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Estate Tax

  • 821. What is the federal estate tax?

    • The federal estate tax is an excise tax on the right to transfer property at death.1

      Changes made to the rules governing estate, gift and GST taxes in 2001 and 2010 created a substantial amount of uncertainty for estate planning purposes.  After 2012, the estate, gift, and GST rules were scheduled to return to pre-2001 levels unless Congress acted to extend the rules enacted in 2001 and 2010. Congress enacted the American Taxpayer Relief Act of 2012 (“ATRA”) on January 1, 2013, making the estate, gift, and GST tax rules that 2010 TRA implemented permanent. The 2017 Tax Act doubled the transfer tax exemption amount, but left the remaining provisions intact.

      Under 2010 TRA, the estate, gift and GST exemptions were $5 million for 2010-2012, with an inflation adjustment to $5.12 million for 2012. ATRA made this exemption level permanent, so that the $5 million exemption was adjusted annually for inflation for 2012-2017. The exemption amount was adjusted upward to $5.43 million in 2015 and $5.45 million in 2016.2 The amount for 2017 was $5.49 million, and increased to $11.18 million in 2018, $11.4 million in 2019, $11.58 million in 2020, and $11.7 million in 2021 under the 2017 tax reform legislation.3


      Planning Point: The increased estate tax exemption means clients and advisors should revisit existing estate planning strategies to determine whether they continue to be advisable.  For example, many clients have made use of so-called “formula trusts” in their estate planning in order to take full advantage of the transfer tax exemption.  A particularly problematic issue may arise when the formula in the plan directs that assets up to the annual exclusion amount will be placed into a credit shelter trust, with the remainder placed into a marital trust designed to take advantage of the marital deduction.  With the enlarged estate tax exemption, some clients may find that no assets will remain to be transferred to the marital trust.  This can present a problem if the surviving spouse is not also the beneficiary of the credit shelter trust (for example, if the decedent’s children are beneficiaries of that trust).


      While no estate tax was required to be imposed for 2010 under 2001 EGTRRA, the “penalty” of choosing to have no estate tax apply was that the estate then became subject to certain carryover basis rules. 2010 TRA allowed estates of decedents dying in 2010 to elect to fall under the $5 million exemption (and 35 percent estate tax rate) or be subject to the carryover basis rules. Estates electing the carryover basis rules were required to file a Form 8939 to report information about property acquired from a decedent and to allocate basis increases to certain property acquired from a decedent.

      Under 2010 TRA, a surviving spouse may use any unused estate tax exemption from the deceased spouse.4  This “portability” rule also allows a surviving spouse to use the deceased spouse’s unused exemption for gift tax purposes, but apparently not for GST exemption purposes. (See Q .) ATRA made this portability rule permanent as long as an estate tax return is filed and the portability election is made.

      Under 2010 TRA, the gift tax applicable exclusion amount was made equal to the estate and GST tax exemptions discussed above.

      The maximum estate tax rate and gift tax rate for 2010 through 2012 was 35 percent. The GST tax rate was zero in 2010 and 35 percent for 2011 and 2012. Under ATRA, the maximum estate, gift, and GST tax rates were permanently increased to 40 percent for the largest estates.

      The estate tax is measured by the value of the property or property interests transferred. The estate tax is also an extension of the gift tax, with the gift tax being an excise tax on the right to transfer property during life (see Q 891). Generally, both types of transfers are taxed according to the same rate schedule and a unified credit applies to both. As is explained in Q 891, the gift tax is cumulative and the tax rates are progressive. Thus, while taxable lifetime gifts may cause gifts made in subsequent years to be taxed at higher rates, all lifetime taxable gifts (if substantial enough) tend to push the taxable estate into higher tax brackets. That is, the cumulative effect follows through to the last taxable transfer a person makes – at death. This effect is seen clearly when the steps in the computation of the estate tax are followed.

      Planning Point: Lifetime gifts, however, are often preferred to transfer at death because lifetime gifts are “tax exclusive” as the amount of tax paid is not subject to gift tax while the estate tax is “tax inclusive” since the assets used to pay the estate tax are also subject to tax.

      Planning Point: The expansion of the transfer tax exemption under the 2017 tax reform legislation created much uncertainty for taxpayers contemplating large gifts.  The provision is set to sunset after 2025, leading many taxpayers to question whether large gifts made while the $11.4 million exemption is effective would be exempt once the exemption reverts to the much lower $5 million limit.  In general, the exemption applies first to gifts made during life and then to the individual’s remaining estate.  Under final regulations released late in 2019, estates are allowed to compute the available estate tax credit using the higher of the basic exclusion amount that applied to gifts made during life or the basic exclusion amount applicable on the date of death.  Essentially, this rule provides certainty that taxpayers can make large gifts now (i.e., gifts that exceed the $5 million exemption) without generating transfer tax liability if the exemption amount is reduced in the future.

      An estate tax return, if required, must generally be filed within nine months after the decedent’s death. A six month extension for filing is available. Tax is generally due within nine months after the decedent’s death, but certain extensions for payment may be available. See Q 861.

      Property includable in the gross estate is generally valued at fair market value on the date of death (Q ). An election may be available to use an alternative valuation date six months after death (Q 916).

      Certain deductions (Q 847) are available against the gross estate. Deductions for funeral and administration expenses, debts and taxes, and losses are subtracted from the gross estate to produce an adjusted gross estate. The adjusted gross estate is used to determine qualification for a few tax benefits, such as estate tax deferral under IRC Section 6166 (see Q 861).

      Unlimited marital and charitable deductions are available for certain transfers to surviving spouses and charities. The taxable estate equals the gross estate reduced by all deductions.

      Tax is imposed on the taxable estate. Tax rates (Appendix D – 01) are generally progressive and tax is based on cumulative taxable transfers during lifetime and at death. To implement this, the tentative tax is calculated on the sum of the taxable estate and adjusted taxable gifts (the computation base), and the gift tax that would have been payable on adjusted taxable gifts (using the tax rates in effect at decedent’s death) is then subtracted out. Adjusted taxable gifts are taxable gifts (the balance after subtracting allowable exclusions and deductions) made by the decedent after 1976 other than gifts includable in the decedent’s gross estate.

      Planning Point: A gift made after August 5, 1997 cannot be revalued if the gift was adequately disclosed on a gift tax return and the gift tax statute of limitations (generally, three years) has passed.5 Consider filing gift tax returns and adequately disclosing even annual exclusion gifts to start the limitation period.

      The tentative tax is then reduced by credits (Q 860) to produce estate tax payable. The unified credit is generally the most important credit available.


      1. IRC Sec. 2001.

      2. Rev. Proc. 2014-61, 2014-47 IRB 860, Rev. Proc. 2015-53.

      3. Rev. Proc. 2016-55, Pub. Law No. 115-97, Rev. Proc. 2018-18, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45.

      4. IRC Sec. 2010(c).

      5. IRC Sec. 2001(f).

  • 822. What are the steps that must be taken to calculate the federal estate tax?

    • The Federal Estate Tax Worksheet, below, shows the steps for calculating the estate tax. Calculation starts with determining what is includable in the decedent’s gross estate (see Q 824). In general, the gross estate includes property owned by the decedent at death, as well as property in which the decedent retained or held certain strings such as a retained income interest, a reversionary interest, a right to change beneficial interests, jointly owned property, a general power of appointment, certain interests in annuities or life insurance, and certain transfers within three years of death. A limited exclusion is available from the gross estate for conservation easements (Q 846).

      Federal Estate Tax Worksheet

      1

      Year of Death

       

      2

      Gross Estate (before exclusions)

      $

      Q 824

      3

      – Conservation Easement Exclusion

      ($

      Q 846

      )

      4

      Gross Estate

      $

      Q 824

      5

      – Funeral and Administration Expenses Deduction

      $

      Q 890

      6

      – Debts and Taxes Deduction

      $

      Q 890

      7

      – Losses Deduction

      $

      Q 890

      8

      – Subtotal: 5 to 7

      ($

      )

      9

      Adjusted Gross Estate

      $

       

      10

      – Marital Deduction

      $

      Q 847

      11

      – Charitable Deduction

      $

      Q 847

      12

      – Other Deductions

      $

      Q 847

      13

      – Subtotal: 10 to 12

      ($

       

      )

      14

      Taxable Estate

      $

       

      15

      + Adjusted Taxable Gifts

      $

       

      16

      Computation Base

      $

       

      17

      Tax on Computation Base

      $

      Appendix D

      18

      – Gift Tax on Adjusted Taxable Gifts

      ($

      Appendix D

      )

      19

      Tentative Tax

      $

      Appendix D

      20

      – Unified Credit

      $

      Q 860

      21

      – State Death Tax Credit (now a deduction)

      $

      Q 860

      22

      – Pre-1977 Gift Tax Credit

      $

      Q 860

      23

      – Previously Taxed Property Credit

      $

      Q 8755

      24

      – Foreign Death Tax Credit

      $

      Q 860

      25

      – Total Credits

      ($

      Q 860

      )

      26

      Federal Estate Tax

      $

       

  • 823. Is the exclusion amount of the first spouse to die portable? What is “portability”?

    • Yes. The 2010 Tax Relief Act introduced a new estate tax concept for 2011 and 2012, the deceased spouse unused exclusion amount (DSUEA). The DSUEA is portable, meaning that a surviving spouse can utilize the unused exclusion amount of the first spouse to die. ATRA made this portability concept permanent for tax years beginning in 2013 and thereafter.

      In general, under the provision, an estate’s exclusion amount, referred to as its applicable exclusion amount, is the sum of two components: the basic exclusion amount and the DSUEA. The basic exclusion amount for estates of decedents dying in 2015 was $5.43 million, $5.45 million in 2016, $5.49 million in 2017, and jumped to $11.18 million in 2018, $11.4 million in 2019, $11.58 million in 2020, and $11.7 in 2021 under the 2017 Tax Act.1 The second part of the equation, the DSUEA, is the amount of the first-to-die spouse’s exclusion amount that is not used by that spouse’s estate. Note that a surviving spouse’s DSUEA is equal to the unused exclusion amount of the surviving spouse’s last deceased spouse.

      The decedent’s executor must make the election on a timely filed estate tax return and include the computation of the DSUEA.  The final regulations provide that an extension of time may be available for filing the estate tax return only if the value of the estate otherwise does not exceed the threshold filing levels ($11.57 million per individual in 2021).  In other words, an extension of time may be granted if the taxpayer is only required to file an estate tax return in order to elect portability.2

      Further, the portability election will be effective if the executor of an estate completes and files an estate tax return containing a computation of the unused DSUE amount, but it is later found that adjustments are required in order to recompute the correct amount.  The IRS provides an example of an estate that has a DSUE amount equal to zero at the deadline for filing, but has claims pending against it that, when subsequently paid, result in an unused exemption.  The final regulations clarify that the recomputed DSUE amount will be available to the surviving spouse in such a situation, and the originally filed return will be considered “complete and properly prepared” for purposes of the election.3

      The Tax Court has held that the estate tax return of a predeceased spouse could be examined in determining the correct DSUE amount for a surviving spouse seeking to take advantage of portability.  This was the case even though the period of limitations for assessment had expired with respect to the return.  In this case, one spouse died and reported DUSE of about $1.26 million and elected portability.  The return was accepted by the IRS as filed.  The next year, the surviving spouse died and claimed the reported DSUE amount on her estate tax return.  The IRS examined both the returns of the surviving spouse and predeceased spouse, and determined that the predeceased spouse had failed to report certain taxable gifts, so reduced the DSUE amount and applied an estate tax deficiency with respect to the surviving spouse’s return.  The Tax Court found this permissible despite the fact that the IRS has issued a closing letter with respect to the predeceased spouse’s return but, because there was no agreement resulting from negotiations between the estate and IRS, the letter was not a closing agreement.  Further, examination was not an impermissible second examination because the IRS did not obtain any new information from the estate.4

      Under the final regulations, a surviving spouse who was not a U.S. citizen may use the DSUE amount if he or she subsequently becomes a U.S. citizen and the executor of the estate has filed an estate tax return properly making the portability election. Previously existing rules prevented a non-citizen spouse from taking advantage of portability except where allowed under a U.S. treaty obligation.5


      1. Rev. Proc. 2015-53, Rev. Proc. 2016-55, Pub. Law No. 115-97, Rev. Proc. 2018-18, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45.

      2. Treas. Reg. §20.2010-2(a)(1).

      3. Treas. Reg. §20.2010-2.

      4.Estate of Sower v. Commissioner, 149 TC 11.

      5. Treas. Reg. §§20.2010-3, 25.2505-5.

  • 824. What items are includable in a decedent’s gross estate for federal estate tax purposes?

    • The items that comprise the gross estate are described in IRC Sections 2033-2046 and the regulations thereunder. See Q 825 to Q 841 for a detailed discussion of these includable items. Gratuitous transfers of federal, state, and municipal obligations are discussed in Q 897. See Q 846 for the qualified conservation easement exclusion from the gross estate.

  • 825. What property is includable in the gross estate under IRC Section 2033?

    • “The gross estate of a decedent who was a citizen or resident of the United States at the time of death includes under IRC Section 2033 the value of all property, whether real or personal, tangible or intangible, and wherever situated, beneficially owned by the decedent at the time of his death…(see Q 897). Real property is included whether it came into the possession and control of the executor or administrator or passed directly to heirs or devises.  Interest and rents accrued at the date of the decedent’s death constitute a part of the gross estate. Similarly, dividends which are payable to the decedent or estate by reason of the fact that on or before the date of the decedent’s death he was a stockholder of record (but which have not been collected at death) constitute a part of the gross estate.”1

      Interest accrued, for example, on certificates of deposit owned at death and payable after death but forfeitable in the event of surrender during the owner’s life2 is includable in the decedent’s estate under IRC Section 2033. The result is not changed by the fact that the decedent owned the CDs as a joint tenant at the time of death.3

      Note that it is only property “beneficially owned” by the decedent that is includable under IRC Section 2033. Thus, IRC Section 2033 does not reach property held by the decedent in trust for others. On the other hand, the decedent’s beneficial interest in property held by another as trustee is includable under IRC Section 2033 unless the decedent’s death terminates the interest.

