Estate Planning (Portfolio 800)

Tax Management Portfolio, Estate Planning, No. 800-3rd, is designed as an authoritative and practical working tool for attorneys, accountants, and others involved in estate planning practice.

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Tax Management Portfolio, Estate Planning, No. 800-3rd, is designed as an authoritative and practical working tool for attorneys, accountants, and others involved in estate planning practice. The basic estate, gift, and trust planning concepts are presented in a descriptive and conveniently accessible form. The topics treated include: the development by the advisor of an estate planning strategy for the client; fundamentals of the federal transfer tax system and related federal income tax rules; lifetime donative asset transfers; gratuitous property transfers at death; generation-skipping transfers; special property transfer planning considerations (e.g., community property, life insurance, charitable transfers, closely held corporations); and post-mortem planning. Other Portfolios in the Tax Management Estates, Gifts, and Trusts series provide detailed coverage of the various specific planning topics surveyed in this Portfolio. These Portfolios are identified at appropriate locations in the text of this Portfolio.
Effective estate planning (particularly, the federal tax planning component) enables a person to make both lifetime and testamentary transfers of assets to that person's beneficiaries of choice and, in the process, conserve wealth for those recipients (often family members). Various methods may be employed to both (i) achieve the estate planning client's objectives regarding the completion of these transfers and the port-mortem management and disposition of the property, and (ii) minimize income, gift and estate tax liabilities on the asset transfers. Effective estate planning, however, requires a working knowledge of both the federal and state tax rules (income, estate, and gift) and the non-tax reasons for using traditional wealth shifting mechanisms such as wills, trusts, gifts and powers of appointment. Therefore, a familiarity with various state property, trust and business laws is also essential for the estate planner. This Portfolio provides the practitioner with an overview of the estate planning concepts necessary in advising clients concerning these several elements of wealth transfer planning.
The federal transfer tax planning discussed in this Portfolio is primarily focused on the period beginning with the year 2013 and thereafter. After a decade of uncertainty, in 2013, Congress finally made permanent many of the estate, gift and generation-skipping transfer tax changes that were enacted in 2001 and 2010.
This Portfolio may be cited as Streng, 800-3rd T.M., Estate Planning.


William P. Streng, Esq.

William P. Streng, Wartburg College (B.A., 1959); Northwestern University School of Law (J.D., 1962); Law Clerk to Honorable Lester L. Cecil, Chief Judge, U.S. Court of Appeals for the Sixth Circuit, 1963–1964; associated with Taft, Stettinius & Hollister, Cincinnati, Ohio, 1964–1970; Attorney-Advisor, Office of Tax Legislative Counsel (Office of the Assistant Secretary for Tax Policy), U.S. Dept. of the Treasury, Washington, D.C., 1970–1971; Deputy General Counsel, Export-Import Bank of the United States, Washington, D.C., 1971–1973; Of Counsel, Haynes & Boone, Dallas, Texas (1977–1979); Professor of Law, School of Law, Southern Methodist University, Dallas, Texas (1973–1979); Bracewell & Patterson, Houston, Texas (Partner, 1980–1985; Consultant, 1985–2005); Bracewell & Giuliani LLP (Consultant, 2005–2011); Professor of Law, University of Houston Law Center (1985–present); Visiting Professor, The Ohio State University College of Law (1977); New York University School of Law (1990); & The University of Texas School of Law (2002); Lecturer, Rice University (1987–1989); Distinguished Lecturer, University of Hong Kong Law Faculty (1992); Fulbright Professor, University of Stockholm Law Faculty (1993); Visiting Fellow, Victoria University Law Faculty (1996); Visiting Professor, The University of Leiden (International Tax Center), The Netherlands, 1997, 1998, 2000, 2007 & 2009; Visiting Professor, Yokohama National Univ., Japan (2005); Member: American Law Institute (Tax Advisory Group); the International Fiscal Association (and Council Member, USA Branch); European Association of Tax Law Professors (EATLP); The International Academy of Estate and Trust Law; the American Bar Association's Section of Taxation; the BNA Tax Management Advisory Board; and various other professional organizations; Author or co-author of books and Tax Management portfolios, including: 700 T.M., Choice of Entity (2007); Tax Planning for Retirement, with M. Davis (ThomsonReuters/Checkpoint, 2011); “International Business Planning: Law and Taxation — United States,” with J. Salacuse (three volumes, 2011, Lexis-Nexis/Matthew Bender); Bittker, Emory & Streng, “Federal Income Taxation of Corporations and Shareholders — Forms,” ThomsonReuters/Checkpoint, 4th ed. (1995, and chapter revisions and supplements to 2012); previously “U.S. International Estate Planning,” (RIAG-Warren, Gorham & Lamont, 1996, and updates on ThomsonReuters/Checkpoint).

