Estate planning chapter 5
John transferred a $2 million life insurance policy on his own life to an irrevocable trust nine years ago. The policy was paid up and had a gift tax value of $500,000. He paid gift tax of $198,000 out of pocket in the year of the gift. If John dies, how much is included in his gross estate?
$0
Diane and Clara are spouses. They own their home as a joint tenancy with right of survivorship (JTWROS). They both worked during their marriage, and Diane contributed 30% of the purchase price for the home, while Clara contributed 70%. The home is currently valued at $1 million. If Clara dies, what amount will be included in her gross estate for estate tax purposes?
$500,000 Because Diane and Clara are spouses, 50% of the value of any property they own as JTWROS is included in the gross estate of the first spouse to die, regardless of how much each spouse contributed to the acquisition of the property.
Walter died with a gross estate of $18 million, which included an interest in a closely held business. His total estate tax is $2 million, and the estate tax attributable to the closely held business interest is $800,000. Assuming Walter's estate qualifies for the installment payment of estate taxes, what is the maximum amount of federal estate tax that may be deferred?
$800,000 The amount of federal estate tax that may be deferred is limited to the tax attributable to the value of the closely held business or businesses.
Which of the following statements regarding donor-advised funds is CORRECT?
A donor-advised fund is an arrangement in which the donor makes a gift to charity and then makes future recommendations regarding who should receive grants or future monies from the charity. The major advantage of a donor-advised fund to the donor is the ability to name several charitable recipients.
Which of the following assets must be listed at their date of death value on the federal estate tax return, even if the estate elects the alternate valuation date (AVD)?
Joint and survivor annuities The answer is joint and survivor annuities. Wasting assets, such as installment notes and joint and survivor annuities, must be listed at their date of death value, even if the estate elects the AVD.
As part of their retirement plan, Stefon and his spouse, Addy, jointly purchased a commercial deferred annuity. This annuity paid income to Stefon and Addy on a joint and survivor basis. Stefon has now died. Which of the following statements regarding this commercial annuity is CORRECT?
The amount of the annuity includible in Stefon's estate is half of the replacement cost of a single life annuity on Addy at the time of Stefon's death.
Davis died in 2020 and was survived by his spouse and two children. At the time of his death, he owned the following property interests: Solely owned property valued at $6 million Property owned in joint tenancy with right of survivorship (JTWROS) with his spouse, with his share valued at $2 million Davis's will made no charitable bequests and provided that his entire probate estate go equally to his surviving children. Other pertinent facts include the following: Davis made $1 million in post-1976 taxable gifts. Davis's estate had $170,000 in allowable debts. Davis's estate had funeral expenses of $80,000. Davis's estate had administrative expenses of $100,000. Davis's estate paid $50,000 in state death taxes. Which of the following amounts most closely approximates Davis's federal estate tax base (also known as his tentative tax base, which is the amount with which he enters the estate tax table)?
The answer is calculated as follows: Gross estate of $7 million ($6 million in solely owned property plus $1 million as his half of the JTWROS property), less $400,000 in deductions for expenses and debts, less $1 million for the marital deduction of the JTWROS property, equals a taxable estate of $5.6 million. To that, add $1 million for post-1976 gifts to arrive at $6.6 million.
If Arthur died today, which of the following estate tax features would NOT apply to his estate?
The carryover basis for most inherited assets For decedents dying in 2020, the estate tax lifetime exemption amount is $11,580,000, the top estate tax rate is 40%, and portability of the unused exemption amount is available between spouses. Inherited assets—other than income in respect of a decedent—generally receive a stepped-up basis.
Which of the following are requirements that must generally be met for property to qualify for the estate tax marital deduction?
The property must be included in the decedent's gross estate. The property must pass to the decedent's surviving spouse. The property must not be a terminable interest or must qualify under one of the exceptions to the terminable interest rule.
Which of the following are effective method(s) of limiting or avoiding federal estate taxes?
Use the annual gift tax exclusion Create an irrevocable life insurance trust Use qualified transfers to pay tuition and medical expenses directly to the provider Use the unlimited marital deduction
Paulo and Francisca own a piece of property as tenants in common. Paulo owns an undivided 45% interest in the property, and Francisca owns an undivided 55% interest. The property has a fair market value of $1 million. If Francisca dies, what amount will be included in her gross estate for federal estate tax purposes?
When property is owned as a tenancy in common, the amount included in the gross estate is based on the decedent's percentage of ownership. Francisca owns a 55% interest in the property, so her gross estate will include $550,000 ($1,000,000 × 55% = $550,000).