      IRC Section 2033 does not include interests which terminate on the decedent’s death, such as a life interest in a trust. (But such termination may be subject to the tax on generation-skipping transfers–see Q 874.) Similarly, if a decedent sells property in exchange for notes which provide that his death will extinguish the balance owing at that time, such balance will not be includable in the decedent’s estate under IRC Section 2033 if the sale was for an adequate and full consideration and the cancellation provision was part of the bargained for consideration.4

      Among the items includable in a decedent’s gross estate are rights to future income (for example, the right to payments under an individual deferred compensation agreement or partnership income continuation plan). Such rights – called “income in respect of a decedent” – are included at their present (commuted) value. Since the income is also subject to income tax in the hands of the person who receives it (decedent’s estate or beneficiary), the recipient is allowed an income tax deduction for the estate tax paid on the income right (see Q 747).

      Planning Point: In light of this double taxation, taxpayers beyond retirement age should consider alternatives for removing funds from retirement accounts during life to fund other investments.

      The decedent’s interest in any business owned at death, whether as a proprietor, a partner, or a shareholder in a corporation, is likewise includable under IRC Section 2033. However, the decedent’s interest may be subject to certain discounts for lack of marketability and lack of control.

      Local property law (state law) determines the nature and extent of a decedent’s ownership rights in property at the time of death. Under community property law, for instance, property acquired by a husband or wife during marriage by purchase with community funds is generally considered to be owned one-half by each spouse. Consequently, upon the death of the spouse who dies first, only one-half of the community property is includable in his gross estate. Ten states–Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin–operate under some form of community property system.

      The value of Social Security survivor benefits, whether paid in the form of a lump sum or monthly annuity, is not includable in the decedent’s estate under IRC Section 2033.5


      1 .Treas. Reg. §20.2033-1.

      2 .See Federal Reserve Banking Regulation Section 217.4.

      3 .Jeschke v. U.S.,814 F.2d 568, 87-1 USTC ¶13,713 (10th Cir. 1987).

      4 .Est. of Moss v. Comm., 74 TC 1239 (1980), acq. in result, 1981-1 CB 2.

      5 .Rev. Rul. 55-87, 1955-1 CB 112; Rev. Rul. 67-277, 1967-2 CB 322; Rev. Rul. 81-182, 1981-2 CB 179.

  • 826. Are dower and curtesy interests and their statutory substitutes includable in a decedent’s gross estate under IRC Section 2034?

    • IRC Section 2034 specifically includes in the gross estate the interest of the decedent’s surviving spouse “existing at the time of the decedent’s death as dower or curtesy, or by virtue of a statute creating an estate in lieu of dower or curtesy.”

      At one time, certain courts held that dower and curtesy interests were not subject to death taxes because they were not received by transfer from the decedent. IRC Section 2034 was enacted to make sure that these marital interests would not escape the federal estate tax. The full value of the property without deduction of the surviving spouse’s interest is includable in the gross estate.

  • 827. When are gifts made within three years of death includable in a decedent’s gross estate under IRC Section 2035?

    • Gift tax paid by the decedent or the estate on any gifts made by the decedent or spouse within three years of the decedent’s death is includable in the gross estate in any case, regardless of whether the value of the gift itself is includable under IRC Section 2035 or any other IRC section.1 Gift tax paid by the decedent’s spouse on a split-gift within three years of the decedent’s death was included in the decedent’s estate where the decedent had funneled money to his spouse who then transferred the money to a life insurance trust (and to the IRS to pay gift tax); the transfers were treated as collapsed into one transaction under the step-transaction doctrine.2

      Under Section 2035, the value of the gross estate also includes the value of property to the extent a donor gratuitously transferred property within three years of death but retained an interest in that property described in IRC Section 2036 (transfer with a retained life estate), 2037 (transfer taking effect at death with reversionary interest retained), 2038 (transfer with power retained to revoke or amend), or 2042 (incidents of ownership in insurance on life of donor); or if a donor transferred property subject to such retained interests more than three years before death, but relinquishes that interest within three years of death. The three-year rule applies to these transfers whether or not a gift tax return was required to be filed.3 The entire value of the property transferred under this exception is includable in the decedent’s gross estate, including the value of the property, if any, transferred by the decedent’s consenting spouse (i.e., a split gift–see Q 904). If the consenting spouse dies within three years of the gift and the entire value of the gift was includable in the donor spouse’s estate under IRC Section 2035, the consenting spouse’s portion of the gift is not an adjusted taxable gift and is not includable in the consenting spouse’s gross estate.4 The gift tax paid by the donor spouse or the estate is includable in the donor spouse’s estate, and the gift tax paid by the consenting spouse or her estate is includable in the consenting spouse’s estate.5 However, gift tax paid by a decedent’s spouse on a gift split between the spouses within three years of the decedent’s death was included in the decedent’s estate where the spouse did not have sufficient assets to pay the spouse’s share of the gift tax and the decedent transferred assets to the spouse to pay the taxes.6

      A transfer from a revocable trust is treated as made directly by the grantor and therefore included in the gross estate.7 Such a transfer will generally be subject to the Section 2035 inclusion rule also with respect to gift tax paid within three years of death and for the limited purpose of the second exception below.

      IRC Section 2035 also applies to increase the gross estate for the purposes of the following:

      (1)determining the estate’s qualification for

      (a)IRC Section 303 stock redemptions (redemption of stock held by a decedent at death in an amount not in excess of death taxes and settlement costs under special income tax rules that treat the redemption as a capital transaction rather than as a dividend), and

      (b)current use valuation for qualified real property (see Q 915); and

      (2)determining property subject to estate tax liens.8 With respect to the IRC Section 6166 extension of the time to pay estate tax (see Q 861), the requirement that the decedent’s interest in a closely held business must exceed 35 percent of the adjusted gross estate is met by an estate only if the estate meets the requirement both with and without the application of the bringback rule.9 An exception to this second exception is that any gifts (other than a transfer with respect to a life insurance policy) not required to be reported on a gift tax return filed by the decedent for the year the gift was made are not includable in the gross estate. Gifts up to the limit of the gift tax annual exclusion and qualified transfers (see Q 904), but not split gifts, do not require the filing of a return. Another exception to the second exception is a gift which qualifies for the gift tax marital deduction (see Q 911).10

      The Bringback Rule

      The three-year rule of IRC Section 2035, referred to above, operates as follows: In general, gifts made by the decedent (in trust or otherwise) which are caught by the three-year rule, are includable in the decedent’s gross estate. Also includable is the amount of any gift tax paid by the decedent or his estate on any gifts made by the decedent or his spouse within three years prior to the decedent’s death; the gift tax is includable regardless of whether the value of the gift itself is includable under IRC Section 2035 or any other IRC section.11 Where the decedent made a “net gift” (i.e., a gift made on the condition that the donee pay the gift tax–see Q 899), the amount includable in the gross estate is the total value of the property transferred.12


      1 .Estate of Hester v. United States, 2007 WL 703170, 99 A.F.T.R. 2d 1288 (W.D. Va., 2007), afff’d per curiam, 297 Fed. Appx. 276, 2008 WL 4660189, 102 A.F.T.R. 2d 2008-6714 (4th Cir. Oct. 21 2008), Cert. denied sub nom. IRC Sec. 2035(b); Rev. Rul. 81-229, 1981-2 CB 176; Rev. Rul. 82-198, 1982-2 CB 206.

      2 .Brown v. U.S., 329 F3d 664 (2003), 2003-1 USTC ¶60,462 (9th Cir. 2003).

      3 .IRC Sec. 2035(a).

      4 .IRC Sec. 2001(e); Rev. Rul. 82-198, 1982-2 CB 206.

      5 .IRC Sec. 2035(b); Rev. Rul. 82-198, above.

      6 .TAM 9729005.

      7 .IRC Sec. 2035(e).

      8 .IRC Sec. 2035(c)(1).

      9 .IRC Sec. 2035(c)(2).

      10 .IRC Sec. 2035(c)(3).

      11 .IRC Sec. 2035(b); Rev. Rul. 81-229, 1981-2 CB 176; Rev. Rul. 82-198, 1982-2 CB 206.

      12 .Let. Rul. 8317010.

  • 828. When are gifts with a life interest retained by the donor includable in the donor’s gross estate under IRC Section 2036?

    • IRC Section 2036 is one of the three sections (2036, 2037, 2038) dealing with lifetime transfers whereby the donor retained some rights over the property given. IRS Section 2036 brings into the gross estate lifetime transfers of property where the decedent retained the use of the property or the income from the property for life. Included are transfers made directly to a donee and transfers made to an irrevocable trust for designated beneficiaries, and transfers made to entities such as a partnership, if the decedent retained the prohibited “strings.”

      Specifically, IRC Section 2036 requires any property which an individual gratuitously transfers during lifetime to be included in the gross estate if he retains “for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death,” either:

      “(1) the possession or enjoyment of, or the right to income from, the property, or

      “(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.”

      The IRS asserts the decedent’s retention of possession or enjoyment of, or the right to income from, property may be evidenced by an agreement, or by prearrangement, or merely by circumstantial evidence.1

      In November 2011, the IRS finalized regulations regarding the includability of property (including property held in trust) in the grantor’s gross estate under Section 2036 where the grantor retained: (i) the use of the property; (ii) the right to an annuity or unitrust; (iii) a graduated retained interest; or (iv) other payment from the property.

      Excepted from the scope of IRC Section 2036 is a transfer of property by way of “a bona fide sale for an adequate and full consideration in money or money’s worth.”2 This exception to Section 2036 is often referred to as the “bona fide sale exception.” Courts have wrestled with the interpretation of this exception in “widow’s election” cases. Typically, a married decedent leaves certain property (and/or certain community property) in trust for his children, with all income to the surviving spouse for her lifetime, on the condition that the surviving spouse transfer certain of her property (or community property share) to the trust. The surviving spouse thus has her choice between what has been provided for her in the will and her statutory (intestate) share (or community property share). If the widow elects to take under the will, and transfers the agreed-upon property to the trust in exchange for a life income from all the trust assets, what has she transferred for purposes of IRC Section 2036? Has she transferred the entire property, or has she transferred only a remainder interest? If she is considered to have transferred the entire property, and the value of property transferred exceeds the value of the life income interest she receives in return, then she has not made a “bona fide sale for an adequate and full consideration” and the entire value of the property she transferred is includable in her gross estate under IRC Section 2036. If, however, she is considered to have transferred only a remainder interest, and that interest is of less value than the value of her life income from trust assets in excess of the value of the property she actually transferred, then she will have received adequate and full consideration for the transfer, and none of the property she actually transferred will be includable in her estate under IRC Section 2036. Case law appears to support the former interpretation.3

      For purposes of analyzing the bona fide sale exception to contributions/transfers to family entities, such as LLCs or limited partnerships, courts analyze whether a “legitimate and significant,” non-tax purpose existed for the formation of the partnership and whether the decedent received a share in the entity proportionate to her contribution.4 If these conditions are satisfied, Section 2036 does not apply and the gross estate includes the value of the decedent’s interest in the entity at the time of death (after gifts of interests, etc.). If, on the other hand, Section 2036 does apply (bona fide sale exception not satisfied and decedent retained prohibited rights), the gross estate includes the value of the assets contributed (without consideration of the entity, discounts applicable to ownership of an interest in the closely-held entity, or gifts made during life of interests).5


      1 .See Lee v. U.S., 86-1 USTC ¶13,649 (W.D. Ky. 1985).

      2 .IRC Sec. 2036(a).

      3 .Gradow v. U.S., 897 F.2d 516, 90-1 USTC ¶60,010 (9th Cir. 1990).

      4 .Estate of Bongard v. Comm., 124 TC 95 (2005).

      5 .Estate of Kimbell v. United States, 371 F.3d 257 (5th Cir. 2004).

  • 829. When are gifts taking effect at death includable in a decedent’s gross estate under IRC Section 2037?

    • IRC Section 2037 requires inclusion in the gross estate of any interest in property transferred by the decedent if both of the following conditions are met:

      (1)Possession or enjoyment of the property can, through ownership of the transferred interest, be obtained only by surviving the decedent; and

      (2)The decedent has retained a reversionary interest in the property which, immediately before his death, exceeded 5 percent of the value of the property.

      A simple example would be a transfer to an irrevocable living trust under the following terms: income to grantor’s wife for her life; property to revert to grantor if living at wife’s death and if not, property to their daughter.

      Assuming that the grantor predeceases his wife and daughter, the value of the daughter’s interest – the value of the property less the wife’s life interest – is includable in the grantor’s gross estate. Obviously, the daughter had to survive the grantor in order to receive the property. And in all probability, the grantor’s reversionary interest, valued immediately before death, exceeded 5 percent of the value of the property.

      The term “reversionary interest” means any possibility that the property may return to the donor or to his estate, and any possibility that the property may become subject to a power of disposition by him. The term does not, however, include a possibility that the income alone may return to the donor or his estate. Thus, retention of a secondary life estate would not constitute a reversionary interest (although it would cause inclusion under IRC Section 2036). Also, the term “reversionary interest” does not include a mere expectancy by the decedent that upon the death of the transferee he (or his estate) may reacquire the property under the will of the transferee or under state inheritance laws.1


      1 .Treas. Reg. §20.2037-1(c)(2).

  • 830. When are gifts includable in the decedent’s gross estate under IRC Section 2038 where a decedent retains a power to revoke or amend?

    • IRC Section 2038 brings into a decedent’s gross estate property that he has gratuitously transferred if immediately before his death he possessed the power to alter, amend, revoke, or terminate the transfer.

      The language of the section refers to transfers “by trust or otherwise,” but generally the section applies to transfers in trust. The most obvious example of the applicability of IRC Section 2038 is, of course, the revocable living trust. Where the grantor of a trust retains until his death the power to revoke the trust, the full value of the trust corpus is includable in his gross estate.

      It makes no difference whether the decedent could exercise the power alone or only in conjunction with another person.

      It also makes no difference in what capacity the decedent could exercise the power–whether as grantor, trustee, or co-trustee.

      IRC Section 2038 is not limited to transfers where the decedent retained the power to alter, amend, revoke, or terminate at the time of transfer, except with respect to transfers made on or before June 22, 1936. With respect to transfers made after that date, possession of such a power at death will cause inclusion in the gross estate regardless of when or from what source the decedent acquired the power. Thus, IRC Section 2038 would reach a case in which the decedent, who had not originally retained the power, subsequently succeeded to it by being appointed a trustee.

