that is, the recipient must give up nothing in return); and the donor must relinquish all control over the transferred interest To constitute a tax-exempt gift, a transfer also must constitute a present interest
in property (A present interest is something that
a person owns at the present time, whereas a future interest is something that a person will come to own in the future, such as the proceeds
of a trust.) Lack of Consideration A transfer is not a gift
if the transferor receives consideration, or something of value, in return for it For example, if A sells B a used car worth $5,000 and receives $5,000 in exchange, the transfer is not a gift because it is supported by“adequate and full consideration” (26 U.S.C.A § 2512[b])
But if A sells B the same car for only $2,000, the transfer constitutes a gift of $3,000 because A exchanges $3,000 worth of car for nothing
Finally, if A gives B the car without receiving anything in return, the transfer constitutes a gift
of $5,000 Although consideration may be whole or partial, not all transfers for partial or insufficient consideration result in gifts An arm’s-length sale (a sale free of any special relationship between buyer and seller) will not
be considered a gift where no intent to make a gift exists, even if the consideration is not adequate This limit on the definition of gifts
excludes bad business deals and forced sales from gift tax treatment
The Completeness Requirement A transfer constitutes a gift for tax purposes only if the donor has parted with the ability to exercise
“dominion and control” over the property transferred Many transfers of property satisfy this condition For example, if A takes B out for a birthday dinner, the act of purchasing the dinner
is a gift because A cannot regain control over the food that B consumes or revoke the acts of purchasing and consuming the meal When the donor has not relinquished absolutely the ability
to control or manage the property or its use, however, the“gift” may not be complete for tax purposes The most common example of an incomplete transfer is a transfer of property to a revocable trust, in which the donor retains the right, as trustee, to alter, amend, or rescind the trust The gift is not completed because the donor could restore ownership in the trust property to himself or herself or change his or her mind about who will enjoy or later receive the property This distinction between complete and incomplete transfers determines whether prop-erty will be included in an estate at death, as well as the value of that property The value of property that was incompletely transferred during life will be included in the gross estate
at death (26 U.S.C.A §§ 2035-2038) Therefore, any appreciation in the value of incompletely transferred property will be included and taxed
in the estate, whereas none of the value of completely transferred property will be included
in the estate Accordingly, if A transfers 1,000 shares of XYZ stock outright to B when it is worth $10 per share, the value of the transfer subject to tax equals zero because A can take advantage of the annual exclusion described in the following section If A transfers the same stock to a revocable trust for B’s benefit, however, and that stock is worth $100 per share
on the date of A’s death, the entire $100,000 is included and taxable in A’s estate Moreover, any income distributions from the trust after the transfer of property to the revocable trust are taxable gifts to B for which A must pay tax Sometimes people make incomplete trans-fers, rather than completed gifts, in order to retain control over the property, even though appreciation in property value is taxed as a consequence of an incomplete transfer For various reasons, a person might not want to give
Trang 5up that control An individual might wish to
control the distribution of income from a gift to
a trust or even to receive the income
distribu-tions from a trust Or an individual may create a
trust for non-gift reasons, such as to ensure
property or investment management Parents
might not trust their children to manage gifts of
stock or cash effectively and thus might retain
control to ensure that transfers are not
squandered Occasionally, donors mistakenly
believe that revocable trusts are effective devices
to avoid paying estate taxes and simply do not
realize that transfers to revocable trusts are
incomplete for gift purposes
Present versus Future Interests: The Annual
Exclusion Each individual may make
tax-exempt gifts of up to $11,000 to each donee
every year To qualify for this so-called annual
exclusion, a gift must be of a present interest in
property (26 U.S.C.A § 2503[b]) Completed
transfers of future interests, such as remainder
interests in real estate or the vested right to the
distribution of trust principal on the donor’s
death, constitute gifts for tax purposes but do
not qualify for the annual exclusion
Only the unrestricted right to use, enjoy, or
possess property in whole or in part constitutes
a present interest For example, if A transfers a
life estate in his home to B, with a remainder
to C, only the life estate to B, which is a present
interest in the home, qualifies for the annual
exclusion The remainder interest to C is a
completed gift but does not qualify for the
