Introduction to Estate and

Tax Planning Fundamentals

[Major Joseph E. Cole]{.smallcaps}[^1]

Advising clients concerning the best way to administer and preserve an
estate can be either one of the most basic or most complicated exercises
faced by an attorney. On one hand, the clients may be a happily married
couple with no children whose only goal is to memorialize their
intentions to leave their belongings to the surviving spouse.
Conversely, the client could be driven by concerns that the \$50 million
family business empire she's built will be destroyed by poor business
management, legal attacks from some of her malcontent children she would
like to disinherit, or the vagaries of the federal estate tax system.
Paramount to the success of any estate plan[^2] is an acknowledgement by
the estate owner of what he or she wishes to accomplish through the
estate planning process. Some important and fundamental estate planning
questions concerning the best method to accomplish the client's goals
are what significance, if any, the probate process will have on the
estate; how the estate will be affected by taxes; and, of maximum
importance to some, what can be done to ensure preservation of the
greatest amount of assets for the heirs.

While the wishes of these clients might vary greatly, they generally
share a common link---the desire to preserve assets of the estate. Yet,
different estate owners could have vastly different concepts of asset
preservation. To one, the goal may be to pass on all of her assets to
her husband so that he can have the flexibility to do as he wishes.
Another may be concerned about the amount the government will take from
the estate. Still another may be interested in avoiding the costs of
probate. Many different factors can impact the ability of the estate
owner to preserve the estate. Lack of proper planning, poor
decision-making, and an ignorance of the tools available to achieve
specific estate planning objectives are just a few of the reasons. This
article begins with the practical considerations inherent in the probate
and administration of an estate. Thereafter, the article will address
the importance of federal estate and gift taxation and offer a review of
property ownership methods for transferring wealth outside of probate.
The article will conclude with an examination of some of the means
available to address fundamental estate planning objectives within the
proscriptive landscape of the federal estate tax system.[^3]

# I. Estate Administration

Prior to consideration of more complex estate planning tools, it may be
helpful to address the simple and still most basic legal device to
transfer wealth through methods of descent and distribution---the will.
The "last will and testament"[^4] is a universal phrase in the lexicon
of modern America. Indeed, the general knowledge of wills is so
commonplace that it would be difficult to find a competent adult who
could not express the fundamental functions of a will. Understanding of
the concept diminishes once the testator has passed away and the will
begins to function as the legal mechanism to effect the intentions of
the decedent. To bring about those intentions, the will must meet
certain formal requirements.

Before the formalities even become a concern, though, the creator of the
will, the testator, must meet the underlying standards of competency.
The traditional requirements for proving competency are that the
testator knew the nature and extent of his or her property, knew who the
natural objects of his bounty were, understood the distribution being
made, and knew how these factors related to provide for the disposition
of his or her property.[^5] After addressing the issue of competency,
the validity of the will generally depends on satisfaction of the formal
requirements.[^6] After meeting these formal requirements, the will has
the legal authority to serve as the instrument for transferring assets
to the desired beneficiaries.

Why does the law require such formality? Most agree that the formalities
themselves are the evidence of a testator's final intentions regarding
the distribution of his or her estate.[^7]

> \[T\]he fact that a testator\'s will follows a standardized form is
> evidence that he or she intended that the document function as a will.
> Similarly, we caution a testator of the seriousness and finality of
> the event because cautioning increases the chances that the document
> represents his or her final, deliberate wishes regarding the
> distribution of his or her estate, as opposed to some momentary
> whim.[^8]

Others assert that the formalities themselves are a means to an end,
that is, the requirements serve as a formalized standard simplifying the
probate process by enabling the document to be recognized as a will.[^9]
While the establishment of the will formalities may aid this process,
the will cannot effect the intentions of the testator until it is
admitted to probate.