Table of Contents

Detailed Analysis

I. Introduction

II. Inventory of the Client's Assets and Objectives

A. Scope of Factual Analysis

B. Family

C. Assets and Liabilities

D. Cash Flow Analysis

E. Present Objectives for Estate Disposition

III. Preliminary Estate Planning Considerations

A. Expanded Responsibilities of the Professional Tax Advisor

B. Facilitating Lifetime Capital Formation

C. Fundamental Federal Income Tax Planning

D. Managing and Structuring the Closely Held Business Ownership: Business Succession Planning

E. Additional Important Preliminary Planning Inquiries

1. Life Insurance

2. Joint Tenancy Property

3. Conflict of Laws Problems

4. Classification of Community Property

F. Financial Adequacy of the Estate

G. Hypothetical Probate Administration

H. Lifetime Asset Management

IV. The Basic Federal Transfer Tax and Income Tax Structure

A. Estate, Gift and Generation-Skipping Transfer Taxes

1. The Federal Transfer Tax System

2. The Federal Estate Tax

a. Scope of the Tax: Probate Estate v. Taxable Estate

b. Determination of a Decedent's Property Rights

c. Determination of the Taxable Estate

d. Property Includible in Gross Estate

e. Deductions from Gross Estate

f. Asset Valuation

(1) Valuation Alternatives

(2) Determining "Fair Market Value": Anticipate Controversies

(3) Actuarial Valuations

(4) Alternate Valuation

(5) Special Valuation for Farms and Real Property

(6) Minority and Marketability Discounts

(7) Discount to Reflect Asset's Potential Future Income Tax Liability

3. The Gift Tax - Determining the Taxable Gift

a. Defining Donative Transfers

b. Exclusions and Deductions

(1) Annual Donee Exclusion

(2) Transfers for Educational or Medical Expenses

(3) Marital Deduction

(4) Gift-Splitting

4. Determining the Specific Transfer Tax Liability

a. Outline of the Federal Estate Tax Computation

b. Outline of the Federal Gift Tax Computation

c. Unified Rate Schedule

(1) Cumulative Transfer Tax Computation

(2) Lifetime Transfers - Gift Tax Computations

(3) Estate Tax - Computation of Liability

(4) Gift Transfers Included in Gross Estate

(5) Adjustment for Gift Tax Paid by Spouse

d. Unified Transfer Tax Credit

5. Filing Requirements

a. Estate Tax Return

b. Gift Tax Return

6. Generation-Skipping Transfer Tax

B. Related Federal Income Tax Considerations

1. Gifts and Bequests as Gross Income

2. Income Tax Basis Provisions - Gift Transfers

3. Income Tax Basis Provisions - Property Transfers at Death

a. Stepped-Up Tax Basis at Death

b. Carryover Tax Basis at Death Rules Applicable After 2009

c. Gifts to a Decedent Within One Year of Death

4. Treatment of "Income in Respect of a Decedent"

a. Purpose of IRD Treatment

b. Types of Income in Respect of a Decedent

c. Deductions in Respect of a Decedent

d. Deduction for Estate Tax

5. Gain Recognized on the Satisfaction of Pecuniary Bequests

V. Fundamental Testamentary Planning

Introductory Material

A. Basic Mechanisms for Transferring Property

1. Available Alternatives

2. Basic Structure of the Last Will

a. Exordium Clause

b. Payment of Debts Clause

c. Payment of Taxes Clause

(1) Purpose of Tax Payment Clause

(2) Allocating Tax Payment Burden When Marital Deduction Applies

(3) Estate Tax Allocation upon Death of Surviving Spouse

(4) Assets Held in Revocable Trust

(5) Summary of Objectives in Structuring Death Tax Payment Provision

d. Disposition of Tangible Personal Property Clause

e. Disposition of Residential Real Estate Clause

f. Specific Bequests and Devises

g. Power of Appointment Clause

h. Residuary Estate Clause

i. Disposition of Trust Assets Clause

(1) Credit Shelter Trust

(2) Marital Deduction Qualified Terminable Interest Trust

(3) Marital Deduction Power of Appointment Trust

(4) Multiple Marital Deduction Trusts to Accommodate Generation Skipping Tax Planning