annual exclusion because it is a gift of a future
interest A more subtle and common illustration
of this principle involves trust property For
example, A creates an irrevocable trust giving B,
the trustee, complete discretion over the
distri-bution of income to C for ten years, at which
time the trust will terminate, and the entire trust
corpus and accumulated income will be paid to
C In this case, A has made a completed gift of
the entire trust corpus, but the gift does not
qualify for the annual exclusion because C has no
present right to the trust income
Testamentary Transfers
The gross estate is the measure of the interests an
individual is considered capable of transferring at
the time of death and provides the starting point
for computing the estate tax (26 U.S.C.A § 2031)
The gross estate is an artificial concept, in part
because it may include interests that the individual
did not actually own at death (§§ 2035-2038)
From the gross estate are deducted expenses of administering the estate, the decedent’s legal obligations at death, the value of property passing
to a surviving spouse, and the value of bequests to charity (§§ 2053-2056) The remainder is known
as the taxable estate and is the value on which the estate tax is computed
Conventional interests in property, such as ownership of real estate, stocks and bonds, cash, automobiles, art, and personal property, must
be included in the gross estate and valued at their fair market value on the date of death In addition, interests in life insurance, annuities, and certain death benefits are included to the extent that the decedent was able to confer an interest in them on another person Finally, three somewhat artificial ownership attributes, including the power to change beneficial enjoyment and the power to revoke or change the type and time of enjoyment, are included in the gross estate to the full extent of the property
to which the power applies The value of property included in the gross estate is equal
to its fair market value on the date of death
Designation of Beneficiaries Life insurance, annuities, and certain death benefits are sub-stitutes for dispositions at death and are included in the gross estate to the extent that the decedent owned or could exercise“incidents
of ownership” over them until the time of death
Thus, the value of a life insurance policy payable
to the decedent’s estate on death is included in the decedent’s gross estate (26 U.S.C.A § 2042[a]
[1]) In addition, life insurance is includable in the gross estate even though neither the decedent nor the decedent’s estate actually owned it, if the decedent possessed any incidents of ownership over the policy Incidents of ownership encom-pass the rights to change the distribution of the economic benefit flowing from the insurance policy For example, if A purchases a life insurance policy that is payable to B on A’s death, the value of that policy is includable in A’s gross estate if she retained, at the time of her death, the ability to change the policy beneficiary
to C If the decedent had no rights to direct or affect economic benefits at the time of her death, then the proceeds of the policy are not includable
in the gross estate
Powers of Appointment Frequently, an indi-vidual owns the power to designate who will
Trang 6enjoy an item of property This power may be considered an attribute of ownership sufficient
to be included in the gross estate The provision
26 U.S.C.A § 2038, discussed below under retained power, addresses these powers of appointment that individuals reserve to them-selves when creating property rights for another individual Section 2041, in contrast, includes in the gross estate the value of property subject to a
“general” POWER OF APPOINTMENT that the dece-dent acquired from another person A general power of appointment is one that individuals may exercise in their own favor or in favor
of their estate, their creditors, or the creditors of their estate If the decedent may only exercise the power in conjunction with either the creator
of the power or a person having an adverse interest in the property subject to the exercise of the power, then the power is not considered a general power of appointment because the decedent cannot freely control the transfer of the property at the decedent’s death, and the property subject to the power is not included in the gross estate For example, if A dies and leaves B the right to income in a trust, as well as the right to appoint the trust in whatever manner he wishes, then the entire value of the trust is included in B’s estate when B dies If, by contrast, A leaves B the right to income from the trust as well as the right to appoint the trust only to C or C’s heirs, then no portion of the trust is includable in B’s estate when B dies
A power that is limited by an ascertainable standard is not a general power, even if it otherwise appears to be a general power Ascer-tainable standards include health, education, support, and maintenance Accordingly, if A dies and leaves B the power to appoint trust principal
to herself if it is required for her health, education, support, or maintenance, B’s power