In common parlance, the term *probate* is often used to address both
aspects incumbent in the settling of an estate---validation and
administration.[^10] The term probate initially referred only to the
proceedings used to validate a will.[^11] *Administration*, on the other
hand, meant the process in which the court-appointed personal
representative of a decedent was responsible for all the proceedings
inherent in concluding the affairs of the estate.[^12] Notwithstanding
variances in the procedural and substantive provisions between states,
probate codes generally require property of the estate be subject to
administration and recognize that the will is the sole means to
affirmatively direct the transfer of property owned at death.[^13] If
any of the probate property is not disposed of by will, the net probate
estate---the amount remaining after paying any allowances required by
state statute, the expenses of probate administration and any other
claims---will pass under state intestacy statutes.[^14] The probate
process, however, does not apply to those assets that transfer by some
other method, such as through contract, joint ownership with right of
survivorship, or by statute. These nonprobate assets transfer in
accordance with the appropriate legal process governing the subject of
the property.[^15] As seen in the next section, the growing use of these
alternative methods of property ownership and the attendant methods of
beneficiary designation has focused greater attention on probate
avoidance techniques.[^16]

The majority of clients probably are not exactly sure what probate is,
but they are sure that it is something they want to avoid if at all
possible. This predisposition against the probate process has a long
history in the annals of testate succession.[^17] Since the publication
of Norman Dacey\'s, *How to Avoid Probate,*[^18] in the 1960s, there has
been no shortage of commentary on this topic. Some of the fears of
probate relate to the potential disadvantages in the process, such as
cost, delay, and loss of privacy as a result of the public nature of the
court proceedings.[^19] While the probate system itself may be somewhat
responsible for this reputation, most jurisdictions have taken steps to
simplify probate procedures to help reform the process.[^20]

**II. Nonprobate Dispositions**

Perhaps as a result of the probate process or because of their
practicality and ease of function, nonprobate transfers have become the
primary method used by individuals to transfer wealth through
succession.[^21] Characterizing this change as a revolution, Professor
Langbein captured the prevailing view that has more application today
than when it was first written:

> > Probate, our court-operated system for transferring wealth at death,
> > is declining in importance. Institutions that administer noncourt
> > modes of transfer are displacing the probate system. Life insurance
> > companies, pension plan operators, commercial banks, savings banks,
> > investment companies, brokerage houses, stock transfer agents, and a
> > variety of other financial intermediaries are functioning as
> > free-market competitors of the probate system and enabling property
> > to pass on death without probate and without will. The law of wills
> > and the rules of descent no longer govern succession to most of the
> > property of most decedents. Increasingly, probate bears to the
> > actual practice of succession about the relation that bankruptcy
> > bears to enterprise: it is an indispensable institution, but hardly
> > one that everybody need use.[^22]

These financial intermediaries have all but dispensed with the
title-clearing purpose of probate. Once the primary purpose of probate,
this need to transfer title to heirs or devisees through some type of
post-death legal process has been greatly diminished as a result of the
immediate transfer of ownership available through the use of will
substitutes. Three of the most common types of will substitutes are life
insurance, joint accounts, and revocable living trusts.[^23] While this
may be a reflection of the changing modes of wealth holding, these will
substitutes have become an integral part of how individuals hold and
transfer wealth in the United States.

If properly prepared, these substitutes can effectively take the place
of the will as the traditional means of transferring property. What
distinguishes them from a will is, not surprisingly, that the property
is conveyed without the need for probate. These devices avoid probate by
disposing of property while the owner is alive. The grantor/owner,
however, retains complete power over the property during life, leaving
an ownership interest that vests in the beneficiary at the grantor's
death.[^24] While the goal of probate avoidance is an appropriate one in
estate planning, the purported cost of the process may make this
approach unattractive. Some of the costs include probate court fees,
attorney fees, appraiser fees, and executor and guardian
commissions.[^25] More importantly, the use of some nonprobate transfers
can create estate planning problems concerning federal estate
taxation.[^26] Indeed, when making the decision whether to use
nonprobate transfers, an evaluation of the tax implications is critical.