j. Appointment of Fiduciaries Clause

k. Powers Clause

l. Appointment of Guardian

m. Common Disaster Provision

n. Survivorship Provision

o. Testimonium Clause

p. Attestation Clause

q. In Terrorem Clause

B. Trusts

1. General Purposes of Trusts

2. Types of Estate Planning Trusts

a. Alternatives

b. Irrevocable Inter Vivos Trusts

c. Inter Vivos Revocable Trusts

d. Testamentary Trusts

e. The "Dynasty Trust" Concept

3. Basic Trust Structure

a. Framework of a Trust

b. Dispositive Provisions

c. Other Relevant Trust Provisions

(1) Payment of Taxes, Claims, and Expenses

(2) Facilitating Estate Liquidity

(3) Small Trust Provisions

(4) Merger of Trusts

4. Trust Administration

a. Selection and Responsibilities of Trustees

b. Powers of the Trustee

5. Federal Taxation of Trust Income

a. Basic Income Tax Structure

b. Current Distributions

(1) The DNI Concept

(2) DNI Defined

(3) Simple vs. Complex Trusts

c. Accumulation Trust Rules

(1) Purpose of the "Throwback" Rules

(2) Accumulation Distribution Tax Computation

(3) Accumulation During Minority

d. Multiple Trusts

(1) Possible Tax Consolidation of Trusts

(2) Accumulation Trust Rules

e. Capital Gains

f. Trust Distributions of Appreciated Property

g. Trust Income Tax Planning Ideas

C. Credit Shelter Trust

D. Estate Tax Marital Deduction

1. Fundamental Elements

2. Historical Background and Legislative Purpose of the Estate Tax Marital Deduction

a. Original Enactment

b. Tax Reform Act of 1976

c. Economic Recovery Tax Act of 1981

(1) Quantitative Limits

(2) Qualitative Restrictions

(3) Summary of Available Property Transfer Options

d. Qualified Domestic Trust Legislation

3. Transfers Qualifying for Marital Deduction

a. Basic Qualification Requirements

b. Outright vs. Trust Transfer

c. Factors Affecting the Net Value of a Marital Deduction Bequest

(1) Encumbrances Reduce Available Marital Deduction

(2) Tax Allocation Clause in First Spouse's Will

(3) Use of Administration Expenses as Income Tax Deductions

(4) Impact of State Death Taxes

d. The Terminable Interest Rule and Its Purpose

e. Description of a Nondeductible "Terminable Interest"

f. Limited Survivorship Period Exception

(1) Deduction Allowed Under Limited Survivorship Condition

(2) Uniform Simultaneous Death Provisions

g. Life Estate - Power of Appointment Trust

(1) Fundamental Requirements

(2) Right to Income

(3) "Specific Portion"

(4) Power of Appointment

h. Life Insurance Payments

i. Qualified Terminable Interest Property (QTIP)

(1) Basic Requirements

(2) Right to Income

(3) Power to Appoint or Distribute to Spouse Alone

(4) Election for QTIP Qualification

(5) Qualification of Specific Portion

(6) Marital Deduction Amount Contingent on Executor's Election

(7) Disclaimer

(8) Subsequent Transfer Tax Treatment to Surviving Spouse

(a) Gift Tax on Disposition of the Qualifying Income Interest

(b) Transfers at Death of Surviving Spouse

(9) Summary of QTIP Trust Planning Considerations

(a) Estate Tax Deferral

(b) Mandatory Income Distribution Requirement

(c) Limitation on Inter Vivos Gifts

(d) Possible Impact of Any State Death Tax

j. Charitable Remainder Trusts

(1) The Qualified Charitable Remainder Trust

(2) Alternative Charitable Transfer Structure

k. Estate Trusts

4. Determining the Precise Amount of the Marital Deduction Transfer

a. Objective of Determining the Marital Deduction Amount

b. Basic Marital Deduction Transfer Mechanics

(1) Available Choices

(2) Specific Bequests or Legacy

(3) Nonformula Pecuniary Bequest

(4) Nonformula Fractional Share Bequest

c. Formula Clauses for Implementing the Marital Deduction Gift

d. Maximizing the Marital Deduction Portion

e. Equalization of the Marital Estates vs. Deferral of Estate Tax

f. Dividing Property Between the Credit Shelter and Marital Dispositions

(1) Alternative Situations

(2) Both Estates Less than One Spouse's Unified Credit Exemption Equivalent

(3) Both Estates Less than the Spouses' Combined Unified Credit Exemption Equivalents

(4) Total Marital Assets in Excess of the Spouses' Combined Unified Credit Exemption Equivalents

g. Reducing Marital Deduction Utilization

5. Mechanics for Funding the Marital Deduction Formula Amount

a. Fundamental Choices

b. Pre-Residuary or Residuary Marital Deduction Gift?

c. Limitation on Funding Pecuniary Bequests - Rev. Proc. 64-19

(1) Pecuniary Formula

(2) Limitations on Available Marital Deduction Bequest Funding Options

d. Pecuniary Formula Funding Mechanisms

(1) Types of Pecuniary Formula Provisions

(2) Pre-Residuary or Post-Residuary Approach?