is limited by an ascertainable standard, and the value of the trust is not included in the gross estate But if B may invade the trust principal for her “comfort and happiness,” B’s power is not limited by an ascertainable standard, and the value of the trust is included in B’s estate
Artificial Aspects of the Estate Tax System Before 1976 the gross estate included the value
of all gifts made in CONTEMPLATION OF DEATH Because determining whether a gift was in contemplation of death turned out to be subjective, difficult to prove, and somewhat morbid, a 1976 amendment to the estate tax law
automatically included any gift that a decedent made within three years of death (26 U.S.C.A
§ 2035[a]) Unfortunately, the effect of § 2035(a) was to include in the gross estate the full value
of the transferred property at the date of death, including any appreciation in value since the transfer Thus, if A transferred $3,000 worth of stock to B in 1978 and died in 1980, when the stock was worth $25,000, the stock’s full value
of $25,000 was included in the gross estate, defeating much of A’s pre-death tax planning
In 1981 sweeping tax changes eliminated from the gross estate most transfers made within three years of death Even so, three specific types of transfers (transfers with a retained life estate, transfers with retained powers, and transfers effective on death) are included in the gross estate because the decedent owned an interest in the property at the time of death Moreover, the value of property once subject to certain retained interests is included in the gross estate if the release or lapse of the retained interest takes place within three years of death, because the disposition of the retained interest is considered
a substitute for disposition at death
Transfers with a retained life estate Trans-fers with a retained life estate are covered in 26 U.S.C.A § 2036 For purposes of the estate tax laws, the term life estate includes more than just
an expressly retained life interest in property For example, if A creates a trust for the benefit
of B but retains the right to receive the income from the trust for the rest of her life, her retained income interest clearly is a retained life estate in the property But the retention of the right to change the economic benefit derived from the property also constitutes a retained life estate, as when A reserves the right to change the trustee and appoint herself the trustee It also might include retained life estates by tacit agreement, such as when A transfers her home
to B, with the understanding that A and not B will live there for the rest of her life
The mere possession of a life estate in property is insufficient to bring it into the gross estate under § 2036 The life interest must be retained by the decedent and must apply to an interest in property that the decedent trans-ferred Thus, a life income interest created by someone other than the decedent is not includable in the gross estate under § 2036
Trang 7Transfers with retained powers Transfers in
which the decedent owns, at the time of death,
the power to alter, amend, revoke, or terminate
the enjoyment of the property are covered in 26
U.S.C.A § 2038(a)(1) In contrast to § 2041,
which allows general powers of appointment,
§ 2038 includes only powers associated with a
property interest that the decedent gave away
during his or her lifetime The most commonly
encountered retained powers are the powers
applicable to a revocable trust A revocable trust
is a legal instrument through which an individual
relinquishes legal ownership of the property to
the trustee of a trust, either retaining to himself
or herself beneficial enjoyment of the property,
such as the right to income, or granting it to
another individual As its name indicates, the
revocable trust is set up so that the creator,
known as the grantor, the settlor, or the trustor,
may revoke the trust entirely, may change the
terms of the trust, or may change the beneficial
ownership in the trust
The creation of, or an addition to, a
revocable trust almost never constitutes a gift
A gift must be completed in order to be taxable;
the creation of or an addition of property to a
revocable trust is, by definition, incomplete
because the creator may change the beneficial
enjoyment at some time, effectively
withdraw-ing the “gift.” Distributions from a revocable
trust may, however, constitute completed gifts
For example, if A transfers $2 million to a
revocable trust that pays income to B, the
transfer of the $2 million is not a completed gift,
but the annual payment of $100,000 in interest
to B is a taxable gift when it takes place Upon
A’s death, the entire value of the property
subject to the power, including both the trust
corpus and undistributed income payable to B,
is included in the gross estate Moreover,
because the property is valued as of the date
of death, any increases or decreases in the value
of the property since the transfer will appear in
the gross estate
Transfers effective on death The provision
26 U.S.C.A § 2037 includes in the gross estate
the value of transfers that take effect on death
Although at a distance § 2037 seems to apply to
all property transfers that occur as a result of an
individual’s death, the stipulated transfers are
rarely encountered To meet the requirements
of § 2037, the beneficiary must be able to
acquire an interest in the property only by