**A. Gift and Estate Taxation**

One of the main sources of concern regarding actually planning an
estate, and the common thread binding all will substitutes, is the
effect of taxation on the estate. As a result of high tax rates[^27] for
transfer of estate property, much of the attention on estate planning is
focused on methods of tax minimization and avoidance. The federal
government employs a unified estate and gift tax, which means the same
tax rates apply regardless of whether the property is transferred by
gift or as part of the gross estate of the decedent.[^28]

When evaluating the tax implications of the transfer of property,
consideration must be given to the impact of the *unified credit*.
Before application of the estate tax, the estate is able to claim a
credit against the taxes owed.[^29] That credit, which is currently
\$211,300, represents the amount of estate tax that would be due on a
transfer of \$650,000.[^30] This unified credit amount is then
subtracted from the amount of tax otherwise owed as a result of the
transfer of the taxable estate.[^31] As a result, for example, if the
taxable portion of the estate of a decedent is \$650,000 or less, there
is no federal estate tax owed on the transfer of those assets to the
heirs of the estate because the credit will offset the amount of tax
owed. By the year 2006, the amount that can be transferred free from
estate taxes will increase to \$1,000,000.[^32] While this is a sizable
amount to pass free of taxation, many will substitutes also provide
great opportunities to pass large amounts of assets to descendents while
at the same time avoiding probate procedures. One common way to transfer
assets in an effort to avoid probate is through gifts but, of course,
this approach is not without its own tax implications.

The gift tax is an excise tax on the gratuitous transfer of property (or
services) made during the life of the transferor/donor "for less than
full and adequate consideration in money or money's worth."[^33] In
general, a gift is complete when a donor has severed control over the
property to such a degree that she is powerless to change the
disposition of the property.[^34] In *Metzger v. Commissioner*,[^35] the
United States Tax Court dealt with the concept of a completed gift. The
case involved an application of the relation-back doctrine to a gift of
money paid by checks from Mr. Metzger (through his son acting under
authority of a power of attorney). The gifts were made during one tax
year and deposited during that year, but not paid by the drawee bank
until the next tax year.[^36] Of critical importance to the court was
that the decedent intended to make the gifts, delivered them to the
donee, had sufficient funds in his account to cover the checks, and
actually transferred the money prior to his death.[^37] The court held
that under these facts where "there is no uncertainty as to the donor's
intent and unconditional delivery of the gifts and no danger of a scheme
to avoid estate taxes . . . that the gifts should relate back to the
date of deposit."[^38] This view was later followed by the Internal
Revenue Service (IRS) in a revenue ruling in similar case that was
decided by applying *Metzger.* The IRS found that a gift was complete on
either the date on which the donor no longer has the power to change the
disposition of the gift or the date on which the donee deposits or
otherwise presents the check for payment, whichever occurs first.[^39]

The reason the issue was raised at all in *Metzger* was because of the
taxpayer's desire to take advantage of the favorable tax protection that
would have resulted had the gifts been treated as being given in
separate years.[^40] For gift and estate purposes, the most favorable
aspect of the gift tax rules is that the first \$10,000[^41] in gifts
made to a donee in a year is excluded from taxes.[^42] Any gifts over
this amount are subject to gift tax[^43] and will have the concurrent
effect of decreasing the amount of the unified credit.[^44] The entire
amount of the unified credit is available unless the decedent made
taxable gifts during his lifetime. If such gifts were made, the amount
of the gift tax is subtracted from the amount available as a credit for
estate taxes.[^45] The annual \$10,000 gift tax exclusion is limited to
the gift of a present interest, which means that the donor must transfer
an unrestricted right to the immediate use, possession, or enjoyment of
the item.[^46]

Another key aspect of "gifting"[^47] is that annual gifts to spouses are
treated differently than gifts to other donees. The value of a gift to a
spouse is deducted from the amount of taxable gifts made during a
calendar year.[^48] The net result is that there is no limitation and no
immediate tax consequences on any gifts made to a spouse.[^49] Spouses
also receive different treatment under the gift rules in that if one
spouse makes a gift to a third party, the other spouse can treat half of
the value of the gift as if he was the actual donor.[^50] Since the
amount of the annual exclusion is limited, this gift splitting allows
one spouse to give up to \$20,000 per year tax free so long as the other
spouse does not also make a gift to the same donee.[^51]

Of course, the gift tax rules can have important consequences on
lifetime transfers made by a donor. Nevertheless, there are some rather
advantageous applications of the annual exclusion benefits for a donor.
The practical benefit derived from the annual exclusion is that by
giving away assets of the estate, the donor is actually decreasing the
size of estate, thereby decreasing the estate's exposure to estate
taxes. The secondary, albeit intangible, benefit is that the donor will
probably receive certain contentment in actually seeing a beneficiary
use and enjoy the gift during the donor's lifetime.