(3) Pre-Residuary "True Worth" Funding Approach

(4) Pre-Residuary "Fairly Representative" Funding Approach

(5) Pre-Residuary "Minimum Worth" Funding Approach

(6) Residuary "True Worth" Funding Approach

(7) Residuary "Fairly Representative" Funding Approach

e. Formula Fractional Share Bequests

(1) Structuring the Fractional Share Formula

(2) Choosing Assets for Completing Fractional Share Transfer

f. Estate Equalization Formula Clause

g. Gain Recognition on Funding Marital Deduction and Credit Shelter Bequests

(1) Pecuniary Bequest - Gain Recognition Event to Distributor Estate

(2) Fractional Share Bequest - No Gain Recognition Event to Distributor Estate

(3) Planning Considerations

h. DNI Distributions on Funding the Marital Deduction Bequest

(1) DNI Distribution Effects

(2) Tax Basis Effects to Distributee

6. Eligibility of Community Property for Marital Deduction

7. Foreign Recipients or Foreign Decedents

a. QDOT Trust - Alien Spouse as Recipient

b. Nonresident Alien Decedent

8. Disclaimers in Marital Deduction Context

a. Disclaimer Planning Options

b. Disclaimers into the Credit Shelter Trust

9. Post-Funding Marital Trust Administration

a. Reduction of Marital Deduction Trust Assets During Survival Period

b. Tax Allocation Clause in Surviving Spouse's Will

E. Powers of Appointment

1. Benefit of the Limited Power of Appointment Technique

2. Applicable Terminology

3. Tax Classification of Powers

a. General Power of Appointment

b. Limited Power of Appointment

c. Scope of Powers of Appointment

4. Taxation of Powers of Appointment

a. Estate Tax

(1) Gross Estate Inclusion

(2) Lifetime Exercise or Release

(3) Disclaimers

(4) Lapses and the "Five and Five" Power

(5) Successive Powers

(6) Certain Imputed Powers

(a) Power to Substitute Trustees

(b) Power to Distribute in Satisfaction of Support Obligation

b. Gift Tax

c. Income Tax

5. Planning Considerations

a. Creating Powers of Appointment

(1) Reasons for Using Powers of Appointment

(2) Drafting Considerations

(3) Rule Against Perpetuities

b. Exercising the Power of Appointment

VI. Lifetime Asset Transfers

A. Lifetime Gifts - Arguments For and Against

1. Reasons for Making Gifts

2. Arguments Against Completion of Gifts

B. Basic Federal Tax Considerations

1. Gift Tax Considerations

a. Tax Rates

b. The Unified Transfer Tax Credit

c. Annual Donee Exclusion

d. Exclusion for Tuition and Medical Payments

e. Marital Deduction

f. Split Gifts

2. Estate Tax Considerations

a. Gifts Made Within Three Years of Death

(1) Inclusion Under Limited Circumstances

(2) Inclusion of Gift Tax Amount

b. Gifts Made More than Three Years Before Death

3. Income Tax Considerations

a. Income Deflection

b. Income Tax Basis for Gift Property

(1) Transferred Basis

(2) Depreciated Property

(3) Special Rules for Spousal Transfers

c. Holding Period

4. Tax Savings Achieved Through Lifetime Gift Program

a. Gift and Estate Tax Considerations

b. Income Tax Planning Strategies for Completing Gifts

C. Methods of Completing Gifts

1. Concept of Gift Transfers

2. Gift Transfer Variations

3. Gift by Agent on Behalf of Donor

D. Specific Types of Gifts

1. Gifts to Minors

a. Uniform Transfers to Minors Act

(1) Function of the Uniform Transfers to Minors Act (UTMA)

(2) Gift Tax Aspects

(3) Income Tax Aspects

(4) Estate Tax Aspects

b. Section 2503(c) Trusts

(1) Structure of § 2503(c)

(2) Definition of "Property"

(3) Extension of the Trust at Age 21

(4) Practical Use of the § 2503(c) Trust

2. Net Gifts

a. Reasons for Net Gifts

b. Value of the Gift

c. Income Tax Consequences

(1) Possible Gain Realization

(2) Tax Basis to Donee

d. Net Gift Transfer to a Trust

e. Planning Considerations

3. Irrevocable Lifetime Trusts

a. Function of the Irrevocable Inter Vivos Trust

b. Possible Income Taxation to Grantor

(1) Basic Structure of Grantor Trust Rules

(2) Reversionary Interest

(3) Power to Control Beneficial Enjoyment

(4) Administrative Powers

(5) Assignment of Income Principles

c. Trust Income Taxation

d. Gift Tax Consequences

e. Estate Tax Consequences

(1) Unified Tax Computation

(2) Estate Tax Transfer Provisions

(a) Section 2036 - Retained Life Estate

(b) Section 2037 - Transfers Taking Effect at Death

(c) Section 2038 - Revocable Transfers

f. Types of Trust Asset Dispositive Arrangements

g. Demand or "Crummey" Trust

(1) Trust Grantor's Annual Donee Exclusion

(2) Multiple Annual Donee Exclusions

(3) Multiple Trusts and the "Hanging Power" Issue

(4) Donee's Income Tax Consequences

(5) Donee's Gift Tax Consequences

(6) Donee's Estate Tax Exposure

(7) Life Insurance Trusts

h. Estate Tax Planning Problems and Opportunities

4. Intentionally Tax Defective Trusts

a. Concept of Intentionally Tax Defective Trusts

b. Income Tax Defective Trust

(1) Fundamental Concept

(2) Available Income Tax Planning Benefits

(3) Choices for Structuring the Income Tax Defective Trust

(4) Identifying a Nonadverse Party

c. Estate Tax Defective Trust

5. Transfer of the Family Residence

a. Transfer to Spouse

b. Transfer to Children

VII. Intrafamily Transfer Alternatives to Gifts

Introductory Material

A. Intrafamily Sale/Leaseback or Gift/Leaseback

1. Family Sale/Leasebacks

2. Gift/Leaseback

B. Intrafamily Installment Sales

1. Estate Planning Benefits

2. Income Tax Considerations

a. Related Party's Purchase and Sale

b. Sales of Depreciable Property

c. Gift-Cancellation of Installment Obligation

d. Bequest of Installment Obligation

3. Estate Tax Considerations

4. Gift Tax Considerations

5. Bargain Sale

6. "Self-Cancelling" Installment Note (SCIN)