surviving the decedent Furthermore, the dece-dent must have expressly retained a reversionary interest in the property that is worth at least 5 percent of the property’s value at the time of death Both conditions are difficult to meet In the first place, the requirement that the beneficiary obtain an interest in the property solely by surviving the decedent is exclusive: If the beneficiary could have obtained an interest
in any other way, such as by surviving another individual, satisfying a condition, or outlasting a term of years, the property is not includable under § 2037 In the second place, the require-ment that the decedent’s retained reversionary interest exceed 5 percent of the property’s value
is difficult to satisfy because most retained reversions represent remote interests that reach fruition only if the primary, secondary, and all contingent beneficiaries die first or fail to satisfy the conditions of ownership
Release or lapse of rights The gratuitous relinquishment or lapse, within three years of death, of a retained life estate under 26 U.S.C.A
§ 2036, a retained reversion under § 2037, a retained power under § 2038, or an interest in life insurance under § 2042 will subject the value of the property, subject to the retained interest, to inclusion in the gross estate This result is a remnant of the pre-1981 policy that transfers“in contemplation of death” should be included in the gross estate Under § 2035(d)(2), the release or relinquishment of a retained interest within three years of death is conclu-sively presumed to be “in contemplation of death.” Thus, if A transfers his home to B in
2000, retaining the right to live there for life, but abandons that right at the end of 2006, a gift of the remainder interest in the property takes place in 2000, followed by a gift of the relinquished life estate in 2006 But if A dies before the end of 2006, both the 2000 and 2006 gift tax returns will be ignored for estate tax purposes, and the entire value of the home will
be included in A’s gross estate
As with the retained life estate, the relin-quishment or release within three years of death
of a power of appointment retained under
§ 2038 will cause inclusion of the full value of the property at its date-of-death value For example, if A creates a revocable trust in 1990, then amends it to make it irrevocable at the end
of 2002, a gift will result in 2002 when the trust becomes irrevocable If A dies before the end of
Trang 82005, the entire value of the trust, including any appreciation in value, will be included in A’s estate, and the 2002 gift will be ignored Finally, the release or lapse of ownership or any incidents of ownership over a life insurance policy will cause the entire value of that policy
to be included in the gross estate
Deductions
Once the value of the gross estate has been computed, the estate is entitled to take deduc-tions Expenses associated with administering the estate, such as funeral expenses, executors’
commissions, and attorneys’ fees, as well as debts the decedent owed at death, are deductible because they necessarily reduce the value of the property that the decedent actually is capable of transferring (26 U.S.C.A § 2053[a], [b]) The two most important deductions for tax pur-poses are the marital deduction and the charitable deduction
The Marital Deduction The marital deduc-tion applies to certain interests in property passing from the first spouse to die to the surviving spouse It permits an estate to deduct the value of certain property included in the estate from the value of the gross estate, thus eliminating the estate tax with respect to that property The rationale behind the marital deduction is simple: A husband and a wife should be considered a single unit for purposes
of wealth transfer Accordingly, as a general rule, the marital deduction will be allowed with respect to certain property passing to a surviv-ing spouse, provided that it will be included and taxed in the estate of that spouse on his or her death
To qualify for the marital deduction, property must satisfy three basic requirements
First, the surviving spouse must be a U.S
citizen Second, the interest in the property must pass directly from the first spouse to die
to the surviving spouse Third, the interest generally must not be terminable (26 U.S.C.A
§ 2056) The concept of a terminable interest is complex and technical, but for the most part,
an interest is terminable for tax purposes if another interest in the same property passes to someone other than the surviving spouse by reason of the decedent’s death, allowing that other person to enjoy the property after the surviving spouse’s interest terminates For example, if A leaves to her husband, B, a life
estate in her property, with a remainder to their children, her bequest to B does not qualify for the marital deduction B’s interest terminates automatically on his death, and the children, by reason of the termination, will then enjoy the property
If no one else can enjoy the property following the termination of the surviving spouse’s interest, the property interest is not considered terminable for tax purposes, and a deduction will be allowed For example, if A leaves to her husband, B, her interest in a patent and dies while the patent has ten years of life left, the patent interest qualifies for the marital deduction, because no one else will enjoy it after