      IRC Section 2038 also reaches transfers to an irrevocable trust if the settlor possesses at his death the power to alter or amend the trust.1 However, the provision in a trust instrument for the inclusion of all the settlor’s after-born and after-adopted children as additional beneficiaries is not the retention of a power to change the beneficial interests of the trust within the meaning of IRC Section 2038.2

      The regulations also make it clear that the mere discretionary power reserved to the grantor to accumulate or distribute trust income for a single beneficiary is sufficient to bring the trust property into the grantor’s estate under IRC Section 2038.3

      However, if the grantor’s power to affect the beneficial enjoyment of the transferred property is limited by an ascertainable objective and external standard, the power will not fall within IRC Section 2038. The IRS acquiesces in the ascertainable standard doctrine established by the cases.4

      If a grantor creates an irrevocable trust under which the trustee is given the power to distribute income and principal unlimited by an ascertainable standard, the value of the trust property will be includable in the grantor’s estate under IRC Section 2038 (and also under IRC Section 2036) if (1) the grantor names himself as trustee or retains at his death the power to do so, or (2) the grantor retains at his death the power to remove the trustee without cause and replace him with another.5 However, a later revenue ruling modified Revenue Ruling 79-353 to provide that the above-described estate tax holding will not be applied to a transfer, or to an addition to a trust, made before October 29, 1979 (the date of publication of the revenue ruling) if the trust was irrevocable on October 28, 1979.6 Further, for purposes of IRC Section 2036 or IRC Section 2038, the Service will no longer include trust property in a decedent-grantor’s estate where the grantor retains the right to replace the trustee, but can replace the trustee with only an independent corporate trustee.7


      1 .Marshall v. U.S., 338 F. Supp. 1321 (D. Md. 1972).

      2 .Rev. Rul. 80-255, 1980-2 CB 272.

      3 .Treas. Reg. §20.2038-1(a).

      4 .1947-2 CB 2; Rev. Rul. 73-143, 1973-1 CB 407. For more information on the ascertainable standard doctrine, see Stephens, Maxfield, Lind & Calfee, Federal Estate and Gift Taxation (Boston: Warren, Gorham & Lamont, 7th ed.), ¶4.105, and the cases cited therein.

      5 .Treas. Reg. §20.2038-1(a)(3); Rev. Rul. 79-353, 1979-2 CB 325.

      6 .Rev. Rul. 81-51, 1981-1 CB 458.

      7 .Rev. Rul. 95-58, 1995-2 CB 191; Est. of Wall v. Comm., 101 TC 300 (1993).

  • 831. When are annuities or annuity payments includable in a decedent’s gross estate under IRC Section 2039?

    • IRC Section 2039 deals with annuities or other payments receivable by any beneficiary under any form of contract or agreement by reason of surviving the decedent. Subsections (a) and (b) of that section state the circumstances under which such an annuity or payment is includable in the decedent’s gross estate. Thus, IRC Section 2039 applies to death and survivor benefits under annuity contracts and under optional settlements of living proceeds from life insurance policies and endowment contracts.

      Exclusions under various provisions of IRC Section 2039 may apply to employee annuities which are part of qualified pension and profit sharing plans; to employee annuities payable under nonqualified deferred compensation plans, including death benefit only plans; to certain tax sheltered annuity plans; and to individual retirement savings plans.

  • 832. Are joint interests includable in a decedent’s gross estate under IRC Section 2040?

    • Yes. IRC Section 2040 deals with all classes of property held jointly with a right of survivorship. This includes, for example, jointly held real estate, jointly held bonds, and joint bank accounts. IRC Section 2040 does not deal with other forms of co-ownership in which property interests pass at death other than automatically to surviving co-owners. Thus, tenancies in common and community property interests are includable under IRC Section 2033, not under IRC Section 2040.

      The general rule of IRC Section 2040 requires that the entire value of the jointly owned property must be included in the gross estate of the joint owner who dies first, except such part as can be shown to have originally belonged to the survivor and never to have been acquired from the decedent “for less than an adequate and full consideration in money or money’s worth.”1 Thus, the rule is as follows: if the decedent furnished the entire purchase price, the entire property is includable; if the decedent furnished only a part of the purchase price, only a corresponding proportion of the property is includable; if the decedent furnished no part of the purchase price, no part of the property is includable.2 (But see below for the special rule applicable to spouses who own property jointly.)

      ­­­­Planning Point: As a result of these rules, it is important that joint owners keep good records of the funding for the jointly-owned property.

      Where the joint owners are related (not spouses) and the survivor paid part of the purchase price, he must be able to prove that the funds did not come to him by way of gift from the decedent. In other words, the purchase price will be traced to its original source; and the burden of proof is not on the IRS but on the survivor. It is often difficult to prove the amount of contribution of the survivor to the joint ownership. If the assets of the joint owners became inextricably commingled prior to acquisition of the jointly owned property, proof may be impossible and the property will be wholly includable in the decedent’s gross estate.

      But while money or property acquired by the surviving joint owner by gift from the decedent and contributed to the purchase price of the jointly held property is traced to the decedent for purposes of IRC Section 2040, income from property so acquired which is contributed to the purchase price is treated as the survivor’s own contribution for purposes of IRC Section 2040.3 Further, the IRS has ruled that where the survivor’s contribution to the purchase price of jointly held property was traced to proceeds from the sale of property acquired by the survivor with money received from the decedent by gift, the sale proceeds attributable to appreciation in value of the property during the period the survivor owned the property were treated as the survivor’s own contribution for purposes of IRC Section 2040. Also, consistent with the above-cited regulation, the Service ruled that sale proceeds attributable to income from the property received by the survivor and reinvested were treated as the survivor’s individual contribution.4

      Revenue Ruling 79-372 is also consistent with earlier case law, as noted in the Ruling. However, the regulations call for a different result when the survivor’s contribution was of property received by gift from the decedent (rather than of proceeds from the sale of such property), which property had appreciated in value during the period held by the survivor. In this situation the regulations require that the portion of the purchase price attributable to such appreciation be traced to the decedent for purposes of IRC Section 2040.5

      Where the property was acquired by the decedent and the other joint owner by devise, bequest, or inheritance, or by gift from a third party, the decedent’s fractional share of the property is included in his gross estate. For example, if the decedent’s father has conveyed the property by gift to the decedent and his wife in joint tenancy or tenancy by the entirety, one-half of the property will be includable in the gross estate of whichever spouse dies first.6

      See Q 833 for a discussion of when a qualified joint interest is included in a decedent’s gross estate.


      1 .IRC Sec. 2040(a).

      2 .Treas. Reg. §20.2040-1(c).

      3 .Treas. Reg. §20.2040-1(c)(5).

      4 .Rev. Rul. 79-372, 1979-2 CB 330.

      5 .Treas. Reg. §20.2040-1(c)(4).

      6 .IRC Sec. 2040(a).

  • 833. What is a qualified joint interest? When is a qualified joint interest included in a decedent’s gross estate?

    • Effective for estates of decedents dying after 1981, in the case of joint interests created after 1976, notwithstanding the provisions of IRC Section 2040 explained in Q 832 (subsection (a)), only one-half the value of a qualified joint interest is included in a decedent’s gross estate under IRC Section 2040. (The rule for inclusion in a decedent’s estate for spousal jointly owned property is still based upon consideration furnished if the joint interest was created prior to 1977.1) A qualified joint interest means any interest in property held by the decedent and the decedent’s spouse as (1) tenants by the entirety; or (2) joint tenants with right of survivorship, but only if the decedent and the spouse of the decedent are the only joint tenants.2 However, with respect to decedents dying after November 10, 1988, if the decedent’s spouse is not a United States citizen, interests in property held by the decedent and the decedent’s spouse are not treated as a qualified joint interest (apparently unless the transfer to the surviving spouse is in a qualified domestic trust, see Q 847).3 For purposes of applying the consideration furnished test (see above) where the qualified joint interest rule does not apply because the decedent’s spouse is not a United States citizen, consideration furnished by the decedent to the decedent’s spouse before July 14, 1988 is generally treated as consideration furnished by the decedent’s spouse.4


      1 .Gallenstein v. U.S.,975 F.2d 286, 92-2 USTC ¶60,114 (6th Cir. 1992); Patten v. U.S., 116 F.3d 1029, 97-2 USTC ¶60,279 (4th Cir. 1997); Anderson v. U.S., 96-2 USTC ¶60,235 (D.C. Md. 1996); Hahn v. Comm., 110 TC 140 (1998), acq. 2001-42 IRB iii.

      2 .IRC Sec. 2040(b).

      3 .IRC Sec. 2056(d).

      4 .OBRA ’89, Sec. 7815(d)(16).

  • 834. When are powers of appointment includable in a decedent’s gross estate under IRC Section 2041?

    • IRC Section 2041 governs the includability in the decedent’s gross estate of property subject to his power of appointment. For estate tax purposes, a “power of appointment” is a power which has been given to the decedent by another person, as distinguished from a power retained by him over property which he formerly owned. A power of appointment enables the holder thereof to dispose of property he does not own.

      Example:A’s will provides that part of his estate is to be placed in trust. The will gives A’s spouse all the trust income for life and also the power to designate who shall receive the trust principal after death. If A’s spouse fails to exercise the power, the trust principal is to go to their daughter. A’s spouse exercises the power by executing a will in which she directs the trust principal to their son.

      In this example, A is the donor of the power; A’s spouse is the donee of the power; their son is the appointee of the power; and the daughter, had A’s spouse failed to exercise her power, would have been the taker in default of appointment.

      Of course, powers of appointment can be created otherwise than by a testamentary trust. They can also be created, for example, by the terms of a living trust, or by the terms of a life insurance beneficiary arrangement.

      The law provides two sets of rules for gift and estate taxation of powers of appointment. The first set of rules deals with powers created before October 22, 1942, sometimes called “pre-1942” powers. The second set of rules governs powers created after October 21, 1942, sometimes called “post-1942” powers.

      A power of appointment created by will is considered as created on the date of the testator’s death. A power created by an inter vivos instrument is considered created on the date the instrument takes effect.1 Thus, in the case of a living trust, the power is created when the trust takes effect, even though the trust is revocable. Likewise, in the case of life insurance, the power is created when the beneficiary designation is made, even though the designation is revocable.

      Regardless of when the power is created, however, it is not taxable in any event unless it is a “general” power of appointment (see Q 835).


      1 .Treas. Reg. §20.2041-1(e).

  • 835. What is a general power of appointment?

    • The IRC defines a general power of appointment as a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate. Here the “decedent” is, of course, the donee – that is, the holder of the power.

      A power exercisable in favor of the holder, his estate, his creditors, or the creditors of his estate is a general power of appointment; it need not be exercisable in favor of both.1 Thus, if the holder can withdraw all or part of the principal for any purpose, he has a general power of appointment exercisable in favor of himself. Or, if he can will (or bequeath) the property to anyone he wishes, including his own estate, he has a general power of appointment exercisable in favor of his estate.

      However, a power to “consume, invade, or appropriate” the principal for the holder’s own benefit is not a general power of appointment if it is limited by an “ascertainable standard” relating to the holder’s “health, education, support, or maintenance.” According to the regulations, “A power is limited by such a standard if the extent of the holder’s duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health, education, or support (or any combination of them). As used in this subparagraph, the words ‘support’ and ‘maintenance’ are synonymous and their meaning is not limited to the bare necessities of life. A power to use property for the comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard.”

      Planning Point: To ensure a power of appointment is limited by an ascertainable standard, the drafter must use the exact terms referenced in the regulations. Too much is at stake to use terms the drafter may believe are “similar.”

      Examples of powers which are limited by the requisite standard are powers exercisable for the holder’s ‘support,’ ‘support in reasonable comfort,’ ‘maintenance in health and reasonable comfort,’ ‘support in his accustomed manner of living,’ ‘education, including college and professional education,’ ‘health,’ and ‘medical, dental, hospital and nursing expenses and expenses of invalidism.’ In determining whether a power is limited by an ascertainable standard, it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised.”2

      A pre-1942 power is not considered to be a “general” power of appointment if it is exercisable only in conjunction with another person. And a post-1942 power is not considered to be a “general” power of appointment if it is exercisable only in conjunction with the donor of the power or only in conjunction with someone who has a substantial interest in the property which is adverse to the holder’s interest.3 It has been held that a trustee does not have a substantial and adverse interest simply because the trust is a taker in default of exercise of the power, so long as the trustee himself is not a beneficiary of the trust.4

      In the past, a number of letter rulings have determined that a beneficiary who has the power to remove a trustee will be treated as holding any powers held by the trustee for purpose of determining whether the beneficiary holds a general power of appointment.5 However, for purposes of IRC Section 2036 or IRC Section 2038, the Service will no longer include trust property in a decedent grantor’s estate where the grantor retains the right to replace the trustee but can replace the trustee with an independent trustee “that was not related or subordinate to the decedent (within the meaning of Section 672(c)), the decedent would not have retained a trustee’s discretionary control over trust income.”6

      More recently, the power to remove a trustee and replace the trustee with an independent corporate trustee was not treated as the retention of powers held by the trustee for purposes of IRC Section 2041.7 Hopefully, this represents an extension by the Service of its new policy with regard to trustee removal under IRC Section 2036 and IRC Section 2038 to IRC Section 2041. Similarly, a beneficiary’s right to veto a replacement trustee and to petition a court for appointment of an independent replacement trustee was not treated as a general power of appointment.8

      Any power of appointment which is not a general power is called a “special” or “limited” power. A special power of appointment is not taxable in the holder’s estate regardless of when it was created.

      Post-1942 Power: Generally

      The mere possession at death of a post-1942 general power of appointment will cause the property to be included in the holder’s gross estate. Thus:

      (1) If the decedent had a general power of appointment which he could have exercised by will in favor of his estate, the property subject to the power is taxable in his estate whether or not he exercised the power; or

      (2) If, immediately before his death, the decedent had a general power of appointment which he could have exercised in his own favor during his lifetime, the property subject to the power is taxable in his estate.

      But even though the decedent does not still possess the power at the time of his death, if he has had such a power and has exercised or released it or allowed it to lapse during his lifetime, the property which was subject to the power may, under some circumstances, be included in his gross estate.

      Thus, if the decedent once possessed a general power of appointment and has exercised or released it in such a way that, had the property been his own, it would have been included in his gross estate under one of the IRC Sections 2035 through 2038, then the property that was subject to the power is includable in his gross estate.

      Pre-1942 Power

      Prior to 1942, property subject to a general power of appointment was taxable in the donee’s estate only if the power was exercised. Thus, the property is includable in the holder’s gross estate only if (1) he has exercised the power by will at his death, or (2) he has exercised the power during life in such a way that, had the property been owned by him, it would have been includable under one of the IRC Sections 2035-2038.


      1 .Treas. Reg. §20.2041-1(c)(1).

      2 .Treas. Reg. §20.2041-1(c)(2).

      3 .Est. of Maxant, TC Memo 1980-414, nonacq. 1981 AOD LEXIS 58; Rev. Rul. 82-156, 1982-2 CB 206.