a. Structure of Arrangement Terminating Note Obligation

b. Inclusion in Gross Estate

c. Gift Tax Treatment

d. Income Tax Treatment

e. Advantages of the Self-Cancelling Installment Note

C. Interest-Free Loans of Money

1. Recharacterization of Intrafamily Loans

2. Gift Tax Issues

3. Income Tax Issues

4. Section 7872 Below Market Loan Tax Principles

a. Conceptual Framework

b. Gift Tax Rules

c. Income Tax Rules

d. Small Gift Loan Exception

e. Gift Loan Interest Accrual Limitation

f. Tax Planning Observations

D. Loans of Property or Credit

1. Loans of Real Property and Tangible Personal Property

2. Loan of Creditworthiness

E. Tax-Free Property Exchanges with Family Members

1. Possible Like-Kind Property Exchange Situations

2. Objective of the Tax-Free Exchange Transaction

3. Income Tax Rules Applicable to the Property Exchange

a. Tax-Free Exchange Treatment

b. Limitation for Like-Kind Exchanges Between Related Persons

4. Estate Tax Inclusion of the Exchanged Property

F. Private Annuities

1. Estate Planning Objectives

a. Planning Environment for Using a Private Annuity

b. Concept of a Private Annuity

c. Federal Tax Planning Objectives

(1) Estate Tax Avoidance Objective

(2) Gift Tax Avoidance Objective

(3) Income Tax Postponement Objective

2. Private Annuitant's Income Taxation - Basic Elements

a. Income Tax Components

b. Significance of Capital Gain Treatment

3. Dividing the "Return of Capital" Portion

a. Dividing Between Basis and Property Gain

b. The Capital Gain Portion

c. Annuity Income Portion

d. Mortality Gain or Loss

4. Private Annuitant's Gift Taxation

5. Transferee's Income Tax Treatment

a. Determining Income Tax Basis for Property Received

b. Subsequent Income Tax Basis Adjustments

c. Disposition Before Annuitant's Death

d. Interest Paid by Transferor

6. Special Precautions for the Transferor

a. Risks

b. Transferred Property Used to Secure Annuity Promise

c. Risk of Estate or Gift Tax Inclusion

(1) Gift Transfer Risk

(2) Estate Tax

d. Illusory Promise/Federal Gift Tax Risk

e. Illusory Promise/Federal Estate Tax Risk

f. Use of Irrevocable Trust to Make Annuity Promise

G. Joint or Split Purchases

1. Description of Split Purchase Technique

2. Gift Tax Considerations

a. Actuarial Determinations Required

b. Term Interests in Certain Tangible Property

3. Investment/Income Tax Considerations

a. Investment Return to Life Tenant

b. Life Tenant's Income Taxation

c. Investment Return to Remainder Beneficiary

d. Remainder Beneficiary's Income Tax Considerations

4. Spousal Joint Purchase Alternative

a. Description of Transaction

b. Gift Tax Applicability

c. Federal Income Tax Applicability

5. Split Ownership Estate Tax Planning

6. Implementing the Split-Purchase Transaction

H. Sale of Remainder Interest in Property

1. Technique Described

2. Estate and Gift Tax Considerations

a. Gift Transfer

b. Retained Life Interest/Estate Valuation Provision

c. Transfer of Wealth Occurring?