Which of the following statements regarding the basis of inherited assets is CORRECT?
When spouses own property as community property, both halves of the community property receive a stepped-up basis when the first spouse dies. When spouses own property as joint tenants with right of survivorship (JTWROS), 50% of the property receives a stepped-up basis when the first spouse dies.
Leilani made lifetime taxable gifts of $2.5 million. At her death in 2020, she was survived by her spouse and daughter and owned the following property interests: Sole ownership: Life insurance on her spouse's life with a death benefit of $5 million and a replacement cost of $100,000, with her children as the beneficiaries An investment portfolio worth $7 million A personal residence with a fair market value of $1 million Co-ownership: Property held with her spouse as joint tenants with right of survivorship (JTWROS) worth $4 million total Property held with her daughter as tenants in common, including a vacation condo valued at $750,000 (Leilani owns 80%) In her will, Leilani bequeaths the personal residence outright to her spouse and leaves the remainder of her probate estate to her daughter. Leilani had $200,000 of combined debts, funeral, and administrative expenses. Her estate paid $50,000 in state death taxes. Many years ago, she paid $210,000 in gift tax out of pocket. Which of the following amounts most closely approximates the net federal estate tax liability for Leilani's estate? Use the Unified Federal Estate and Gift Tax Rates table.
$0 Leilani's gross estate is $13,200,000 ($2.5 million in taxable gifts + $100,000 replacement cost of the life insurance on her spouse's life + $7 million in investments + $1 million personal residence + $2 million as her half of the JTWROS property + $600,000 as her share of the vacation condo). But, the residence and JTWROS property are eligible for the marital deduction, removing $3 million from her estate and thereby reducing it to a level where her applicable credit would eliminate taxes. The debts and expenses, death taxes, and gift taxes previously paid would further reduce the taxable estate.
Dorothy gifts her vacation condo to her grandson but reserves the right to use the condo whenever she chooses for the rest of her life. The market value of the condo at the time of the gift is $300,000. When Dorothy dies, the condo has a market value of $350,000. What amount is included in Dorothy's gross estate for estate tax purposes?
$350,000 Because Dorothy retained the right to use the condo for the rest of her life, the entire fair market value of the condo on Dorothy's date of death is included in her gross estate.
Mohammed and his spouse, Fatema, own $13 million worth of property as equal joint tenants with right of survivorship. Neither has made any lifetime taxable gifts. Assuming death in 2019, Mohammed's estate tax liability would be zero, but Fatema's would be $640,000, assuming Mohammed's DSUE amount is not available. Mohammed and Fatema may revise their estate plan in the following ways: Transferring $6.5 million into Mohammed's name as sole owner and $6.5 million into Fatema's name as sole owner Amending their wills to provide that their solely owned property shall be placed in a trust that gives the trustee the right to pay as much income to the surviving spouse as the institutional trustee, in its sole discretion, determines appropriate, with the the remainder going to their children. The surviving spouse has a right of invasion of trust corpus based on receiving the children's consent. If the plan is implemented, and both spouses died in 2020, which of the following amounts best describes the family's estate tax savings?
$5,145,800, only if Fatema dies first The trust described does not qualify for the marital deduction—it gives the surviving spouse a terminable interest without an exclusive lifetime mandatory right to income. The taxable amount in both estates would be $6.5 million, which can easily be covered by the estate tax credit amount of $4,577,800—the tax on $11.58 million. Thus, neither Mohammed's nor Fatema's estate would owe estate taxes, regardless of which one dies first. Savings would be $640,000 ($640,000 tax under the old plan minus zero tax under the new plan).
The following is a complete list of the lifetime gifts made by Julie: $50,000 to her mother in 1972 before Julie was married $600,000 to her brother in 2001. Her husband, Hank, agreed to split this gift; Hank did not make any taxable gifts in this year. $350,000 to an irrevocable trust in 2012. Julie and Hank were income beneficiaries at a corporate trustee's discretion, and their children were equal remainder beneficiaries at the death of the last parent. Hank did not split this gift. $5,000,000 outright to her cousin late in 2016 after Hank had died the year before. Julie paid $264,000 in gift tax when she filed her gift tax return in 2017. Julie died early in 2020. What is the correct amount of adjusted taxable gifts that Julie's personal representative should add to her taxable estate when computing her federal estate tax?