      4 .Miller v. U.S., 387 F.2d 866 (3rd Cir. 1968); Est. of Towle v. Comm., 54 TC 368 (1970).

      5 .Let. Ruls. 8916032, 9113026 (does not apply to transfers in trust before October 29, 1979, if trust was irrevocable on October 28, 1979).

      6 .IRC Sec. 2041.

      7 .Let. Rul. 9607008.

      8 .Let. Rul. 9741009.

  • 836. What non-cumulative annual withdrawal rights may the grantor give beneficiaries without subjecting the power to estate and gift taxes?

    • In many situations, an insured or the grantor of a trust will wish to give his beneficiary not only all the income from the fund, but also a right to withdraw some limited amount of principal each year. If the beneficiary does not exercise his right of withdrawal in any year, the right expires or “lapses” at the end of the year. Where it cannot be carried forward to subsequent years, it is characterized as a “non-cumulative” withdrawal right.

      Where the beneficiary permits such a right to lapse, gift and estate taxes may result by reason of the lapse. In other words, by not withdrawing the amount she could have withdrawn, the beneficiary has made a gift to those persons designated to receive the principal.

      However, in framing the powers of appointment tax law, Congress recognized that modest annual withdrawal rights are socially desirable and that their use, within limits, should not be discouraged. Therefore, an exemption is granted in an amount equal to whichever is greater: (1) $5,000; or (2) 5 percent of the value of the fund as of the date of the lapse of the power.

      Consequently, where a non-cumulative power of withdrawal is permitted to lapse, only the excess over and above the “$5,000 or 5 percent of the fund” limit will be subject to gift and estate taxes. This excess is treated as a transfer with life income retained. But the entire amount which could have been withdrawn in the year of death, but was not withdrawn, is includable in the gross estate since this power has not lapsed at the time of death.

  • 837. When are life insurance proceeds includable in a decedent’s gross estate under IRC Section 2042?

    • IRC Section 2042 deals specifically with the includability of life insurance proceeds in the gross estate of the insured. The proceeds are includable in the insured’s gross estate under IRC Section 2042 if they are as follows:

      (1)Receivable by or for the benefit of insured’s estate; or

      (2)Receivable by a beneficiary other than the insured’s estate and the insured possessed at his death any of the incidents of ownership in the policy (whether exercisable by the insured alone or only in conjunction with another person).

       

      Planning Point: Generally, the dispute arises as to whether the decedent held any “incidents of ownership” in the policy. A decedent may have an incident of ownership if he has the power to change the beneficial ownership in the policy regarding its proceeds. To help remove the insurance proceeds from the insured’s estate, it may be desirable to acquire the policy in the name of an irrevocable life insurance trust or “ILIT”.

  • 838. Are transfers made for insufficient consideration includable in a decedent’s gross estate under IRC Section 2043?

    • If any one of the transfers described in IRC Sections 2035 through 2038 and 2041 is made for consideration in money or money’s worth, but the consideration is not adequate and full, the excess of the fair market value of the property transferred over the consideration received is the amount includable in the gross estate.1 There is a split of authority over whether adequate and full consideration is measured by reference to what would otherwise be included in the estate or using time value of money discounts.2

      In general, for purposes of the estate tax, a relinquishment or promised relinquishment of dower or curtesy, or of a statutory substitute, or of other marital rights in the decedent’s property or estate, is not considered consideration “in money or money’s worth.” However, an exception is made for the limited purpose of allowing a deduction from the gross estate in the case of a transfer which meets the following conditions: Where two spouses enter into a written agreement relative to their marital and property rights and divorce occurs within the three-year period beginning on the date one year before the agreement is entered into, any transfer of property or interests in property made pursuant to the agreement to either spouse in settlement of marital or property rights is deemed to be a transfer made for a full and adequate consideration in money or money’s worth. The deduction allowed is for the value of the property transferred as a claim against the estate (see Q 847).


      1 .IRC Sec. 2043(a).

      2 .Gradow v. U.S.,897 F.2d 516, 90-1 USTC ¶60,010 (Fed. Cir. 1990); Pittman v. U.S.,878 F. Supp. 833, 95-1 USTC ¶60,186 (E.D.N.C. 1994); Parker v. U.S., 894 F. Supp. 445, 95-1 USTC ¶60,199 (N.D. Ga. 1995); Est. of D’Ambrosio v. Comm., 101 F.3d 309, 96-2 USTC ¶60,252 (3rd Cir. 1996), rev’g 105 TC 252 (1995); Wheeler v. Comm., 116 F.3d 749, 97-2 USTC ¶60,278 (5th Cir. 1997), rev’g 96-1 USTC ¶60,226 (W.D. Tex. 1996); Est. of Magnin v. Comm., 184 F.3d 1074, 99-2 USTC ¶60,347 (9th Cir. 1999), rev’g TC Memo 1996-25.

  • 839. When is marital deduction property in which a decedent had a qualifying income interest includable in the gross estate under IRC Section 2044?

    • A marital deduction is allowed for transfers of “qualified terminable interest” property, commonly referred to as “QTIP,” if the decedent’s executor (or donor) so elects and the spouse receives a “qualifying income interest” in the property for life. (See Q 847, Q 911.) If the property subject to the qualifying income interest is not disposed of prior to the death of the surviving spouse, the fair market value of the property determined as of the date of the spouse’s death (or alternate valuation date, if so elected) is included in the spouse’s gross estate pursuant to IRC Section 2044.

  • 840. When are disclaimers includable in a decedent’s gross estate under IRC Section 2046?

    • It is possible for a person who is (or would be) the transferee of an interest in property to refuse to accept the interest and thus prevent any part of the value of the property from being included in his gross estate at his death. However, with respect to transfers creating an interest in the person disclaiming made after December 31, 1976, the refusal must take the form of a qualified disclaimer.1

      A qualified disclaimer is an irrevocable and unqualified refusal to accept an interest in property. The refusal must satisfy four conditions: First, the refusal must be in writing. Second, the written refusal must be received by the transferor of the interest, his legal representative, or the holder of the legal title to the property not later than nine months after the day on which the transfer creating the interest is made. However, if later, the period for making the disclaimer will not expire in any case until nine months after the day on which the person making the disclaimer attains age twenty-one. Third, the person must not have accepted the interest or any of its benefits before making the disclaimer. Fourth, the interest must pass to a person other than the person making the disclaimer as a result of the refusal to accept the property.2

      A qualified disclaimer can be made up of an undivided portion of any separate interest in property, even if the disclaiming person has another interest in the same property.3 In addition, the question of whether a separate interest may be disclaimed depends upon whether the interest is severable.4

      A power with respect to property5 is treated as an interest in such property.6 The exercise of a power of appointment to any extent by the donee of the power is an acceptance of its benefits.7

      A written transfer of the transferor’s (disclaimant’s) entire interest in property to the person or persons who would otherwise have received the property if an effective disclaimer had been made will be treated as a valid disclaimer for federal estate and gift tax purposes provided the transfer is timely made and the transferor has not accepted any of the interest or any of its benefits.8


      1 .IRC Secs. 2046, 2518(a).

      2 .IRC Sec. 2518(b).

      3 .Treas. Reg. §25.2518-3.

      4 .Treas. Reg. §25.2518-3(a)(1)(ii).

      5 .See IRC Section 2041, Powers of Appointment, above.

      6 .IRC Sec. 2518(c)(2).

      7 .Treas. Reg. §25.2518-2(d)(1)(i); Let. Rul. 8142008.

      8 .IRC Sec. 2518(c)(3), as added by ERTA ’81, and effective for transfers creating an interest in the person disclaiming made after 1981.

  • 841. What additional amounts may be includable in a decedent’s gross estate?

    • IRC Section 2701
      Recapture of Qualified Payments

      Additional estate tax may be due with respect to certain transfers of interests in corporations or partnerships to reflect cumulative but unpaid distributions on retained interests (see Q 934).1

      IRC Section 2704
      Deemed Transfer of Lapsing Right

      There may be a deemed transfer at death upon the lapse of certain voting or liquidation rights in a corporation or partnership (see Q 943).2

      IRC Section 2801
      Property Received from Expatriate

      A United States citizen or resident who receives a covered bequest from certain expatriates may owe estate tax on the transfer.


      1 .IRC Sec. 2701.

      2 .IRC Sec. 2704.

  • 842. In whose estate is property held in custodianship under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act includable for federal estate tax purposes?

    • The value of property transferred under either of the Uniform Acts is includable in the gross estate of the donor if the donor dies while serving as custodian and before the donee attains the age of twenty-one. (But see the discussion of gifts made within three years of death at Q 824.) In all other circumstances, custodial property is includable only in the gross estate of the donee.1 If A and B, spouses, make identical gifts under a Uniform Act, each naming the other as custodian, for federal estate tax purposes each will be deemed to have transferred the property over which he held custodianship rights at death, even though the property actually transferred by him was in the custody of the other.2 Custodial property is not included in the estate of a custodian who consented to a split gift of the property by her spouse.3

      Where the donor dies while serving as custodian, the value of the custodial property is includable in his estate under IRC Section 2038(a)(1), as a transfer with the power retained to alter, amend, revoke, or terminate. This result is reached because of the custodian’s power, under Section 4 of the Uniform Act, to withhold enjoyment of the custodial property until the donee reaches majority. To avoid this result, the donor should name someone other than himself as custodian, and should not accept appointment as successor custodian.

      The IRS has ruled that the power given the donee’s parent (under section 4(c) of the Gifts to Minors Act) or interested person (under section 14(b) of the Transfers to Minors Act) to petition the court to order the custodian to expend funds for the minor’s support, maintenance, or education is not a general power of appointment; therefore, the custodial property is not includable in the parent’s or interested person’s gross estate under IRC Section 2041.4


      1 .Rev. Rul. 57-366, 1957-2 CB 618; Treas. Reg. §20.2038-1(a); Rev. Rul. 59-357, 1959-2 CB 212; Rev. Rul. 70-348, 1970-2 CB 193; Est. of Prudowsky, 55 TC 890 (1971), aff’d per curiam, 465 F.2d 62 (7th Cir. 1972); Stuit v. Comm., 452 F.2d 190 (7th Cir. 1971).

      2 .Exchange Bank & Trust Co. of Fla. v. U.S.,694 F.2d 1261, 82-2 USTC ¶13,505 (Fed. Cir. 1982).

      3 .Rev. Rul. 74-556, 1974-2 CB 300.

      4 .Rev. Rul. 77-460, 1977-2 CB 323.

  • 843. Is an education savings account includable in an individual’s gross estate?

    • Upon the distribution of an education savings account on account of the death of the beneficiary, the amount of the education savings account is includable in the estate of the beneficiary, not the contributor. However, where a donor elects to have contributions prorated over a five year period for gift tax purposes (see Q 901) and dies during such period, the gross estate of the donor includes prorated contributions allocated to periods after the donor’s death.1

      See Q 901 for the gift tax treatment and Q 681 for the income tax treatment of education savings accounts.


      1 .IRC Secs. 530(d)(3), 529(c)(4).

  • 844. Is a qualified tuition program includable in an individual’s gross estate?

    • No interest in a qualified tuition program is includable in the estate of any individual for purposes of the estate tax, with two exceptions: (1) distributions made to the estate of the beneficiary upon the beneficiary’s death; and (2) if such a donor dies before the end of a five-year gift tax proration period (see Q 902), the gross estate of the donor will include the portion of contributions allocable to periods after the death of the donor.1

      See Q 902 for the gift tax treatment and Q 687 for the income tax treatment of qualified tuition programs.


      1 .IRC Sec. 529(c)(4).

  • 845. Is the value of a life insurance agent’s renewal commissions includable in the gross estate?

    • Yes, assuming that he owns the right to the renewal commissions at the time of his death. The value includable will be the fair market value of the renewals at the time of death. Following the agent’s death, the actuaries of the company will value the renewal account using some appropriate persistency table and an assumed rate of interest. If desired, the renewal commissions can be made to qualify for the marital deduction. For example, the value of the commissions will qualify for the marital deduction if all commissions are payable to the surviving spouse during her lifetime, and to her estate at her death. They should also qualify if she has the right to all renewals payable during her lifetime and a power to appoint who shall receive the commissions payable after her death. But if the surviving spouse is given only a right to those commissions which are payable during her lifetime, and someone else will receive the remaining payments in the event of her death during the renewal period, she will have only a “terminable interest” in the commissions, and they will not qualify unless a QTIP election is made.1 The recipient must pay income tax on the renewals as received but is entitled to an income tax deduction for the estate tax attributable including the value of the renewals in the agent’s gross estate.


      1 .Est. of Selling v. Comm., 24 TC 191 (1955); Est. of Baker v. Comm., TC Memo 1988-483; Let. Rul. 9016084.

  • 846. What estate tax exclusion is available for a qualified conservation easement?

    • An estate tax exclusion is provided for qualified conservation easements.1 An irrevocable election must be made by the executor if the exclusion is to apply. The exclusion is available for the lesser of (1) the applicable percentage of the value of land subject to the qualified conservation easement, reduced by the amount of any charitable deduction for the easement under IRC Section 2055(f), or (2) the exclusion limitation.2 The applicable percentage is equal to 40 percent reduced (but not below zero) by two percentage points for every percentage point (or fraction thereof) by which the value of the conservation easement is less than 30 percent of the value of the land (determined without regard to the easement and reduced by any development right).3 After 2001, the exclusion limitation is $500,000.4 See Appendix D for limitations in other years.

      The land subject to the conservation easement must be located in the United States or its possessions (for decedents dying in 2001 and thereafter).5 For decedents dying before 2000, the land subject to the conservation easement must generally, on the date of the decedent’s death, be located within one of the following: (1) twenty-five miles of a metropolitan area; (2) twenty-five miles of part of the National Wilderness Preservation System; or (3) ten miles of an Urban National Forest.

      The land subject to the conservation easement must be owned by decedent or members of decedent’s family at all times during the three year period ending at decedent’s death.6

      The exclusion is not available to the extent that the land is subject to acquisition indebtedness or retained development rights (excludes certain farming uses).7 Nor is the exclusion available if the easement is granted after the death of the decedent and anyone receives an income tax deduction with regard to granting of the easement.8

      A conservation easement is not available if it is not exclusively for conservation purposes.9


      1 .IRC Sec. 2031(c).

      2 .IRC Secs. 2031(c)(1), 2031(c)(6).

      3 .IRC Sec. 2031(c)(2).

      4 .IRC Sec. 2031(c)(3).

      5 .IRC Sec. 2031(c)(8)(A)(i), as amended by EGTRRA 2001.