3. Income Tax Considerations

a. Sale of Remainder Interest

b. Installment Sale/Private Annuity

c. Depreciation Deductions

d. Amortization of Retained Life Interest by Life Tenant

e. Recognition Event upon Life Tenant's Death

f. Implementing the Sale of Remainder Transaction

I. Grantor Retained Annuity Trust and Unitrust

1. GRAT (or GRUT) Technique Described

2. Gift Tax Considerations

a. Determination of Gift Portion

b. Time of Gift Completion

c. Annual Donee Exclusion

d. Trust Termination upon Grantor's Earlier Death

3. Estate Tax Considerations

a. GRAT (or GRUT) Termination Prior to Death

b. Death Before GRAT (or GRUT) Termination

4. Income Tax Considerations

a. GRAT (or GRUT) Income Distributions

b. Capital Gain and Gain Realization

5. GRAT (or GRUT) Structuring Strategies

a. Choosing Assets for Trust Funding

b. Limiting Estate Tax Risk of Early Death

6. Making Assets Available to Grantor After GRAT (or GRUT) Expiration

J. Personal Residence Trusts

1. Primary Use of Property as a Residence

2. Structuring the "Personal Residence Trust"

3. The Alternative "Qualified Personal Residence Trust"

a. Structuring the QPRT Agreement

b. Cessation of QPRT Qualification

c. No Commutation of Retained Interest

d. Post-Trust Termination Occupancy of Residence

e. Grantor's Death Before Trust Expiration

f. Spousal Joint Interests

4. Gift Tax Consequences

5. Estate Tax Consequences

a. Grantor's Death During Trust Term

b. Grantor's Death After Trust Term Expires

6. Generation-Skipping Transfer Tax Effects

7. Income Tax Considerations

a. Grantor's Trust Status

b. Mortgage Interest Expense and Taxes Deduction

c. Differentiating Between Income and Corpus

d. Exclusion of Residence Sale Gain

e. Tax Basis to Remainder Beneficiary

VIII. Generation-Skipping Transfers

A. Purpose of the Generation-Skipping Transfer Tax

B. Definitional Provisions

1. Generation-Skipping Transfer

a. Tax Applicability

b. Exceptions

c. Taxable Termination

d. Taxable Distribution

e. Direct Skip

2. Definition of Other Terms

a. Skip Person

b. Interest

c. Transferor

3. Assignment to a Generation

C. Tax Computation

1. Calculating and Paying the Tax

a. Responsibility for the GST Tax

b. Taxable Distribution Tax Amount

c. Taxable Termination Tax Amount

d. Direct Skip Tax Amount

e. Multiple Skips

f. Comparisons of GST Tax Costs

2. Valuation

3. Applicable Rate

D. Exemptions

1. GST Exemption Amount

2. Allocation of Exemption Amount

E. GST Tax Planning Considerations

1. Importance of GST Tax Planning

2. GST Exemption

3. Layering Trusts

4. Exclusions

5. Reverse QTIP Election

IX. Special Nonprobate Planning Situations

A. Joint Property

1. Description of Ownership Form

2. Joint Tenancy Income Tax Considerations

3. Gift Tax Applicability upon Creation

a. Possible Gift Completion

b. Determining the Amount of the Gift

c. Joint Tenancies Between Spouses

4. Estate Tax Considerations

a. Joint Tenant Spouse

(1) Surviving Joint Tenant Spouse Is U.S. Citizen

(2) Surviving Joint Tenant Spouse Is Not U.S. Citizen

b. Joint Tenancies Between Nonspouses

5. Joint Tenancy Estate Planning

B. Community Property

1. Community Property Classification Issues

2. Community Property in the Gross Estate

a. Characterization Rules

(1) Basic Characterization Rules

(2) Life Insurance Characterization

(3) State Law Property Classification Rules Not Consistent

b. Choice of Law Rules

c. Procedures for Property Identification

(1) Property Identification Process

(2) Maintaining Separate Property

d. Partitioning Community Property

(1) Local Law and Gift Taxes

(2) Income Tax Considerations

3. Lifetime Transfers of Community Property

a. Gift Tax Applicable

b. Unanticipated Gifts

4. Estate Tax Considerations

5. Widow's Election

a. Concept of the Widow's Election

b. Nontax Reasons for Use of Forced Widow's Election

c. Gift Tax Aspects of Widow's Election

d. Estate Tax Effects to Widow from Widow's Election

e. Income Tax Effects of Widow's Election

(1) Estate as Seller of Life Interest

(2) Capital Gain to Surviving Spouse on the Exchange

(3) Amortization by Purchasing Surviving Spouse

f. Time and Manner of Election by Surviving Spouse

6. Structuring Various Trusts Where Community Property Devised

C. Life Insurance

1. Basic Uses of Life Insurance

a. Estate Planning Objectives

b. Definition of Life Insurance

(1) Concept of "Risk Shifting"