$5,276,000
Joellen dies on March 13. Her gross estate includes publicly traded stock that has a market value of $6 million on Joellen's date of death. Joellen's estate sells the stock for $5.7 million on May 2. The same stock has a market value of $5.5 million on September 13. If Joellen's estate elects the alternate valuation date, the stock will be valued at what amount in Joellen's gross estate?
$5.7 million If an estate elects the alternate valuation date and sells an asset before the six-month valuation date, the asset must be valued at its sale price, regardless of whether that price is more or less than the AVD value.
Rupert's gross estate is valued at $13.6 million using fair market valuations. His largest asset is a chicken breeding business, with real estate valued at $10.81 million and equipment valued at $1.4 million. Which of the following facts would Rupert's executor need to know to determine whether the real estate used in the chicken breeding business will qualify for special use valuation under Code Section 2032(a)? To whom the real estate will go according to Rupert's will How long Rupert or a member of his family has owned the real estate and how it has been used in the business The amount and types of gifts Rupert made within three years of his death amount of all secured debts on the business property
1,2,3,4 All cited factors have the potential to impact the property's qualification for special use valuation. Option I is relevant to the requirement that the real estate must pass to a qualified heir. Option II is necessary to determine material participation and how long the real estate has been operated in a qualified use. Options III and IV are necessary to determine if the percentage tests can be met.
Jose and Alfonso are brothers. They own a rental property as joint tenants with right of survivorship. The current value of the property is $1 million. Jose can prove that he contributed 80% of the acquisition price for the property. If Alfonso dies, what amount will be included in his gross estate for estate tax purposes?
200,000
Anne purchased property and titled it as joint tenancy with right of survivorship with her spouse. If she dies, how much of the property will be included in her gross estate?
50%
Odell is the income beneficiary of a trust currently valued at $1 million. He also has a noncumulative general power of appointment with respect to the trust principal of $50,000 (5% of the total value) per year. If Odell dies in the current year without exercising his power over the trust principal and before the power lapses, what amount will be included in his gross estate?
50,000
Juniper and her spouse purchased a home for $1M when they were first married. Juniper contributed 75% of the purchase price. They titled the property as joint title with right of survivorship (JTWROS). If Juniper died today, how much of the residence would be included in the gross estate?
500,000
Gary and Georgeann have the following objectives: If Gary predeceases Georgeann, to provide her exclusively with a mandatory stream of income from the assets included in his gross estate To ensure that Gary's children from his prior marriage will ultimately receive the income-producing assets upon Georgeann's death To prevent assets used to provide income to Georgeann from being included in her gross estate Which of the following estate planning techniques would accomplish the couple's second and third objectives simultaneously?
A family bypass (B) trust A QTIP (C) trust, without an election To accomplish the couple's second and third objectives, the property must be placed in a trust that will not qualify for the marital deduction. A family bypass trust and a QTIP trust without an election do not qualify for the marital deduction. If the estate of the first spouse to die takes a marital deduction, the estate of the surviving spouse will always have to include the trust assets in his gross estate.
Which of the following characteristics of the unified transfer tax system are common to both testamentary transfers and lifetime gifts?
A single applicable credit amount that offsets taxes due A cumulative calculation using the same progressive tax rate schedule Statement II is false because only testamentary transfers receive a step-up in basis. Statement III is false because the annual exclusion applies only to lifetime gifts.
Svetlana has a large estate. She and her spouse, Igor, are childless. Svetlana has promised her favorite brother, Max, a portion of her wealth. Svetlana recently updated her will. Which of the following provisions of Svetlana's will qualify assets placed in the cited trusts for the marital deduction?
A trust that must pay all income to Igor at least annually during his lifetime. He has a lifetime, or testamentary, right to designate anyone, including himself, as an appointee of trust property.
Which of the following statements regarding adjusted taxable gifts (ATGs) is CORRECT? ATGs are taxable gifts made by the decedent after December 31, 1976. ATGs are included in the estate tax calculation at their date of death value. ATGs are included in the decedent's gross estate.
ATGs are taxable gifts made by the decedent after December 31, 1976. Statements II and III are incorrect because ATGs are added to the taxable estate (not the gross estate) at their date of gift value. All appreciation after the gift is made escapes transfer taxation for the original giver.
Which of the following statements about the nontax characteristics of a charitable remainder unitrust (CRUT) are CORRECT?
Assets can be added to a CRUT in subsequent years. At the end of the trust term, the remaining trust assets are paid to the charity. Option I is incorrect because the charity receives the remainder interest rather than the income interest in a CRUT. Option III is incorrect because while the trust agreement may provide for invasion of corpus in these circumstances, it is not mandatory that it do so.