      6 .IRC Sec. 2031(c)(8)(A)(ii).

      7 .IRC Secs. 2031(c)(4), 2031(c)(5).

      8 .IRC Sec. 2031(c)(9).

      9 .Herman v. Commissioner , TC Memo 2009-205.

  • 847. What deductions are allowed from the gross estate in arriving at the taxable estate for federal estate tax purposes?

    • The following deductions are allowed from the gross estate in arriving at the taxable estate (see Q 821):

      (1)(a) funeral expenses, (b) administration expenses, (c) claims against the estate, and (d) unpaid mortgages on or other indebtedness against property included at its full value in the gross estate (see Q 848);

      (2)casualty and theft losses incurred during settlement of the estate and not compensated for by insurance or otherwise (see Q 850);

      (3)the charitable bequests deduction (see Q 851);

      (4)the marital deduction (see Q 853 through Q 858);

      (5)the (pre-2005) qualified family-owned business interest deduction (see Q 859); and (6)state death taxes (see Q 860).1


      1 .IRC Secs. 2053-2058, as amended by EGTRRA 2001.

  • 848. What deductions for expenses, indebtedness and taxes are allowed from the gross estate in arriving at the taxable estate for federal estate tax purposes?

    • Most of the claims, expenses, and charges payable by the estate under local law are allowable deductions from the gross estate. These include the following: (1) funeral expenses; (2) administration expenses; (3) certain taxes; and (4) indebtedness and claims against the estate.

      Funeral expenses are generally allowable, although the regulations limit expenditures for a tombstone, monument, mausoleum, or burial lot to a reasonable amount.

      Administration expenses include primarily fees or commissions of executors, accountants, and attorneys, and miscellaneous costs incurred in connection with the preservation and settlement of the estate, including determination and contest of death taxes. Expenditures not essential to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees, or devisees, may not be taken as deductions.1 Expenses for selling property of the estate are deductible if the sale is necessary in order to pay the decedent’s debts, expenses of administration, or taxes, to preserve the estate, or to effect distribution.

      Planning Point: The estate should document contemporaneously with the sale why the estate needed to sell the property in order to avoid a future challenge.

      The phrase “expenses for selling property” includes brokerage fees and other expenses attending the sale, such as the fees of an auctioneer if it is reasonably necessary to employ one.2

      IRC Section 642(g) says that amounts allowable under IRC Section 2053 or 2054 as a deduction in computing the taxable estate shall not be allowed as a deduction (or as an offset against the sales price of property in determining gain or loss) in computing the taxable income of the estate unless the executor files a statement that the amounts have not been allowed as deductions under IRC Section 2053 or 2054 and waives the right to claim such deductions in the future. It has been held that where an estate necessarily incurred expenses in selling securities for the purpose of obtaining funds with which to pay estate settlement costs and taxes and used such expenses as offsets against the selling price of the securities in computing estate income taxes, and where the IRS did not require the above-described statement and waiver, the estate was free to claim the selling expenses as an estate tax deduction under IRC Section 2053.3

      IRC Section 265(1) says that no deduction will be allowed for federal income tax purposes for expenses for production of income (see Q 8050) allocable to tax-exempt income. Assume, for example, that during a taxable year an estate receives $200,000 of income, $25,000 of which is tax-exempt because it is interest on municipal bonds. Assume, also, that in the same period the estate disbursed $50,000 for attorneys’ fees and $30,000 for miscellaneous administration expenses, neither amount attributable to either the taxable or the tax-exempt income. By virtue of the above-described limitation of IRC Section 265, the executor is allowed to deduct on the estate’s federal income tax return no more than $70,000 of the $80,000 in fees and expenses, the portion allocable to includable income. The following formula illustrates this calculation.

      $200,000 – 25,000

      × 80,000 = $70,000

      $200,000

      Assume that as a condition of allowance of the income tax deduction, the IRS required of the executor the statement and waiver described in the preceding paragraph. The waiver would not preclude the executor from claiming a deduction on the estate tax return under IRC Section 2053, for the $10,000 balance of fees and expenses he was not allowed to deduct on the income tax return.4

      As a general rule, claims against the estate which are founded on a promise or agreement are not deductible unless they were contracted for an adequate consideration in money or money’s worth. An exception is made for enforceable pledges to qualified charitable organizations. Such pledges are deductible even though not contracted for an adequate consideration in money or money’s worth. A release of dower or other marital rights generally is not deemed an adequate consideration; but a claim for alimony is fully deductible if founded on a divorce decree.

      Final amendments to the regulations under Section 2053 are effective for the estates of decedents dying after October 19, 2009. The basic focus of the regulations is the extent to which post-death events may be considered in determining the deductible amount of the claim or expense. The significance of these new regulations is that generally the right to take a deduction (and the value of the deduction) is determined at the moment of death but the new regulations mandate consideration of postmortem facts (i.e., resolution of the claim) for deduction purposes.5

      Planning Point: An estate must analyze the judicial decisions in its district in order to determine if a conflict exists between the new 2053 Regulations and the earlier decisions interpreting the deductibility of “claims against the estate” under Section 2053.

      A payment in settlement of a will contest is generally not deductible from the gross estate. A claim to share in the estate is to be distinguished from a claim against the estate.6

      Unpaid mortgages are deductible provided the property subject to the mortgage is included at its full value in the gross estate.

      Property taxes accrued prior to the decedent’s death, and taxes on income received during the decedent’s life, are deductible. The property taxes, however, must be enforceable obligations (a lien upon the property) at the time of death. Ordinarily, state and foreign death taxes are not deductible, but may be taken as a credit against the tax (see Q 861). As an exception, however, the executor may elect to deduct any state or foreign taxes paid on bequests which qualify as charitable deductions under the federal estate tax law. If deducted, they cannot, of course, be taken as a credit against the tax. An estate tax deduction is not allowed for death taxes paid to a city even though a credit is not allowed for such taxes (see Q 861).7

      In community property states, the extent to which administration expenses and claims are deductible depends upon their treatment under state law. If they are expenses or debts of the entire community, only one-half is deductible.

      A deduction is allowed for expenses and debts attributable to non-probate property includable in the gross estate. They are deductible even though they exceed the property in the gross estate which under local law is subject to the claims against the estate. However, to the extent that they exceed such property they are not deductible unless actually paid before the due date for filing the estate tax return.


      1 .Treas. Reg. §20.2053-3(a); Est. of Posen v. Comm., 75 TC 355 (1980).

      2 .Treas. Reg. §20.2053-3(d)(2).

      3 .Smith v. U.S., 319 F.Supp. 174 (E.D. Mo. 1970).

      4 .Rev. Rul. 59-32, 1959-1 CB 245; Rev. Rul. 63-27, 1963-1 CB 57, clarifying Rev. Rul. 59-32.

      5 .T.D. 9468 ; Notice 2009-84; Treasury –IRS 2009-10 Priority Guidance Plan; CCA 200848045.

      6 .Est. of Moore v. Comm., TC Memo 1987-587.

      7 .TAM 9422002.

  • 849. If an estate sells a large block of stock through an underwriter, are the underwriting fees deductible from the gross estate?

    • A large estate may include a large block of stock in a single corporation that the executor determines must be sold to meet estate settlement costs and death taxes. Often, it is found that the best method of sale in these circumstances is to register the securities with the SEC for public sale by means of a secondary offering through an underwriter. The agreement between the executor and the underwriter may be one of two types:

      “Under a ‘firm commitment’ agreement the underwriter agrees to purchase a specific amount of stock for a fixed price at a certain time. In contrast, under a ‘best efforts’ agreement the underwriter sells the stock for the stockholder as an agent and only agrees to use its best efforts in obtaining sales.”1

      Under a firm commitment agreement, the executor undertakes to pay all registration and incidental selling expenses plus an “underwriting discount” paid to the underwriter. The underwriting discount amounts to the difference between the amount realized on sale of the shares to the public and the amount paid by the underwriter for the shares. The IRS has taken the position that “underwriting fees” (by which the Service clearly means to include the “underwriting discount”) are not considered in determining the blockage discount to be accorded in valuing the stock for federal estate tax purposes (see Q 919), but instead are deductible under IRC Section 2053 as administration expenses (assuming the sale was necessary to administer the estate).2 The Tax Court held that expenses of a secondary offering should not be allowed to reduce the value of the stock and at the same time be allowed as IRC Section 2053 expenses.3 As for the underwriting discount, the Tax Court disallowed it as an IRC Section 2053 expense, viewing the transaction between the underwriter and the estate as simply a sale of stock from the estate to the underwriter.4 The U.S. Court of Appeals for the Ninth Circuit has allowed the underwriting discount as an IRC Section 2053 expense when it has been allowed as an administration expense by the probate court and without regard to whether it has been considered in valuing the stock.5 The Seventh Circuit appears generally in accord with the Ninth Circuit.6 For a discussion of these cases and others, see Rifkind v. U.S.7


      1 .Est. of Jenner v. Comm., 577 F.2d 1100, footnote 3 (7th Cir. 1978).

      2 .Rev. Rul. 83-30, 1983-1 CB 722.

      3 .Est. of Joslyn v. Comm., 57 TC 722 (1972), rev’d 500 F.2d 382 (9th Cir. 1974).

      4 .Est. of Joslyn, above, 63 TC 478 (1975), on remand from the Ninth Circuit.

      5 .Est. of Joslyn, above, 566 F.2d 677 (9th Cir. 1977), rev’g 63 TC 478 (1975).

      6 .Est. of Jenner v. Comm., 577 F.2d 1100 (7th Cir. 1978), rev’g TC Memo 1977-54.

      7 .5 Cl. Ct. 362, 84-2 USTC ¶13577 (Cl. Ct. 1984).

  • 850. What deductions for casualty and theft losses may be taken from the gross estate?

    • Under IRC Section 2054, losses incurred during the period of administration from fire, storm, or other casualty, or from theft, are deductible to the extent not compensated by insurance or otherwise. Therefore, post-death events, such as destruction to estate assets from a storm, generate an estate tax deduction that can offset the date-of-death value of the property destroyed or damaged.

  • 851. What deductions for charitable bequests are allowed from the gross estate in arriving at the taxable estate for federal estate tax purposes?

    • An estate tax deduction is allowed for the full amount of bequests to charity (but not in excess of the value of the transferred property required to be included in the gross estate). The deduction is not subject to percentage limitations such as are applicable to the charitable deduction under the income tax.

      Specifically, IRC Section 2055 provides a deduction for bequests:

      (1)to or for the use of the United States, any state, territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes;

      (2)to or for the use of corporations organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster amateur sports competition, and the prevention of cruelty to children or animals (and which meet certain other conditions);

      (3)to trustees, or fraternal societies, orders or associations operating under the lodge system, but only if the bequests are to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals (and if certain other conditions are met); and

      (4)to or for the use of any veterans’ organization incorporated by Act of Congress or to any of its components, so long as no part of the net earnings inures to the benefit of any private shareholder or individual.1

      If any death taxes are, either by the terms of the will, by the law of the jurisdiction under which the estate is administered, or by the law of the jurisdiction imposing the particular tax, payable in whole or in part out of the bequests otherwise deductible as charitable contributions, then the amount deductible is the amount of such bequests reduced by the amount of such taxes.2 Prior to the issuance of regulations discussed below, in a similar situation, it was held that the marital deduction (see Q 853) was reduced where administration expenses were paid from the marital share principal, but not where administration expenses were paid from income from the marital share.3

      Regulations, effective for estates of decedents dying after December 3, 1999, now provide rules for reducing the charitable share by administration expenses depending on the type of expense: transmission expenses or management expenses.4

      Transmission expenses are defined as expenses that would not have been incurred but for the decedent’s death. Transmission expenses are also defined as any administration expense that is not a management expense. Transmission expenses paid from the charitable share reduce the charitable share.

      Management expenses are defined as expenses related to investment, preservation, and maintenance of the assets during a reasonable period of estate administration. Management expenses attributable to the charitable share do not reduce the charitable share except to the extent that the expense is deducted under IRC Section 2053 as an administration expense. Management expenses which are paid by the charitable share, but which are not attributable to the charitable share, reduce the charitable share.

      In U.S. Trust Co. (Chisholm Est.) v. U.S.,5 the executors satisfied a charitable bequest by making the distribution out of estate income. The estate claimed and was allowed an estate tax deduction under IRC Section 2055 for the bequest. The estate could not claim an income tax charitable contributions deduction because the will did not specify that the bequest be paid out of estate income.6 The estate claimed, but was not allowed, an income tax distribution deduction under IRC Section 661(a)(2) for the same distribution.

      Property which is transferred to the charity by the exercise or nonexercise of a general power of appointment is considered transferred by the donee of the power rather than by the donor of the power. Or, to paraphrase, property includable in the decedent’s gross estate under IRC Section 2041 (see Q 824) received by a charity is considered a bequest of such decedent.7

      Distributions of trust income to charity pursuant to a beneficiary’s power of appointment will qualify for a charitable contribution deduction.

      An estate tax charitable deduction was denied for the transfer of a residuary interest in the estate to charity where the amount of the charitable deduction was not ascertainable at the time of death because of discretionary powers given to personal representatives to distribute the estate to other potential beneficiaries.8 Also, in Technical Advice Memorandum (TAM) 9327006, an estate tax charitable deduction was denied where a trustee was given discretion to select donees from among various charities, and not all of the charities were on the IRS list of charities for which a charitable deduction is permitted.