it expires
Whether an interest is terminable must be determined at the time of death Therefore, even if an event following the first spouse’s death makes the termination of the surviving spouse’s interest impossible, the marital deduc-tion will not be allowed if it technically was terminable at the time of death
Congress in 1981 created an important exception to the general rule that a terminable interest does not qualify for the marital deduction This exception, called the qualified terminable interest property (QTIP) exception, is
a sophisticated statutory rule allowing the estate
to deduct the value of a terminable interest that passes to the surviving spouse as long as the transfer meets five requirements:
1 The surviving spouse receives all or a specific portion of the income for life from the interest
2 The income from the QTIP … is paid at least annually
3 The surviving spouse has the power to appoint the interest to himself or his estate
4 The power must be exercisable in all events
5 No other person has the power to appoint the interest to anyone other than the surviving spouse (26 U.S.C.A § 2056[b][7])
In return for the marital deduction, the estate must agree that the QTIP will be included
in the estate of the surviving spouse at death, to the extent that the surviving spouse has not disposed of the property during his or her life (§ 2044)
The Charitable Deduction The charitable deduction permits an estate to deduct the entire
Trang 9value of bequests to any of a number of public
purposes, including the following:
nany corporation or association organized
for religious, charitable, scientific, literary,
or educational purposes
nthe United States
na state or its political subdivisions, and the
District of Columbia
na foreign government, if the bequest is to
be used for charitable purposes
nselected amateur sports organizations (26
U.S.C.A § 2055[a])
The charitable deduction is intended to
provide wealthy individuals a tax incentive to
benefit the public interest Only bequests
passing directly from the decedent’s estate to
the charitable entity qualify for the deduction
Therefore, if A leaves $100,000 to her son C,
who gives $50,000 to the Red Cross immediately
after A’s death, A’s estate cannot receive a
charitable deduction for the sum given to the
charity (§ 2518[b] [4])
Computation of Tax
The estate and gift taxes are progressive and
unified taxes, meaning that each taxable transfer
taking place after 1976 is taken into
consider-ation when computing the tax on subsequent
transfers Progressivity in the estate and gift tax
system ensures that individuals cannot avoid
increased tax rates by making a series of small
transfers If the taxes were not progressive, then
$1 million parceled out into ten annual gifts of
$100,000 would be taxed at the marginal rate of
26 percent for each gift, whereas under the
PROGRESSIVE TAXsystem, the gifts are taxed at the
marginal rate of 39 percent Similarly,
unifica-tion between the transfer tax systems ensures
that individuals cannot avoid paying higher
estate tax rates at death simply by giving away
most of their property interests during life
Thus, in the case of A above, the marginal tax
rate on A’s estate is 49 percent, computed on
$2.7 million of total lifetime and death transfers,
rather than 45 percent, computed only on the
value of the gross estate
FURTHER READINGS
Barlett, Bruce 2003 “Taxing Debate: The Estate Tax.”
National Review (January 23).
Economic Growth and Tax Relief Reconciliation Act of
2001, H.R 1836, May 25, 2001.
“The Revocable Living Trust as an Estate Planning Tool.”
1972 Real Property, Probate, and Trust Journal 11.
Stephens, Richard B., et al., eds 2002 Federal Estate and Gift Taxation 8th ed Valhalla, N.Y.: Warren Gorham &
Lamont.
ESTIMATED TAX Federal and state tax laws require a quarterly payment of estimated taxes due from corporations, trusts, estates, non-wage employees, and wage employees with income not subject to withholding
Individuals must remit at least 100 percent of their prior year tax liability or 90 percent of their current year tax liability in order to avoid an underpayment penalty Corporations must pay at least 90 percent of their current year tax liability
in order to avoid an underpayment penalty
Additional taxes due, if any, are paid on taxpayer’s annual tax return
Typically, non-wage earners pay estimated tax since their incomes are not subject to
WITHHOLDING TAX to the same extent as the income of a salaried worker Persons who receive
a certain level of additional income, apart from their salaries, must also pay estimated tax
The calculation and payment of estimated tax are preliminary stages to the filing of a final income tax return Under federal and most state laws, estimated tax is paid in quarterly install-ments The tax paid is applied to the tax owed when the taxpayer files a final return Any overpayment of estimated tax will be refunded after the filing of the final return If no tax is owed, a taxpayer is still required under federal law, and many state laws, to file a final return