Desiree just met with her financial adviser and discovered that her estate substantially exceeds the estate tax exclusion amount. She would like to reduce her potential taxable estate without giving up control of her property during her life. Which of the following premortem planning techniques would achieve Desiree's goals?
Desiree should make a testamentary transfer of property that will qualify for the charitable deduction.
Erica owns a house that is not her personal residence and has a fair market value of $575,000. Erica's basis in the house is $400,000. She sells the house to her daughter for $450,000. Which of the following statements regarding this transaction is CORRECT?
Erica has a taxable gain of $50,000. The property will not be included in Erica's gross estate when she dies. This is a bargain sale, and Erica has a taxable gain equal to the difference between the sales price and her basis. The property sold in a bargain sale is not included in the seller's gross estate; the taxable gift portion of the transaction is included as an adjusted taxable gift when calculating the seller's tentative tax base.
Chip and Pam, a married couple, are both 65 years old and live in a common-law property state. They have a total combined estate of $10 million, of which each owns half as their sole and separate property. They have three grown children, and Chip has one adult child from a prior marriage. Chip and Pam have the following objectives: To allow each estate to use some or all of its estate tax applicable credit amount To allow part of the estate of the first spouse to die to qualify for the marital deduction That, according to Chip's wishes, his children from his current marriage and his prior marriage share equally in his wealth after Pam's death, if he dies first That, according to Pam's wishes, only her children from her current marriage will share equally in her wealth after Chip's death, if she dies first To be assured that the surviving spouse will have a right to an annual income stream from at least part of the decedent spouse's assets Based on Chip and Pam's objectives, which of the following is the most appropriate testamentary transfer technique or combination of techniques for them to use? Assume 2020 estate tax law in making your decision.
Family bypass (B) trust and QTIP (C) trust The A Trust is a marital trust, and as such, it would not allow the first decedent to use any of his estate tax applicable credit amount, or it could not be assured that his wealth would go only to the beneficiaries desired. The A Trust would not allow the first decedent to be assured that his wealth would go only to the beneficiaries desired. The C Trust would meet the income and distribution objectives and, in addition, would meet the use of the applicable credit amount objective if the QTIP election is not made, the marital deduction objective if it is made, or both if a partial election is made. However, since the C Trust is not listed alone in any option, it must be paired only with an A Trust to meet both spouses' distribution objectives of controlling where the assets go at the second death. Assets that are to receive the marital deduction could be placed in the C Trust, with all other assets being placed in the B Trust.
Mark wants to establish a grantor-retained trust that will provide him with fixed annual payments for the rest of his life. Which of the following trusts will meet his needs?
GRAT A GRAT provides the grantor with a fixed annuity payment. Statement II is incorrect because in a GRUT, the income interest payable to the grantor is in the form of a fixed percentage of the fair market value of trust assets, as revalued annually.
Prior to his death on January 1, 2020, Garth took the following actions in the years indicated: 2017: He gave a cash gift of $50,000 to his brother, on which he paid $14,400 in gift tax out of pocket 2015: He released a general power of appointment over assets in a trust established by his mother; Garth is not the trustee or a beneficiary of this trust. 2012: He relinquished to his three children a life estate in a condominium that he had retained when he transferred title to them in 2004; the life estate had a value of $56,000 at the time of the gift in 2004 and a value of $52,000 at the time of transfer in 2012. 2010: He established an irrevocable trust for the benefit of his grandchildren, naming himself as trustee and providing that the trustee could distribute income and principal from the trust at his sole discretion; the assets used to fund the trust had a date of gift value of $100,000 and a date of death value of $105,000. Which of the following statements regarding the impact of these lifetime transfers on Garth's estate tax liability are CORRECT?
Garth's estate will have to include the $14,400 paid in gift tax in the gross estate and $36,000 in adjusted taxable gifts as a result of the 2017 gift. Release of the power of appointment in 2015 will not be in his gross estate at death. Garth's estate will have to include the date of death value of the assets of the trust established in 2010 in his gross estate, but it will not have to include the amount taxable for gift tax purposes in his adjusted taxable gifts amount.