      The Tax Court denied an estate tax charitable deduction where the amount of the donation was not permanently set aside, and there was a possibility that expenses for litigation relating to the settlement of the estate could deplete the funds that would otherwise be donated. Unless, under the terms of the instrument and the facts of the case, the possibility that the amount would not be available to satisfy the donation was so remote as to be negligible, the amount could not be treated as having been permanently set aside so as to allow the deduction.9 In the case before the Tax Court, the estate had already depleted a portion of its funds in settling estate-related litigation, supporting the finding that the possibility of further depletion was not so remote as to be negligible.10

      Where an interest in property (other than a remainder interest in a personal residence or farm or an undivided portion of the decedent’s entire interest in property) passes from the decedent to a charity and an interest in the same property passes (for less than adequate and full consideration in money or money’s worth) from the decedent to a non-charity, no estate tax charitable contributions deduction is allowed for the interest going to the charity unless–

      (a)in the case of a remainder interest, such interest is in a trust which is a charitable remainder annuity trust (see Q 8088) or a charitable remainder unitrust (see Q 8090) or a pooled income fund (see Q 8097), or

      (b)in the case of any other interest, such interest is in the form of a guaranteed annuity or is a fixed percentage of the fair market value of the property that is distributed yearly (the fair market value is to be determined yearly).11

      If the decedent has created a qualified charitable remainder trust in which his surviving spouse is the only noncharitable beneficiary other than certain ESOP remainder beneficiaries (see Q 853), the estate will receive a charitable contributions deduction for the value of the remainder interest. However, if the property in the trust is “qualified terminable interest property” and the surviving spouse’s interest is a “qualifying income interest for life” (see Q 857), the charitable contributions deduction may be taken by the surviving spouse’s estate upon her death, the decedent’s estate having taken a marital deduction (assuming the executor’s election) for the entire value of the property.12

      Where a decedent left shares of stock to a charity but specified in his will that dividends from the stock during administration of the estate be paid to an individual, it was held that the estate tax charitable contributions deduction was not allowable.13 However, in Letter Ruling 8506089, a decedent left the residue of his estate to a charity on the condition that the charity take on the obligation to pay an annuity equal to 7 percent of the value of the estate assets going to the charity to his brother for his lifetime. The Service ruled that because the annuity was payable out of the general assets of the charity rather than out of the assets in the decedent’s estate going to the charity, the bequest was not a split interest gift in the same property; accordingly, a charitable contributions deduction was allowed equal to the amount by which the value of the property transferred by the decedent to the charity exceeded the present value of the annuity payable to the decedent’s brother.

      In Oetting v. U.S.,14 a trust received assets from the residue of an estate that provided that the assets would be used first to provide life incomes of $100 per month for the lifetimes of three elderly ladies, with the remainder paid to four qualified charities. Since the total assets received by the trust greatly exceeded expectations, the trustees petitioned the probate court for permission to buy annuities for the income beneficiaries with a fraction of the trust assets and to pay the balance immediately to the charities. The court agreed, so the trustees bought the annuities for $23,000 and paid the balance, $558,000, to the charities. The court allowed the estate a charitable contributions deduction for the amount paid to the charities, reasoning that since the amount going to the charities was certain, it was not a split interest in the same property for purposes of IRC Section 2055.


      1 .IRC Sec. 2055(a).

      2 .IRC Sec. 2055(c).

      3 .Comm. v. Est. of Hubert, 520 U.S. 93, 117 S.Ct. 1124, 97-1 USTC ¶60,261 (U.S. 1997).

      4 .Treas. Reg. §20.2055-3.

      5 .803 F.2d 1363, 86-2 USTC ¶13,698 (5th Cir. 1986), rev’g and remanding 617 F. Supp. 575, 85-2 USTC ¶13,642 (S.D. Miss. 1985).

      6 .IRC Sec. 642(c).

      7 .IRC Sec. 2055(b).

      8 .Let. Rul. 200906008. Est. of Marine v. Comm., 990 F.2d 136, 93-1 USTC ¶60,131 (4th Cir. 1993).

      9 .Treas. Reg. §1.642(c)-2(d).

      10 .Est. of Belmont v. Comm., 144 TC 84 (2015).

      11 .IRC Sec. 2055(e)(2).

      12 .Treas. Reg. §20.2044-1(b).

      13 .Rev. Rul. 83-45, 1983-1 CB 233.

      14 .712 F.2d 358, 83-2 USTC ¶13,533 (8th Cir. 1983).

  • 852. Can a trust that does not otherwise qualify for the estate tax charitable deduction be reformed in order to qualify?

    • In general, a trust can be reformed to qualify for the estate tax charitable deduction if the following occur:

      (1)the difference in actuarial value of the qualified trust at time of death and its value at time of reformation is no greater than 5 percent of its value at time of reformation;

      (2)the term of the trust is the same before and after reformation (however, if the term of years for a trust exceeds twenty years, the term can be shortened to twenty years);

      (3)any changes are effective as of date of death;

      (4)the charitable deduction would have been allowable at death if not for the split-interest rules (which generally require use of annuity, unitrust, and pooled income interests); and

      (5)any payment to a noncharitable beneficiary before the remainder vests in possession must have been an annuity or unitrust interest (the lower of income or the unitrust amount, with make-up provisions, is permitted). This fifth provision does not apply if judicial proceedings are started to qualify the interests for the estate tax charitable deduction no later than ninety days after (a) the due date (including extensions) for filing the estate tax return, or (b) if no estate tax return is required, the due date (including extensions) for filing the income tax return for the first taxable year of the trust for which such a return must be filed.1

      A reformation done solely to obtain a charitable deduction (in contrast to a reformation done pursuant to a will contest) must meet the requirements of IRC Section 2055(e)(3).2 The amount of a charitable deduction taken with respect to property transferred to charity pursuant to a will contest cannot exceed the actuarial value of what the charity could have received under a will or through intestate succession.3


      1 .IRC Sec. 2055(e)(3).

      2 .Est. of Burdick v. Comm., 979 F.2d 1369 (9th Cir. 1992).

      3 .Terre Haute First Nat’l Bank v. U.S.,134 NE 2d 1339 (1991), 67 AFTR 2d 1217, 91-1 USTC ¶60,070 (S.D. Ind. 1991).

  • 853. What is the estate tax marital deduction?

    • The estate tax marital deduction is a deduction allowed from the gross estate for interests in property (including community property) which pass from the decedent to his (or her) surviving spouse and which are included in determining the value of the gross estate; the deduction is limited only by the value of such qualifying interests.1 In general, a marital deduction is not available if the surviving spouse is not a United States citizen unless property passes to the surviving spouse in a qualified domestic trust (QDOT) (see Q 858).

      The deduction is limited to the net value of qualifying property interests passing to the surviving spouse. Thus, the value of such interests must be reduced by federal and state death taxes payable out of those interests, by encumbrances on those interests, and by any obligation imposed by the decedent upon the surviving spouse with respect to the passing of such interests.2 Prior to the issuance of regulations discussed below, the marital deduction was reduced where administration expenses were paid from the marital share principal, but not where administration expenses were paid from income from the marital share.3

      Regulations, effective for estates of decedents dying after December 3, 1999, provide rules for reducing the marital share by administration expenses depending upon whether the expense is a transmission expense or management expense.4

      Transmission expenses are defined as expenses that would not have been incurred but for the decedent’s death. Transmission expenses are also defined by exclusion to include any administration expense that is not a management expense. Transmission expenses paid from the marital share reduce the marital share.

      Management expenses are defined as expenses related to investment, preservation, and maintenance of the assets during a reasonable period of estate administration. Management expenses attributable to the marital share do not reduce the marital share except to the extent that the expense is deducted under IRC Section 2053 as an administration expense. Management expenses which are paid by the marital share but which are not attributable to the marital share reduce the marital share.

      To qualify for the marital deduction, the property interest must be includable in the decedent’s gross estate, and must “pass from” the decedent to his surviving spouse.5 (A duty of consistency may require that property be includable in the surviving spouse’s estate if a marital deduction was claimed in the first spouse’s estate even if the marital deduction was improperly claimed in the first spouse’s estate.)6 It may come to the surviving spouse in any of the following ways: (1) by will; (2) under state inheritance laws; (3) by dower or curtesy (or statute in lieu of dower or curtesy); (4) by lifetime gift (made in such way as to cause inclusion in the gross estate–see Q 824); (5) by right of survivorship in jointly owned property; (6) by power of appointment; (7) as proceeds of insurance on decedent’s life; or (8) as survivor’s interest in an annuity.7


      1 .IRC Sec. 2056(a).

      2 .IRC Sec. 2056(b)(4); Adee v. U.S., 83-2 USTC ¶13,534 (D. Kan. 1983).

      3 .Comm. v. Est. of Hubert, 520 U.S. 93, 97-1 USTC ¶60,261 (U.S. 1997).

      4 .Treas. Reg. §20-2056(b)-4.

      5 .IRC Sec. 2056(a).

      6 .Est. of Letts v. Comm., 109 TC 290 (1997); TAM 200407018.

      7 .IRC Sec. 2056(c).

  • 854. What is qualified terminable interest property (QTIP)?

    • “Qualified terminable interest property” (QTIP) means property (1) which passes from the decedent, (2) in which the surviving spouse has a “qualifying income interest for life,” and (3) as to which the executor makes an irrevocable election on the federal estate tax return to have the marital deduction apply. The surviving spouse has a “qualifying income interest for life” if (1) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, and (2) no person has a power to appoint any part of the property to any person other than the surviving spouse unless the power is exercisable only at or after the death of the surviving spouse.1 Apparently, the last requirement is violated even if it is the surviving spouse who is given the lifetime power to appoint to someone other than the surviving spouse.2 The QTIP rules allow a decedent to provide for a surviving spouse, receive the marital deduction, and pass the remainder to beneficiaries the decedent selects in his will.

      Certain “terminable interests” in property do not qualify for the marital deduction. The purpose of this rule is to ensure inclusion in the surviving spouse’s estate of any property remaining in her estate at her death which escaped the initial tax in the predeceased spouse’s estate.

      A “terminable interest” in property is an interest which will terminate or fail on the lapse of time or on the occurrence or the failure to occur of some contingency. Life estates, terms for years, annuities, patents, and copyrights are therefore terminable interests.3 Some terminable interests are deductible and some are nondeductible under the marital deduction law. In general, a “terminable interest” is nondeductible if (1) another interest in the same property passes (for less than an adequate consideration) from the decedent to someone other than his spouse or his spouse’s estate, and (2) the other person may possess or enjoy any part of the property after the spouse’s interest ends.4


      1 .IRC Sec. 2056(b)(7).

      2 .TAM 200234017.

      3 .IRC Sec. 2056(b); Treas. Reg. §20.2056(b)-1(b).

      4 .IRC Sec. 2056(b)(1).

  • 855. Can a QTIP election be voided after it is made if it is unnecessary for transfer tax purposes?

    • Previously, the IRS provided procedures that would disregard (and treat as void) a qualified terminable interest property (QTIP) election (see Q 854) that was not necessary to reduce estate tax liability to zero following the death of the first-to-die spouse. The purpose of these procedures was to provide relief to a surviving spouse who would receive no benefit from the QTIP election, and to prevent unnecessary QTIP elections.1

      In 2016, however, the IRS released guidance recognizing that, because the portability option (see Q 823) has been made permanent,2 some estates might choose to elect QTIP treatment even when such treatment was unnecessary to reduce the estate tax liability to zero in order to maximize the surviving spouse’s deceased spousal unused exclusion (DSUE). As a result, the IRS has determined that procedures to void a QTIP election may only be used if the estate did not elect portability, so that a QTIP election may still be valid if it was not necessary to reduce estate tax liability to zero.3

      Pursuant to the new guidance, a QTIP election will be voided only if (1) the estate’s federal estate tax liability was zero, regardless of the QTIP election, (2) the executor neither made, nor was considered to have made, a portability election and (3) certain procedural requirements have been satisfied. These procedural requirements include:

      1)Filing either (a) a supplemental Form 706 for the estate of the first-to-die spouse, (b) a Form 709 (Gift and GST tax return) or (c) a Form 706 for the estate of the surviving spouse;

      2)Providing notice at the top of the form filed under (1), above, that the QTIP election is within the scope of Revenue Procedure 2016-49, Section 3.01;

      3)Identifying the QTIP election that should be treated as void and providing an explanation of why it should be disregarded, including facts such as the value of the first-to-die spouse’s estate without regard to the marital deduction for the QTIP, as compared to the applicable exclusion amount in effect for the year of that spouse’s death (relevant facts to support the fact that a portability election was not made should also be included); and

      4)Providing evidence that the QTIP election meets the requirements of Revenue Procedure 2016-49 (discussed above) so that it qualifies to be disregarded (for example, the first-to-die spouse’s estate tax return may provide evidence that the QTIP election was not required to reduce the estate tax liability to zero, and that portability was not elected).4

      Once the QTIP election is voided, it is disregarded so that the underlying property will not be included in the estate of the surviving spouse and the surviving spouse will not be treated as though he or she has made a gift under IRC Section 2519 upon disposition of all or a part of the income interest. The surviving spouse will also not be treated as the transferor of the property for GST tax purposes.

      On the other hand, a QTIP election will be treated as valid where:

      1)A partial QTIP election was necessary to reduce the estate tax liability, but the executor made the QTIP election with respect to more property than was necessary to reduce the tax to zero;

      2)The QTIP election was set forth in a formula designed to reduce the estate tax liability to zero;

      3)The QTIP election was considered a protective election under Treasury Regulation Section 20.2056(b)-7(c);

      4)The executor made a portability election, even if the decedent’s DSUE amount was zero; or

      5)The procedural requirements discussed above were not satisfied.


      1 .Rev. Proc. 2001-38, 2001-24 IRB 1335.

      2 .IRC Sec. 2010(c)(5)(A), made permanent by PATH 2015.

      3 .Rev. Proc. 2016-49, 2016-42 IRB 462.

      4 .Rev. Proc. 2016-49, Section 4.02, above.

  • 856. When will a terminable interest in property cause that property to fail to qualify for the estate tax marital deduction?

    • Generally speaking, a terminable interest is deductible if no interest in the property passes to someone other than the surviving spouse or her estate which may be possessed or enjoyed after the spouse’s interest ends. Therefore, if the decedent transfers all interest in a straight life annuity, for instance, the interest will ordinarily qualify. There are two exceptions to this rule. Even though no one else takes an interest in the same property, a terminable interest will not qualify if (1) the decedent has directed the executor or trustee to acquire a terminable interest for the surviving spouse; or (2) an interest passing to the surviving spouse may be satisfied out of a group of assets which includes a nondeductible interest.1

      Where spouses own property as joint tenants with right of survivorship or as tenants by the entirety, upon the death of one spouse, the surviving spouse succeeds to absolute ownership of the entire property. This succession occurs by virtue of the form of ownership, not by virtue of any will provision or intestate succession laws. Such succession qualifies for the marital deduction, but only, of course, to the extent the interest to which the surviving spouse succeeds was includable in the decedent’s gross estate. (See Q 824.)

      A terminable interest passing to a decedent’s spouse may be a deductible interest even though an interest in the property may be enjoyed by someone else after the interest ends if the interest is as follows: (1) terminable only because of a survivorship clause; (2) the right to income for life with general power of appointment over the property producing the income; (3) consists of life insurance or annuity proceeds held by the insurer under an agreement that gives the spouse a life income interest in the proceeds plus a general power of appointment over the proceeds; (4) a “qualifying income interest for life” in “qualified terminable interest property” (see Q 854).