(2) Policy Types

c. Settlement Options

2. Fundamental Federal Tax Rules

a. Federal Estate Tax Treatment

(1) Inclusion Under Life Insurance Provision - § 2042

(2) Proceeds Receivable by the Executor

(3) Incidents of Ownership

(4) Three-Year Transfer Inclusionary Rule

b. Income Tax Treatment

(1) Income Tax Benefits Available

(2) Exclusion of Lifetime Increase in Value

(3) Limitation on Interest Expense Deduction

(4) Exclusion of Proceeds Received at Death

(5) Delayed Payment of Proceeds

3. Life Insurance Estate Planning

a. Insurance Tax Planning Issues

b. Incentive for Lifetime Policy Ownership Transfers

(1) Advantages/Disadvantages of Policy Transfers

(2) Choosing Which Policies to Be Transferred

(3) Completing the Insurance Policy Transfer

(4) Gifts of Policies Within Three Years of Death

c. Insurance Trusts

(1) Estate Planning Advantages

(2) Revocable Insurance Trusts

(3) Irrevocable Lifetime Trust

(4) Testamentary Trusts

(5) Preparation of the Insurance Trust Agreement

d. Insurance Planning and the Marital Deduction

(1) Use of the Unlimited Marital Deduction

(2) Spousal Cross-Ownership

(3) Joint and Survivor Life Policies

(4) Using the Irrevocable Life Insurance Trust

D. Commercial Annuities

1. Function and Structure of Annuities

2. Annuity Income Taxation

3. Estate Tax

E. Charitable Transfers

1. Basic Tax Planning Objectives

a. Tax Planning Issues

b. Income Tax Benefits

c. Estate Tax Benefits

2. Eligible Charitable Recipients

3. Types of Charitable Transfers

a. Property Transfer Options

b. Contributions of Property

(1) Benefits from Property Contributions

(2) Capital Gain Property

(3) Ordinary Income Property

(4) Possible Assignment of Income Risk

(5) Bargain Sales

(6) Gifts of Insurance Policies

c. Partial Interests - Nontrust Transfers

d. Charitable Lead Trusts

(1) Description of Structure

(2) Available Charitable Deduction

(3) Avoiding the Charitable Lead Trust Requirements

(4) Description of Charitable Lead Trust Structuring Options

(5) Planning Benefits and Valuation

e. Charitable Remainder Trusts

(1) Types of Charitable Remainder Trusts

(2) Income Tax Treatment of Charitable Remainder Trusts

(3) Charitable Remainder Annuity Trusts

(4) Charitable Remainder Unitrusts

(5) Pooled Income Funds

(6) IRS Procedures Concerning Charitable Remainder Trusts

f. Gift Annuities

4. Percentage Limitations

a. Income Tax

b. Estate Tax

5. Private Foundations

6. Procedural Requirements

7. Planning Considerations

F. Foreign Trusts

1. The Foreign Trust Planning Context

2. Identifying a Foreign Trust

3. Foreign Trust Formation and Funding

4. U.S. Income Taxation of Foreign Trust

5. U.S. Taxation of Trust Grantor

6. U.S. Income Taxation of Trust Beneficiaries

a. Inbound Trust Distributions

b. Outbound Trust Distributions

7. Foreign Trust Tax Planning

X. Special Business Planning Situations

A. Family Business Planning Options

B. Closely Held Family Corporations

1. Shifting Ownership by Incorporating an Operating Business

a. Planning Alternatives

b. Gain Recognition on Incorporating Transfer of Assets

c. Gift Tax Risk on Incorporation

(1) Possible Transfer of Value

(2) Special Valuation Rules when Divided Equity Structure

2. Corporate Recapitalizations

a. Objectives

b. Tax-Free Reorganization Treatment

c. Possible Dividend Treatment of Recapitalization Exchange

d. Possible Preferred Stock Bailout Treatment

e. Gift Tax Valuation Issues

(1) Elements of the § 2701 Valuation Rules

(2) Subtraction Valuation Approach

(3) Defining Family Member

(4) "Qualified Payments"