Lucinda took all of the following actions within three years of her death: She made a gift to her children by releasing a life interest in a condominium that she had previously placed in an irrevocable trust for her children. She gave $15,000 in cash to her nephew. She assigned all incidents of ownership in a life insurance policy on her life to an irrevocable life insurance trust (ILIT) for the benefit of her children. She released the right to exercise a general power of appointment over assets in a trust established by her father in which she had no other interest. Which of the following assets are included in Lucinda's gross estate? The condominium placed in trust The cash given to her nephew The life insurance policy given to the ILIT The trust assets over which Lucinda held the general power of appointment
I and III
You are meeting with your client, Beatrice, to review her property and value it to estimate her potential gross estate. Included in her list of property owned are the following assets: Fifty shares of AT&T stock A whole life policy with her spouse as the insured and Beatrice as the primary beneficiary, which is still in premium pay status A term life policy provided by her employer, with Beatrice as the insured and her spouse as the primary beneficiary Five hundred shares of Rob Roy, Inc., a closely held corporation Of the following statements to make to Beatrice about the valuation of property includible in her gross estate, which would be CORRECT? The AT&T stock will be entitled to a minority discount. The whole life insurance policy will be valued at its replacement cost, as measured by its interpolated terminal reserve plus any unearned premiums. The term life policy will be valued at the cost of a policy from the issuing company based on her age at the time of her death. The closely held stock may qualify for a lack of marketability discount.
II and IV
Which of the following statements regarding general powers of appointment is CORRECT? If a person owns a general power of appointment when she dies, the property that is subject to that power is not included in the holder's gross estate for federal estate tax purposes. The exercise, release, or lapse of a general power of appointment during the holder's lifetime is a gift to the person who receives the property.
II only
Because of her financial stability and sizable net worth, Marleen intends to leave the funds in her IRA untouched. When she dies, she believes this asset will get a step-up in basis for her heirs. Which of the following statements regarding Marleen's IRA is CORRECT? She must receive minimum distributions after attaining age of 72, but any remaining amounts in the IRA at her death will receive a step-up in basis. She is correct in her belief, and this is a great strategy. The heirs will not receive a step-up in basis, and she will be penalized if she does not receive distributions when required by the Internal Revenue Code.
III only
Peter and Ann are married, and each of them has children from a prior marriage. Most of their assets are solely owned. Peter's solely owned assets are worth $11.4 million, and Ann's are worth $9.4 million. Peter and Ann also hold their residence, automobiles, and other personal property (valued at $1 million) as joint tenants. Peter, 68, is in good health and has made no lifetime taxable gifts. Ann, 63, is in poor health and has made taxable gifts of $1 million (all of which were more than three years ago). Peter willed his solely owned assets to his children from his prior marriage, and Ann did the same to her children. Some friends have suggested that they modify their estate plan by placing their solely owned assets in QTIP trusts and having their personal representative elect the marital deduction for all assets placed in the trust. Their respective children will still receive the assets eventually under the QTIP arrangements. Which of the following statements correctly describes the federal estate tax implications of establishing the QTIP trusts and making the election, assuming both deaths occur in 2020 and the estate of the first to die allows the surviving spouse to use his or her deceased spousal unused exclusion (DSUE) amount under the existing or proposed plan?
Implementing the QTIP trusts as proposed would cost Peter and Ann the same amount in federal estate tax on their combined estates as it would under their existing plan.
Emmet's personal representative is computing his estate tax liability. Among other provisions, Emmet's will provides the following relating to his spouse, Nellie, who is still alive more than seven months after Emmet's death. Which of these interests left to Nellie qualify for the marital deduction?
It establishes Trust 1, on the condition that Nellie survive him by at least three months. This trust grants all income to Nellie for life (to be paid at least annually) and grants her a general power of appointment over the corpus. Since Emmet's will did not contain a residuary clause, his remaining assets passed to Nellie pursuant to state intestacy laws.
Within three years prior to her death, Himari established an irrevocable trust with her children as trust beneficiaries. She transferred ownership of a vacation cabin into it, and in the deed conveying the property to the trust, Himari reserved the right to use the vacation cabin when it is not occupied. Which of the following statements regarding whether the trust property would be included in Himari's gross estate is CORRECT?
It is included because she retained the right to use the property.
Which of the following decedent's estates might be eligible to elect the alternate valuation date (AVD)?
Neither estate can elect the AVD because the AVD is not available when there is no estate tax due. Jeanine's entire estate qualifies for the marital deduction, and Kim's entire estate qualifies for the charitable deduction.
Which of the following statements regarding bypass planning is CORRECT?
One purpose of bypass planning is to take full advantage of the applicable credit amount when the first spouse dies. Assets in a bypass (B) trust are not included in the surviving spouse's gross estate.