      A survivorship clause will preserve the marital deduction if (1) the only condition under which the surviving spouse’s interest will terminate is the death of the surviving spouse within six months after the decedent’s death, or death as a result of a common disaster, and (2) the condition does not occur.2

      The IRS permits a QTIP trust to be reformed to meet the requirements of the estate tax marital deduction.3

      An income interest does not fail to qualify as a qualifying income interest for life merely because the income accumulated by the trust between the last date of distribution and the surviving spouse’s death is not required to be either distributed to such spouse’s estate or subject to a general power of appointment exercisable by such spouse.4 However, any income from the property from the date the QTIP interest is created to the death of the spouse with the QTIP interest which has not been distributed before such spouse’s death is included in such spouse’s estate under IRC Section 2044 to the extent it is not included in the estate under any other IRC provision.5

      In Technical Advice Memorandum (TAM)9139001, the marital deduction was denied because (1) a son’s right to purchase stock in a QTIP trust at book value was treated as the power to withdraw property from the trust (i.e., as a power to appoint property to someone other than the spouse), and (2) the spouse and the trustee lacked the right to make the closely held stock, in which the son held all voting rights, income productive. Similarly, a marital deduction was denied where the trustee could sell stock in a QTIP trust to a son at book value.6 While TAM 9113009 had provided that a QTIP marital deduction would be denied if the non-QTIP portion of the estate were not funded with an amount equal to the face value of loans guaranteed by the decedent, it was withdrawn by TAM 9409018, which provided instead that the marital deduction would not be reduced by the entire unpaid balance of the guaranteed loans unless (1) at the time of death it would appear that a default after the marital deduction were funded would be likely, (2) that marital deduction property would be used to pay the entire unpaid balance of such loans, and (3) that subrogation rights held by the marital portion would appear to be worthless. According to TAM 9206001, a QTIP marital deduction was not available where the spouse was given an income interest in only certain types of property held in a trust and the trustee could change the mix of assets in the trust.

      The IRS has conceded the validity of the contingent QTIP marital deduction (i.e., where the surviving spouse’s qualifying income interest is contingent upon the QTIP election being made), if the QTIP election is made.7

      The term “property” includes an interest in property, and a specific portion of property is treated as separate property.8 However, a specific portion must be determined on a fractional or percentage basis.9 The term “property” also contemplates income-producing property. The deduction will thus be disallowed as to nonincome-producing property if under local law the spouse has no power to convert the property to income-producing property or to compel such conversion.10

      A survivor annuity in which only the surviving spouse has a right to receive payments during such spouse’s life is treated as a qualifying income interest for life unless otherwise elected on the decedent spouse’s estate tax return.11


      1 .IRC Secs. 2056(b)(1)(C), 2056(b)(2).

      2 .IRC Sec. 2056(b)(3).

      3 .Treas. Reg. §20.2044-1(d)(2).

      4 .Let. Rul. 200919003. Treas. Reg. §20.2056(b)-7(d)(4).

      5 .Treas. Reg. §20.2044-1(d)(2).

      6 .Est. of Rinaldi v. U.S., 97-2 USTC ¶60,281 (Ct. Cl. 1997).

      7 .Treas. Reg. §§20-2056(b)-7(d)(3), 20-2056(b)-7(h)(Ex. 6).

      8 .IRC Sec. 2056(b)(7).

      9 .IRC Sec. 2056(b)(10).

      10 .Let. Ruls. 8304040, 8339018, 8745003.

      11 .IRC Sec. 2056(b)(7)(C).

  • 857. When will property held in trust qualify for the marital deduction?

    • There are five kinds of trusts that will qualify for the marital deduction: (1) the “qualified terminable interest property trust,” (2) the “life estate with power of appointment trust,” (3) the “estate trust,” (4) the “special rule charitable remainder trust,” and (5) the “qualified domestic trust.” The first two and the fourth are specific exceptions to the nondeductible terminable interest rule; the third does not come under the rule; the fifth is the only form permitted if the surviving spouse is not a United States citizen (see Q 858).

      If qualified terminable interest property (QTIP), as defined in Q 854, passes to the surviving spouse in trust, the trust is called a qualified terminable interest property trust (or QTIP trust). The surviving spouse must have a qualifying interest for life in the trust property. Neither the trustee nor anyone else may have the power to appoint any part of the trust property to anyone other than the surviving spouse during her lifetime, and the decedent’s executor must make the election to have the trust qualify for the marital deduction.

      An estate trust is a trust in which the property interest transferred from the decedent passes only to the surviving spouse (and the estate of the surviving spouse) and to no other person.

      A life estate with power of appointment trust is a trust in which the property interest transferred from the decedent passes not only to the surviving spouse but to someone else (for less than an adequate consideration) who may possess or enjoy any part of the property after the spouse’s interest ends. If such a trust is to avoid failing to qualify for the marital deduction by reason of being a nondeductible terminable interest, it must meet the requirements of IRC Section 2056(b)(5). In general, the surviving spouse must be given an income interest for life and the power to appoint the property to the surviving spouse or the surviving spouse’s estate.

      If the surviving spouse is the only noncharitable beneficiary (other than certain ESOP remainder beneficiaries) of a “qualified charitable remainder trust” created by the decedent, the spouse’s interest is not considered a nondeductible terminable interest and the value of such interest will qualify for the marital deduction. A “qualified charitable remainder trust” means a charitable remainder annuity trust (see Q 8088) or a charitable remainder unitrust (see Q 8089).1


      1 .IRC Sec. 2056(b)(8).

  • 858. How is the availability of the estate tax marital deduction affected when the surviving spouse is not a United States citizen? What is a QDOT?

    • Generally, there are five kinds of trusts that will qualify for the marital deduction: (1) the “qualified terminable interest property trust,” (2) the “life estate with power of appointment trust,” (3) the “estate trust,” (4) the “special rule charitable remainder trust,” and (5) the “qualified domestic trust.” The first two and the fourth are specific exceptions to the nondeductible terminable interest rule; the third does not come under the rule; the fifth is the only form permitted if the surviving spouse is not a United States citizen.See Q 857.

      A marital deduction is usually not available for a transfer to a surviving spouse who is not a United States citizen unless the transfer is to a qualified domestic trust (QDOT) for which the executor has made an election.1 A QDOT must qualify for the marital deduction under (1), (2), (3), or (4) (above), as well as meet the following requirements.

      At least one trustee of the QDOT must be a United States citizen or a domestic corporation and no distribution (other than a distribution of income) may be made from the trust unless that trustee has the right to withhold any additional gift or estate tax imposed on the trust. Additional gift tax is due on any distribution while the surviving spouse is still alive (other than a distribution to the surviving spouse of income or on account of hardship). Additional estate tax is due on any property remaining in the QDOT at the death of the surviving spouse (or at the time the trust ceases to qualify as a QDOT, if earlier). The additional gift or estate tax is calculated as if any property subject to the tax had been included in the taxable estate of the first spouse to die.2

      Regulations add additional requirements in order to ensure the collection of the deferred estate tax. If the fair market value (as finally determined for estate tax purposes, see Q 916, but determined without regard to any indebtedness with respect to the assets) of the assets passing to the QDOT exceeds $2,000,000, then the QDOT must provide that at least one of the following is true: (1) at least one U.S. trustee is a bank,3 (2) at least one trustee is a U.S. branch of a foreign bank and another trustee is a U.S. trustee, or (3) the U.S. trustee furnish a bond or security or a line of credit equal to 65 percent of the fair market value of the QDOT corpus. The line of credit must be issued by (1) a U.S. bank, (2) a
      U.S.
      branch of a foreign bank, or (3) a foreign bank and confirmed by a U.S. bank.4

      A QDOT with assets of less than $2,000,000 must either (a) meet one of the requirements for a trust exceeding $2,000,000, or (b) provide that (1) no more than 35 percent of the fair market value (determined annually on last day of trust’s taxable year) of assets consists of real property located outside the U.S., and (2) all other QDOT assets be physically located within the U.S. at all times during the trust term. All QDOTs for the benefit of a surviving spouse are aggregated for purposes of the $2,000,000 threshold. A QDOT owning more than 20 percent of the voting stock or value in a corporation with fifteen or fewer shareholders (or 20 percent of the capital interest in a partnership with fifteen or fewer partners) is deemed to own a pro rata share of the assets of the corporation (or the pro rata share of the greater of the QDOT’s interest in the capital or profits of the partnership) for purposes of the 35 percent foreign real property limitation. All interests in the corporation (or partnership) held by or for the benefit of the surviving spouse or the surviving spouse’s family (includes brothers, sisters, ancestors, and lineal descendants) are treated as one person for purpose of determining the number of shareholders (or partners) and whether a 20 percent or more interest exists. However, the attribution rules do not apply in determining the QDOT’s pro rata share of the corporation’s (or partnership’s) assets. Interests in other entities (such as another trust) are treated similarly to corporations (and partnerships).5

      For purposes of the $2,000,000 QDOT threshold and the amount of a bond or letter of credit required, up to $600,000 in value attributable to the surviving spouse’s personal residence and related furnishings held by the QDOT may be excluded. However, the personal residence exclusion does not apply for purposes of determining whether 35 percent of the fair market value of assets consists of real property located outside the U.S. A personal residence is either the principal residence of the surviving spouse or one other residence of the surviving spouse. A personal residence must be available for use by the surviving spouse at all times and may not be rented to another party. Related furnishings include furniture and commonly used items within the value associated with normal household use; rare artwork, valuable antiques, and automobiles are not included.

      If a residence ceases to be used as the surviving spouse’s personal residence or a residence is sold, the personal residence exclusion ceases to apply with regard to that residence. However, if part or all of the amount of the adjusted sales price of the residence is reinvested in a new personal residence within twelve months of the date of sale, the exclusion continues to the extent the adjusted sales price is reinvested in the new residence. Also, if a residence ceases to be used as the surviving spouse’s personal residence or a residence is sold, the exclusion can be allocated to another personal residence of the surviving spouse that is held by a QDOT of the surviving spouse. In this instance, the exclusion can be up to $600,000 (less the amount previously allocated to a personal residence that continues to qualify for the exclusion).6


      1 .IRC Sec. 2056(d).

      2 .IRC Sec. 2056A.

      3 .As defined in IRC Section 581.

      4 .Treas. Reg. §20.2056A-2(d)(1)(i)(C).

      5 .Treas. Reg. §20.2056A-2(d)(1)(ii).

      6 .Treas. Reg. §20.2056A-2(d)(1)(iv).

  • 859. What estate tax deduction was available for qualified family-owned business interests before 2005?

    • For decedents dying before 2005, an estate tax deduction was available for up to $675,000 of qualified family-owned business interests.1 If the deduction was taken, the unified credit equivalent (see Q 861) was changed to equal the lesser of (1) the regular unified credit equivalent, or (2) $1,300,000 minus the amount of the qualified family-owned business deduction. EGTRRA repealed the deduction for qualified family-owned business interests for tax years beginning between 2005 and 2012. Though the EGTRRA provisions were scheduled to sunset (expire) after 2012, ATRA made its changes permanent for tax years beginning after 2012 by repealing the sunset provisions contained in EGTRRA.23

      Despite the unavailability of this deduction, the unified credit was increased substantially for tax years beginning after 2004 (see Appendix D). ATRA also made the increased exemption level ($5.25 million in 2013, $5.34 million in 2014, $5.43 million in 2015, $5.45 million in 2016, $5.49 million in 2017, and $5.6 million in 2018) permanent for tax years beginning after 2012.Under the 2017 tax reform legislation, the exemption was further expanded to $11.18 million in 2018, $11.4 million in 2019, $11.58 million in 2020, and $11.7 million in 2021.

      Pre-2005 Family-Owned Business Deduction

      In order to qualify for the family-owned business deduction, at least 50 percent of the value of the adjusted gross estate must consist of the sum of (1) family-owned business interests included in the estate; and (2) certain gifts of family-owned business interests.5 Gifts of family-owned business interests include family-owned business interests that the decedent gave to members of his or her family if the members of the decedent’s family retained such interests until the decedent’s death.6 The family-owned business interest is not reduced by an IRC Section 303 redemption for purposes of making the initial determination of qualifying for the family-owned business deduction.7

      For this purpose, the adjusted gross estate means the gross estate reduced by the estate tax deductions for claims against the estate and debts under IRC Sections 2053(a)(3) and 2053(a)(4), and increased by certain gifts. These gifts include (to the extent not otherwise includable in the estate): (1) family-owned business interests that the decedent gave to members of his or her family if the members of the decedent’s family retained such interests until the decedent’s death; (2) gifts to a spouse within ten years of the decedent’s death (excluding those under (1)); and (3) gifts within three years of death (excluding annual exclusion gifts to family members and those under (1) or (2)).8

      Family-owned means that either (1) 50 percent of the business must be owned by the decedent and members of his or her family; or (2) 30 percent of the business must be owned by the decedent and members of his or her family and (a) 70 percent of the business is owned by two families, or (b) 90 percent of the business is owned by three families.9

      Family-owned business interests include only equity interests.10 Also, family-owned business interests do not include (1) a business whose principal place of business is not in the United States; (2) any entity whose stock or debt is readily traded on an established securities or secondary market; (3) an entity, other than a bank or building and loan association, if more than 35 percent of the adjusted gross income of the entity for the year which includes the date of the decedent’s death is personal holding company income; and (4) the portion of the business which consists of (a) cash or marketable securities in excess of reasonably expected day-to-day working capital needs, and (b) assets held for the production of personal holding company income or foreign personal holding company income.11

      Personal holding company income generally includes dividends, interest, royalties, annuities, rents, personal property use by a shareholder, and personal service contracts.12 However, personal holding company income does not include income from a net cash lease of property to another family member who uses the property in a way which would not cause income from the property to be treated as personal holding company income if the lessor had engaged directly in the activity of the lessee.13

      Similar to the requirements for special use valuation, (1) for at least five of the eight years ending on the decedent’s death, the business interests must have been owned by the decedent or members of his or her family, and the decedent or members of his or her family must have materially participated in the business,14 and (2) for ten years after the decedent’s death (or until the earlier death of the qualified heir), such business interests must be owned by qualified heirs, and qualified heirs must materially participate in the business.15 Qualified heirs include members of the decedent’s family, as well as any employee who has been an active employee of the business for at least ten years before the decedent’s death.16

      Additional tax, plus interest thereon, is due if the ownership or material participation requirements are not met after the decedent’s death.17 The additional tax is equal to the following percentage of the tax savings attributable to use of the family-owned business deduction, depending on when the failure to meet the requirements occurs.