(5) Failure to Make Qualified Payments

(6) Elections

3. Stock Purchase Agreements

a. Potential Purchasers

(1) Alternative Plans

(2) Stock Redemption Plan

(3) Cross-Purchase Plan

(4) Simultaneous Redemption and Cross-Purchase

b. Fixing the Price to Be Paid

(1) Estate Tax Valuation Limitations

(2) Mutually Agreed Specific Dollar Amount

(3) Book Value

(4) Appraised Value

(5) Capitalization of Earnings

(6) Impact of Life Insurance Proceeds

c. Methods of Payment

4. Retaining the Closely Held Stock

a. Potential Valuation Controversy

b. Relative Tax Considerations

c. Value Defined

d. Availability of Discounts and Premiums

e. Posturing for an Estate Tax Valuation Controversy

C. Closely Held Partnerships and Limited Liability Companies

1. Estate Planning Options for Partnership Structures

2. Family Partnerships Enabling Income Tax Benefits

a. Purpose of Family Partnerships

b. Creation of the Family Partnership

c. Partnership Interest Ownership Tests

d. Allocation of Family Partnership Income

e. Income and Transfer Tax Advantages

3. Family Limited Partnerships

4. Estate Exclusion and Freeze Arrangements for Family Limited Partnership Interests

a. The Family Limited Partnership Estate Planning Objective

b. Estate Tax Planning Purpose

c. Partnership Restructurings vs. Corporate Recapitalizations

d. Description of the Frozen Partnership Interest

e. Regular Partnership Interest

f. Income Tax Considerations

g. Gift Tax Considerations

h. Estate Tax Considerations

5. Partnership/Limited Liability Company/Corporation Choice

6. Terminating the Partnership Interest of a Deceased Partner

D. Special Valuation for Family Farms and Real Property

1. Usual “Highest and Best Use” Valuation Standard

2. Special Valuation Procedure

3. Qualification Requirements for Special Valuation

a. Qualification by the Estate

b. Qualifying Real Property

(1) Qualified Use Requirement

(2) Farm Defined

(3) Adjacent Farm Property and Buildings

(4) Nonfarm Real Property

(5) Qualifying Real Property Held by Entities

c. Material Participation Test

d. Present Interest Test

4. Income Tax Considerations

5. Special Use Valuation Methods

a. Farm Method

b. Multiple Factor Method

c. Special Rule for Standing Timber

6. Recapture of Additional Estate Tax Amounts

a. Basic Recapture Requirements

b. Cessation of Qualified Use

c. Several Recapture Events

d. Several Qualified Heirs

e. Lapse of Recapture Requirement

f. Adjustment to Tax Basis

g. Liability for Recapture Tax

7. Election to Use Special Valuation

8. Using the Special Valuation Method

E. Qualified Family-Owned Business Interests

XI. Special Executive Compensation/Deferred Benefits Estate Planning

A. Executive Compensation Planning

1. Compensation Options

2. Deferred Compensation

a. Economic Components

b. Definition of Nonqualified Deferred Compensation

c. Facilitating Income Tax Deferral

d. Variations on Cash Plans

e. “Rabbi” and Secular Trusts

f. Estate Planning Considerations

3. Stock Options

a. Stock Option Alternatives

b. Incentive Stock Options

(1) Description and Tax Treatment

(2) Estate Planning Considerations

c. Nonqualified Stock Options

(1) Flexibility with Nonstatutory Options

(2) Nonstatutory Options Without Readily Ascertainable Value

(3) Nonstatutory Options Gross Income Inclusion Election

(4) Estate Planning Implications

d. Stock Appreciation Rights

B. Qualified Pension and Profit-Sharing Plans

1. Basic Tax Planning Structure

2. Income Distribution Requirements

a. Joint and Survivorship Requirements

b. Death After Distributions Commence

c. Death Before Distributions Commence

3. Income Tax Treatment of Retirement Plan Distributions

a. Payment Options

b. Periodic Payments

c. Lump Sum Distributions

d. Rollovers of Plan Distribution Amounts

4. Gift Tax Treatment at Retirement

5. Distributions After Death

a. Estate Tax Inclusion

b. Income Tax Considerations

c. Community Property Considerations

6. Estate Planning Considerations Summarized

a. Lump Sum Distribution Election

b. Determining the Beneficiary at Death

(1) Decedent's Spouse

(2) Credit Shelter Trust

(3) Other Possible Beneficiaries

C. Self-Employed Individual

D. Individual Retirement Account

1. Available Income Tax Deduction

2. Treatment of Distributions from Traditional IRAs

3. Estate Tax Treatment

4. IRA Rollover Opportunities

5. Simplified Employee Pension

E. Business-Originated Life Insurance

1. Group Term Life Insurance

a. Benefits of Employee Insurance

b. Assignments of Group Term Insurance

c. Gift Tax Considerations

d. Estate Tax Considerations

e. Retired Lives Reserve Arrangements

2. Split-Dollar Insurance

a. Split-Dollar Concept

b. Income Taxation

c. Estate Tax Planning

d. Gift Tax Planning

XII. Post-Mortem Estate Planning

A. Planning Options

B. Income Tax Planning Opportunities

1. Options

2. Final Income Tax Return of the Decedent

a. Medical Expenses

b. Series E U.S. Savings Bonds

c. Joint Income Tax Return Status

3. Fiduciary Returns

a. Fiduciary's First Return

b. Deferral Through Staggered Fiscal Years

c. Fiduciary Return Estimated Tax Payments

d. Administration Expenses

e. Termination of the Probate Estate

(1) Timing

(2) Carryover of Excess Deductions

4. Distributing Items of Income in Respect of a Decedent

C. Renunciations and Disclaimers

1. Purposes of Renunciations

2. Definition of “Disclaimer”

3. Partial Disclaimers

4. Property Transfers as Qualifying Disclaimers

D. Waiver of Fee by Fiduciary

E. Solving Estate Liquidity Problems

1. Corporate § 303 Stock Redemptions

a. Purpose of Special Redemption Treatment

b. Structure of § 303

(1) Mathematical Tests

(2) Limitation on Redemption Amount

(3) Parties Eligible to Use § 303

(4) Time Limitations

c. Planning Opportunities

2. Closely Held Business - Delayed Tax Payment

a. Purpose of Tax Deferral

b. Elective Deferral

c. Percentage Threshold Test

d. Definition of “Interest in a Closely Held Business”

e. Termination of Installment Privilege

f. Election Procedure

g. Interest Payable on Amounts Not Paid on Return Due Date

h. Lien in Lieu of Executor's Personal Liability or Bond

3. Other Estate Tax Delayed Payment Opportunities

a. Section 6163 - Reversions and Remainders

b. Section 6161 - Commissioner's Discretion

F. Alternate Valuation

XIII. Estate Planner-Client Relationship

A. Professional's Responsibility

1. The Rules of Professional Conduct

a. The Attorney's Rules of Professional Conduct

b. Retention of the Client's Estate Planning Documents

c. The Mentally Impaired Client

d. Applicable Professional Conduct Rules

2. Treasury Department “Circular 230” Applicability

3. Professional Malpractice Risks

B. Determining the Amount of the Estate Planner's Fee

C. Income Tax Deduction of Estate Planning Fees

1. Availability of Deduction

2. Allocation Among Related Taxpayers

3. Individual Estate Planning Costs

a. Categories of Costs

b. Specific Professional Services

(1) Tax Advice

(2) Formulating the Last Will

(3) Drafting Trust Documents

(4) Other Property Adjustments

c. Preparing the Fee Statement

Working Papers

Table of Worksheets

Worksheet 1 Estate Planning Checklist/Questionnaire

Worksheet 2 Client Interview Materials - Factual Analysis and Inventory

Worksheet 3 Estate Tax Projections (Prepared Using BNA Estate and Gift Tax Planner)

Worksheet 4 Client Joint Spousal Engagement and Spousal Conflicts Letter

Worksheet 5 Fee Statement for Estate Planning Services

Worksheet 6 Estate Planning Flowcharts

Worksheet 7 Sample Simple Will

Worksheet 8 Sample Wife's Will, Tax Exempt Amount to Family Trust, Residue to Husband's Marital Trust

Worksheet 9 Sample Will with Outright Marital Deduction, Family Trust and Generation-Skipping Trust Provisions

Worksheet 10 Estate and Gift Tax Rates for U.S. Citizens and Residents

Worksheet 11 Maximum Estate and Gift Tax Rates and Unified Credit Amounts

Worksheet 12 Checklist of Estate Tax Forms and Due Dates

Worksheet 13 Estate Planning Documents & IRS Forms Found in Other Tax Management Portfolios



IRC Sections:

Treasury Rulings:



Books and Treatises:

Estate Planning Periodicals & Course Materials:


1969 and Prior