The first step to understanding how these gift rules interact with
estate taxes is to determine what part of the estate is subject to
taxation. The estate tax is levied upon the distribution of property
that occurs upon the death of an individual.[^52] Like the gift tax, the
estate tax is a tax upon the transfer of property itself. Thus, the
inquiry into estate taxation must begin with an understanding of the
*gross estate,* which is the starting point for determining what
property is subject to taxation. The value of the gross estate is
determined by ascertaining the value of a decedent's property "real or
personal, tangible or intangible, wherever situated" at the time of
death.[^53] While this provision seems to encompass almost all property,
it is actually not all-inclusive. The definition is limited to the "the
value of all property to the extent of the interest therein of the
decedent at the time of his death."[^54] In other words, the gross
estate is made up of all property owned by a decedent at death,[^55]
certain life insurance,[^56] joint interests in property,[^57] and
transfers of property in which the decedent retained the ability to
amend, alter, or revoke.[^58]

The next consideration is to establish of the amount of the gross estate
that is taxable. The taxable estate is calculated by subtracting allowed
deductions from the gross estate of the decedent.[^59] While there are
many deductions from the gross estate,[^60] the two most significant
items for estate tax planning purposes are the marital deduction and the
unified credit.[^61] When property is transferred to a surviving
spouse[^62] through the decedent's estate, the estate tax rules provide
for an unlimited marital deduction for that property to the extent that
such interest in the property is included in calculating the gross
estate of the decedent.[^63] In essence, all property that is passed
from the decedent's estate to the surviving spouse is free from estate
taxes.

**B. Life Insurance**

A life insurance policy is similar to a will in that the beneficiary
determinations[^64] are revocable until the testator's death. Yet, life
insurance is different from a will because a life insurance policy is a
contract between the owner of the policy and the insurance provider,
with the policy's beneficiary serving as a third-party beneficiary of
that contract. Given the contractual nature of this nonprobate
instrument, the assets pass outside of the will and cannot be overridden
by an inconsistent bequest of life insurance proceeds set forth in the
will.[^65] However, "\[t\]he fact that a contract is called an insurance
contract does not automatically entitle it to treatment as insurance for
estate tax purposes if it is not, in fact a contract of insurance."[^66]
Generally, in order to be considered an insurance contract, the owner of
the policy must have an insurable interest in the person or thing
insured.[^67] That is, the owner of the policy must take an actuarial
risk that the insured will live for a certain amount of time and that
the owner will suffer a loss if the insured does not live as long as
expected.[^68]

The benefits of life insurance as a method of transferring property
revolve around its ease of transferability combined with the favorable
tax treatment for the beneficiaries.[^69] As a result, life insurance
has many uses in an estate plan. First, life insurance can be the source
of an estate that did not previously exist or supplement a smaller
estate by providing income to help meet the needs of the insured's
family/heirs. In addition, life insurance benefits provide liquidity to
an estate that might be encumbered by large holdings of real property, a
closely held business, or stock that has restrictions placed upon
resale. More likely than not, the estate and the heirs are either
interested in keeping these assets intact or, at a minimum, avoiding a
fire sale of the asset for less than market value just to have ready
cash to pay estate taxes. Yet another use of life insurance is as a
means of protection against estate taxes. For example, the death
benefits can provide ready assets to the estate for use in paying estate
taxes or serve as the principal of a trust providing protection to
beneficiaries to offset the effects of estate taxes.