      Recapture

      Year

      Percentage

      1-6

      100

      7

      80

      8

      60

      9

      40

      10

      20

      For this purpose, an IRC Section 303 redemption is not treated as a disposition of the family-owned business interest.18


      1 .IRC Sec. 2057.

      2 .American Taxpayer Relief Act of 2012, Pub. Law No. 112-240, Sec. 101.

      3 .IRC Secs. 2057(j), 2210, as added by EGTRRA 2001.

      4 .See Rev. Proc. 2013-15, 2013-5 IRB 444, Rev. Proc. 2013-35, 2013-47 IRB 537, Rev. Proc. 2014-61, 2014-47 IRB 860, Rev. Proc. 2015-53, Rev. Proc. 2016-55, Rev. Proc. 2017-58, Rev. Proc. 2018-57.

      5 .IRC Sec. 2057(b)(1)(C).

      6 .IRC Sec. 2057(b)(3).

      7 .Rev. Rul. 2003-61, 2003-24 IRB 1015.

      8 .IRC Sec. 2057(c).

      9 .IRC Sec. 2057(e)(1).

      10 .Est. of Farnam v. Comm.,583 F.3d 581, 2009-2 USTC ¶60,582 (8th Cir. 2009), aff’g 130 TC 34 (2008).

      11 .IRC Sec. 2057(e)(2).

      12 .IRC Sec. 543(a).

      13 .IRC Sec. 2057(e)(2).

      14 .IRC Sec. 2057(b)(1)(D).

      15 .IRC Sec. 2057(f)(1).

      16 .IRC Sec. 2057(j)(1).

      17 .IRC Sec. 2057(f).

      18 .Rev. Rul. 2003-61, 2003-24 IRB 1015.

  • 860. What estate tax deduction is allowed for death taxes paid at the state level?

    • A deduction is available for federal estate tax purposes for estate, inheritance, legacy, or succession taxes (i.e., death taxes) paid to any state or the
      District of Columbia
      with respect to the estate of the decedent.1 The deduction is available for tax years beginning in 2005 and thereafter. A credit for state death taxes (see Q 861) was available before 2005.

      The deduction is available only for state death taxes actually paid and claimed as a deduction before the later of (1) four years after the filing of the federal estate tax return; (2) sixty days after a decision of the Tax Court with respect to a timely filed petition for redetermination of a deficiency; or (3) with respect to a timely filed claim for refund or credit of the federal estate tax, the later of (a) sixty days of the mailing of a notice of disallowance by the IRS, (b) sixty days after the decision of any court of competent jurisdiction on such claim, or (c) two years after the taxpayer files a notice of waiver of disallowance.


      1 .IRC Sec. 2058, as added by EGTRRA 2001.

  • 861. What credits are allowed against the federal estate tax?

    • After the tax is computed (see Q 821), some of the following credits, as may be applicable, may be taken against the tax to determine the tax actually payable:

      (1) Unified credit (Q 862);1

      (2) Credit for state death taxes before 2005 (Q 863);2

      (3) Credit for gift tax (Q 864);3

      (4) Credit for estate tax on prior transfers (Q 865);4 and

      (5) Foreign death tax credit (Q 866).5


      1 .IRC Sec. 2010.

      2 .IRC Sec. 2011.

      3 .IRC Sec. 2012.

      4 .IRC Sec. 2013.

      5 .IRC Sec. 2014.

  • 862. What is the Section 2010 “unified credit” that is allowed against the federal estate tax?

    • The unified credit is a dollar amount allocated to each taxpayer that can be applied against the gift tax and the estate tax. The estate tax unified credit was equal to $2,141,800 in 2017, which translates into a tentative tax base (or unified credit exemption equivalent or applicable exclusion amount) of $5.49 million; in 2018, the credit is $4,419,800 ($11.58 million), $4,505,800 in 2019 ($11.4 million), $4,577,800 in 2020 ($11.58 million), $4,625,800 in 2021 ($11.7 million), and $4,769,800 in 2022 ($12.06 million).1 See Appendix D for amounts in other years (and gift tax amounts).

      Under EGTRRA 2001, no estate tax is imposed on an estate if the decedent died in 2010, but the beneficiaries are subject to a modified carryover basis. Therefore, 2010 TRA permitted estates to elect to be subject to the modified carryover basis rules and no estate tax or subject to an estate tax, with a step-up in basis, and a $5 million applicable exclusion amount.

      The credit is reduced directly by 20 percent of the amount of lifetime gift tax exemption the decedent elected to use on any gifts made after September 8, 1976 (this $30,000 exemption was repealed by the Tax Reform Act of 1976 as to gifts made after 1976). The 20 percent reduction is made even though the value of the property to which the exemption applied is brought back into the estate for estate tax purposes. The reduction is not a deprivation of property under the due process clause of the U. S. Constitution.2

      The credit is also reduced (but indirectly) by the amount of unified credit applied against any gift tax imposed on the decedent’s post-1976 gifts. The indirect reduction is accomplished by adding to the taxable estate the amount of all taxable gifts made by the decedent after 1976, other than gifts includable in the gross estate, and then applying the estate tax rates to the sum (see Q 821).


       

      1. The unified credit is calculated using the formula specified in IRC Section 2001(c).

      2U.S. v. Hemme, 476 US 558, 86-1 USTC ¶13,671 (U.S. 1986); Est. of Allgood v. Comm., TC Memo 1986-455.

  • 863. What is the Section 2011 credit for state death taxes which can be taken against the federal estate tax?

    • For decedents dying before 2005, a credit was allowed against the federal estate tax for state death taxes–inheritance, legacy, estate and succession taxes–paid to any state of the United States or the District of Columbia with respect to property included in the gross estate (but see phaseout of credit, below).1 The federal estate tax credit for state death taxes paid was not available where the property subject to state death taxes was not includable in the federal gross estate.2 The credit is limited to the amount of state death taxes actually paid and does not include, for instance, the amount of any discount allowed by the state for prompt payment.

      The credit is limited to specified percentages of the “adjusted taxable estate” in excess of $40,000 (see Appendix D). The “adjusted taxable estate” is the taxable estate reduced by $60,000. The maximum amount for which a credit can be taken was reduced by 25 percent in 2002, 50 percent in 2003, and 75 percent in 2004.3 The credit was replaced by a deduction for state death taxes (see Q 847) in 2005.4

      All states collect at least the maximum credit. Some states have enacted estate taxes exactly equal to the maximum credit. Some states refer to the maximum credit as it existed prior to the phaseout by EGTRRA 2001. States that impose an inheritance tax also have an “additional estate tax” which is designed to absorb the difference between the inheritance tax and the maximum credit should the inheritance tax be less than the maximum credit. In most cases, however, the basic inheritance tax will exceed the maximum amount allowable as a credit.


      1 .IRC Sec. 2011.

      2 .Est. of Owen v. Comm., 104 TC 498 (1995).

      3 .IRC Sec. 2011(b)(2), as added by EGTRRA 2001. See IRC Sec. 2011(b), Appendix D – 01.

      4 .IRC Sec. 2011(g), as added by EGTRRA 2001.

  • 864. What is the Section 2012 credit for gift tax that can be taken against the federal estate tax?

    • A credit is allowed for federal gift tax paid on property transferred by the decedent during life but included in the gross estate, but only as to gifts made on or before December 31, 1976.1 The credit cannot exceed an amount which bears the same ratio to the estate tax imposed (after deducting the unified credit and the credit for state death taxes) as the value of the gift(s) (at time of gift or at time of death, whichever is lower) bears to the value of the gross estate minus charitable and marital deductions allowed.2 In the case of (pre-1977) “split gifts” made by the decedent and his consenting spouse (see Q 905), the gift taxes paid with respect to both halves of the gift are eligible for the credit.3

      The gift tax credit cannot be taken with respect to gifts made after December 31, 1976. However, in the computation of the estate tax, an adjustment is made for federal gift tax paid on post-1976 gifts not included in the donor-decedent’s gross estate (see Q 909).


      1 .IRC Sec. 2012(e).

      2 .IRC Sec. 2012(a).

      3 .IRC Sec. 2012(c).

  • 865. What is the Section 2013 credit for estate tax on prior transfers that can be taken against the federal estate tax?

    • Under IRC Section 2013, the federal estate tax otherwise payable by a decedent’s estate is credited with all or a part of the amount of federal estate tax paid with respect to the transfer of property to the decedent (the transferee) by a person (the transferor) who died within ten years before, or within two years after, the decedent’s death. The credit is designed, of course, to alleviate the impact of repeated estate taxation where successive deaths of the transferor and transferee occur within a relatively short time of each other.

      The full amount of the credit is available if the transferor died within two years of the death of the decedent (either before or after). If the transferor predeceased the decedent by more than two years, the credit allowed is the following percentage of the full credit:

      (1)80 percent, if transferor died within the 3rd or 4th years preceding decedent’s death;

      (2)60 percent, if transferor died within the 5th or 6th years preceding decedent’s death;

      (3)40 percent, if transferor died within the 7th or 8th years preceding decedent’s death; and

      (4)20 percent, if transferor died within the 9th or 10th years preceding decedent’s death;

      No credit is allowable if the transferee predeceased the transferor by more than ten years.1

      The credit (before percentage reductions, if applicable) is the portion of the transferor’s federal estate tax attributable to the value of the property transferred, but limited to the portion of the transferee’s federal estate tax attributable to the value of the property transferred.2

      When there are two or more transferor estates, the credit is computed separately for each transferor estate. But the limitation is computed concurrently, i.e., by aggregating the value of the property received from the transferor estates.3 And each transfer meeting the requirements of IRC Section 2013 must be taken into account in computing the credit; no waiver of the credit with respect to any transfer that meets the requirements of IRC Section 2013 is permitted.4 Also, the limitation must be apportioned among the transferors so that the credit and the limitation are computed separately for each transferor. Thus, as to each transferor, the potential credit will be the lesser of the estate tax attributable to the transferred property in the transferor’s estate or that portion of the estate tax attributable to the transferred property in the decedent’s estate. The lesser of the credit or the limitation is then multiplied by the applicable percentage (determined by when the transferor’s death occurred relative to the time of the transferee’s death, as described above) to determine the allowable credit.5

      The prior transfer is not required to be traced into the decedent’s gross estate. The credit is available even though the property was given away, consumed, or destroyed by the decedent during his life. Further, the term “property” includes any beneficial interest in property, including a general power of appointment (see Q 824).6 The term includes also a life estate in property.7

      The credit may be allowed against the present decedent’s estate even though the prior decedent from whom he received the property was his spouse. However, the credit is allowed only with respect to property for which no marital deduction was allowed in the prior decedent’s estate.8


      1 .IRC Sec. 2013(a).

      2 .IRC Secs. 2013(b), 2013(c)(1).

      3 .IRC Sec. 2013(c)(2).

      4 .Rev. Rul. 73-47, 1973-1 CB 397.

      5 .Treas. Reg. §20.2013-6, Example (2); Est. of Meyer v. Comm., 83 TC 350 (1984), aff’d 778 F2d 125, 86-1 USTC ¶13,650 (2nd Cir. 1985).

      6 .IRC Sec. 2013(e).

      7 .Rev. Rul. 59-9, 1959-1 CB 232.

      8 .IRC Sec. 2013(d)(3).

  • 866. What is the Section 2014 foreign death tax credit that can be taken against the federal estate tax?

    • A foreign death tax credit is provided for United States citizens and residents. The credit applies to property which is subject to both federal and foreign death taxes.1 However, if there is a treaty with the foreign country levying a tax for which a credit is allowable, the executor may elect whether to rely on the IRC credit provisions or the treaty provisions.


      1 .IRC Sec. 2014.

  • 867. What are the requirements for filing a federal estate tax return and paying the tax?

    • Except for extensions of time granted under conditions explained in Q 869, a federal estate tax return (Form 706), if required, must be filed, and the tax paid, by the executor within nine months after the decedent’s death.1 A six month extension for filing is available if requested prior to the due date and the estimated correct amount of tax is paid before the original due date.

      The 2010 TRA provided that, for estates of decedents dying after December 31, 2009 and before December 17, 2010, the due date for filing an estate tax return, paying the estate tax, and making a disclaimer of an interest in property passing by reason of the decedent’s death, is not earlier than the date which is nine months after December 17, 2010. However, an estate of a decedent who died in 2010 was permitted to file an election and not be subject to an estate tax, but instead be bound by the modified carryover basis rules under IRC Section 1022. An estate that made such election was required to file a Form 8939.2

      The executor cannot escape responsibility for timely filing of an estate tax return or timely payment of the tax by delegating the responsibility to his attorney or accountant. Ignorance of the necessity to file a return or of the due date of the return is generally no excuse; the executor is required to exercise reasonable care in ascertaining these requirements. An exception to the general rule may exist if an attorney or accountant advised the executor no return was required to be filed.3 However, the penalty for late filing4 does not apply to an executor who by reason of his age, health, and lack of experience is incapable of meeting the criteria of ordinary business care and prudence required by the regulations.5


      1 .IRC Secs. 6018(a), 6075(a), 6151(a).

      2 .See Notice 2011-66, 2011-35 IRB 184.

      3 .U.S. v. Boyle, 105 S. Ct. 687 (1985).

      4 .IRC Sec. 6151(a)(1).

      5 .U.S. v. Boyle (concurring opinion), above; Brown v. U.S., 630 F Supp 57, 86-1 USTC ¶13,656 (M.D. Tenn. 1985).

  • 868. What are the minimum return requirements for determining whether an estate tax return must be filed?

    • Whether or not a return is required depends on the size of the gross estate (see Q 824), and possibly also on what kinds of gifts were made by the decedent during life. Generally, a return must be filed if the gross estate of a decedent who is a U.S. citizen or resident exceeds the estate tax unified credit equivalent ($5,000,000 for 2012-2017 and $10,000,000 for 2018-2025, as adjusted annually for inflation, the amount is $11.18 million in 2018, $11.4 million in 2019, $11.58 million in 2020, $11.7 million in 2021 and $12.06 million in 2022).1 However, the exemption amount is reduced by the amount of taxable gifts (the value of the property given after subtracting allowable exclusions and deductions – see Q 892) made by the decedent after December 31, 1976, except gifts includable in the gross estate. Also, if the decedent made any gifts after September 8, 1976 and before January 1, 1977, the above amounts are further reduced by any amount allowed as a specific gift tax exemption (see Q 914) with respect to such gifts.2 See Appendix D for the exemption amounts for earlier tax years.


      1. Rev. Proc. 2013-35, 2013-47 IRB 537, Rev. Proc. 2018-18, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc, 2020-45.

      2. IRC Sec. 6018(a).