When tax is due upon the filing of the final return, the taxpayer must pay the outstanding amount Depending upon the amount due and the reasons for the miscalculation, a taxpayer might be liable under federal and state law for interest imposed upon the deficiency, as well as being subject to a penalty
ESTOPPEL
A legal principle that bars a party from denying or alleging a certain fact owing to that party’s previous conduct, allegation, or denial
The rationale behind estoppel is to prevent injustice owing to inconsistency or fraud There are two general types of estoppel: equitable and legal
Equitable Estoppel
Equitable estoppel, sometimes known as estoppel
in pais, protects one party from being harmed by
Trang 10another party’s voluntary conduct Voluntary conduct may be an action, silence, acquiescence,
or concealment of material facts One example of equitable estoppel due to a party’s acquiescence is found in Lambertini v Lambertini, 655 So 2d 142 (Fla 3d Dist Ct App 1995) In the late 1950s, Olga, who was married to another man, and Frank Lambertini met and began living together
in Argentina Olga and Frank hired an attorney in Buenos Aires, who purported to divorce Olga from her first husband and marry her to Frank pursuant to Mexican law The Lambertinis began what they thought was a married life together, and soon produced two children In 1968 they moved to the United States and became Florida residents
In 1992 Olga sought a divorce from Frank
She petitioned the Florida court for sole posses-sion of the marital home and temporary alimony, which the court granted Frank sought a rehear-ing, arguing that the Mexican marriage was not a valid legal marriage and was therefore void
Though Frank won with this argument in the trial court, the appellate court reversed, holding that Frank was equitably estopped from arguing that the Mexican marriage was invalid According
to the appellate court, Frank and Olga had held themselves out as a married couple for more than 30 years, lived together, raised two children, and owned property jointly Both Frank and Olga apparently believed all along that the Mexican marriage was legal, and it was only when Olga filed for divorce that Frank discovered and chose
to rely on its invalidity The appellate court granted Olga her divorce, the house, and the temporary alimony Frank’s acquiescence for three decades—holding himself out as being married to Olga—prevented him from denying the marriage’s existence
There are several specific types of equitable estoppel PROMISSORY ESTOPPEL is a contract law doctrine It occurs when a party reasonably relies on the promise of another party, and because of the reliance is injured or damaged
For example, suppose a restaurant agrees to pay
a bakery to make 50 pies The bakery has only two employees It takes them two days to make the pies, and they are unable to bake or sell anything else during that time Then, the restaurant decides not to buy the pies, leaving the bakery with many more pies than it can sell and a loss of profit from the time spent baking them A court will likely apply the promissory
estoppel doctrine and require the restaurant to fulfill its promise and pay for the pies
An estoppel certificate is a written declaration signed by a party who attests, for the benefit of another party, to the accuracy of certain facts described in the declaration The estoppel certificate prevents the party who signs it from later challenging the validity of those facts This type of document is perhaps most common in the context of mortgages, or home loans If one bank seeks to purchase mortgages owned by another bank, the purchasing bank may request the borrowers, or homeowners, to sign an estoppel certificate establishing (1) that the mortgage is valid, (2) the amount of principal and interest due as of the date of the certificate, and (3) that no defenses exist that would affect the value of the mortgage After signing this certificate, the borrower cannot dispute those facts
Estoppel by laches precludes a party from bringing an action when the party knowingly failed to claim or enforce a LEGAL RIGHT at the proper time This doctrine is closely related to the concept of statutes of limitations, except that statutes of limitations set specific time limits for legal actions, whereas under laches, generally there is no prescribed time that courts consider “proper.” A DEFENDANT seeking the protection of laches must demonstrate that the plaintiff’s inaction,MISREPRESENTATION, or silence prejudiced the defendant or induced the defen-dant to change positions for the worse The court applied the doctrine of laches in People v Heirens, 648 N.E.2d 260 (Ill 1st Dist
Ct App 1995) William Heirens pleaded guilty,
in 1946, to three murders, for which he received three consecutive life terms in prison Heirens sought court relief numerous times in the ensuing years In 1989, 43 years after his conviction, Heirens filed his second postconvic-tion petipostconvic-tion seeking, among other things, relief from his prison sentence due to ineffective counsel and the denial of due process at the time of his arrest The court found that all the witnesses and attorneys involved in Heirens’s case had since died Laches precluded Heirens from bringing his action because, according to the court, it would be “difficult to imagine a case where the facts are more remote and where the state might be more prejudiced by the passage of time.”