Ashley has a gross estate valued at $25 million when she dies. She is survived by her spouse, Roland, and their five children. Ashley had previously executed a will that incorporated bypass planning. Which of the following statements regarding Ashley's estate is CORRECT? Ashley's estate will owe significant estate tax. None of Ashley's estate qualifies for the marital deduction.
Statement I is incorrect because with bypass planning (the lifetime exemption amount to a B Trust and the remainder to the marital deduction), no estate tax is due because the entire estate is sheltered by either the estate tax exemption amount (the B Trust) or the marital deduction (the rest of the estate). The portion of the estate that exceeds the estate tax exemption amount qualifies for the marital deduction.
Your data-gathering meeting with Colin indicated the following about his property interests: He has the right to decide, without limitation, who will receive the entire corpus of his uncle's trust. Colin's will does not exercise this right. His spouse owns a paid-up life insurance policy that insures Colin's life, and his spouse, Lois, is the primary beneficiary. Five years ago, he created the revocable CG Trust for his children and funded it with $80,000 worth of securities; two years ago, when the trust fund was worth $130,000, he made it irrevocable. Two years ago, he had cumulative taxable transfers that exceeded the applicable exclusion amount and paid $32,000 in gift tax to the federal government. If Colin died in the current year, which of the following would be excluded from his gross estate?
The death benefit of the life insurance policy
Saquon transferred the ownership of a whole life insurance policy he owned to his daughter last year. This policy had a face value of $1,500,000 and a cash value of $125,000. He also owns a universal life insurance policy with a death benefit of $250,000 and a cash value of $50,000. If Saquon died today, what amount of life insurance proceeds would be included in his gross estate for estate tax purposes?
The death benefits of the whole life policy ($1,500,000) and the variable universal life policy ($250,000) would both be included in Saquon's gross estate. The death benefit from the whole life policy is included because Saquon transferred ownership of the policy within three years of his death. The death benefit from the variable universal life policy is included because Saquon owned the policy on his life at his date of death.
Estate planning data for Harriet indicates the following: She transferred income-producing real estate to a QTIP trust for the benefit of her spouse, George, four years ago, and she elected the marital deduction for all trust assets. She made a series of present-interest gifts of securities for the maximum annual exclusion to each of her three children over the past five years. Six years ago, she made gifts of twice the amount of the maximum annual exclusion to UTMA accounts for each of her four nieces and nephews, naming her brother, Fred, as custodian; George agreed to treat the gifts as split gifts. When she became ill last year, she gave her interest in the family farm to Fred; she withdrew money from a bank account to pay the gift tax due that was in excess of the applicable credit amount. Which of the following statements about the impact of the gifts on her estate tax liability is NOT correct?
The gift tax paid by Harriet last year from her bank account will reduce the size of her gross estate, and thus, her estate tax liability, but only if she dies in the next two years.
Holly read a newspaper article promoting lifetime gifting. Until reading this article, Holly had planned to leave all of her property through a testamentary transfer. What advice should you give Holly regarding the advantages of a lifetime gift over a testamentary transfer for a person who will owe estate taxes at death?
The gifted item is removed from the probate estate. A gift during life is less expensive than a testamentary transfer. A gift during life is less expensive than a testamentary transfer because of the annual exclusion and because any potential future appreciation is removed from the future transfer tax. Also, the gifted item is removed from the probate estate. Statement I is false because it is not an advantage. The donee does receive the donor's carryover basis, but it is not an advantage when compared to the stepped-up basis received with a testamentary transfer.
Brielle, a widow, had been in poor health for several years prior to her death. In the two years preceding her death, Brielle took the following actions: Made several lifetime cash gifts to her children Exercised a special power of appointment over property included in a trust Changed the designated beneficiary on a life insurance policy she owned on her life from her deceased spouse to her estate Gave up a life estate in a vacation cabin inherited from her mother Which of the following is included in Brielle's gross estate?
The life insurance proceeds payable to her estate If something is given away during life, it will be included in the donor's gross estate only if it is subject to the three-year rule (IRC 2035) or the transfer sections (IRC 2036-2038). None of the actions described would require application of the transfer sections, as Brielle did not retain an interest in or control over something that she irrevocably gifted to another person. While all described actions were taken within three years of death, none of the actions fit the description of the three actions that will cause the three-year rule to apply. Giving up the life estate in the vacation cabin did not constitute the release of a retained right since the life estate was not retained—it was the only interest in the property that Brielle ever had. Brielle owned and retained the right to change the beneficiary of the life insurance policy, which shows that she really did not gift this asset prior to her death, and therefore, it must be included in her gross estate, as she had incidents of ownership in the policy at death.