Inasmuch as life insurance is a major part of most estate plans, it
often makes up a significant part of the gross estate of the
decedent.[^70] A way of removing these assets from the gross estate is
to ensure that the decedent no longer holds any *incidents of ownership*
over the policies.[^71] Generally, this term refers to "the right of the
insured or his estate to the economic benefits of the policy."[^72] Some
examples of incidents of ownership include the power to change
beneficiaries, the right to assign the policy or revoke an assignment,
the power to cancel or surrender the policy, and the power to borrow
against the cash value of the policy.[^73] Regardless of whether the
policy is owned directly by the decedent or indirectly through a trust,
a corporation, or another individual, the determining factor is whether
or not the decedent retained incidents of ownership.[^74] If the
decedent policy owner maintains any such incident of ownership over a
life insurance policy, the amount receivable by other beneficiaries as
insurance on the life of the decedent shall be included in the value of
the gross estate of the decedent and thereby subject to estate
taxation.[^75]

The result in *United States v. Rhode Island Hospital Trust Co.*[^76]
made that painfully clear. In that case, a father purchased a life
insurance policy on the life of his son, the decedent. The father paid
all premiums on the policy and, at the time of the decedent's death, was
the primary beneficiary of the policy. Although the son never had
possession of the policy, he was accorded substantial power under the
policy, including the right to change beneficiaries, to assign the
policy, and to borrow against the value of the policy. The court held
that even though decedent's father was the legal owner and beneficiary
of the policy, the decedent possessed incidents of ownership in the
policy at his death causing the proceeds of the policy, paid to his
father, to be included in the son's gross estate.[^77] Critical to the
court was the plain language of section 2042 of the Internal Revenue
Code and the connotations raised by the terminology used in the
statute.[^78] "Power can be and is exercised by one possessed of less
than complete legal and equitable title. The very phrase 'incidents of
ownership' connotes something partial, minor, or even fractional in its
scope. It speaks more of possibility than of probability."[^79]

Within that realm of possibility, those who attempt to transfer policy
ownership incidents to avoid treatment as part of the gross estate will
also be affected by the time in which such transfers are made.

> If (1) the decedent made a transfer (by trust or otherwise) of an
> interest in any property, or relinquished a power with respect to an
> property, during the 3-year period ending on the date of the
> decedent's death, and (2) the value of such property (or an interest
> therein) would have been included in the decedent's gross estate under
> \[section 2042\] the value of the gross estate shall include the value
> of any property (or interest therein) which would have been so
> included.[^80]

Once a source of extensive litigation,[^81] this issue appears to have
been resolved in *Leder v. Commissioner*.[^82] The facts in *Leder*
involved a decedent who at the time of his death was insured under a
\$1,000,000 life insurance policy. His wife was the policy owner and
sole beneficiary. The decedent's wholly owned corporation paid the
premiums for the policy. On February 15, 1983, Mrs. Leder transferred
the policy to herself as a trustee of an inter vivos trust. Mr. Leder
died on May 31, 1983. Upon his death, the proceeds of the policy were
distributed according to the trust and were not included in the
decedent's gross estate on the estate's federal estate tax form. The
ruling was that since Mr. Leder never possessed ownership rights to the
policy, it did not matter that Mrs. Leder transferred the policy to a
trust; the proceeds of the policy would not be brought into his
estate.[^83] Although the policy was transferred within three years of
the Mr. Leder's death, this would not be a factor as the proceeds were
not considered part of the decedent's gross estate.[^84]

Having conceded this point, the IRS will no longer litigate this
issue.[^85] Nor will the IRS pursue the similar issue involving policies
that are not payable to decedent's estate over which decedent held no
incidents of ownership, but for which the decedent made premium payments
within three years of his death.[^86] At one time, the death benefits of
the policy would have been included in the insured's gross estate under
the theory that the premium payments were a constructive transfer.[^87]
Although this is no longer the case after *Leder*,[^88] the downside to
transfers of this sort is the possible gift tax implications and whether
the transfer was of a present interest. Generally, a transfer of
ownership rights in a life insurance policy results in a taxable
gift.[^89] Such concerns as the date the policy is transferred and
whether or not the policy is fully paid up are important to a
determination as to valuation of the life insurance and the valuation of
the gift created by the transfer.[^90]

**C. Joint Property**

As a will substitute, the use of joint tenancy in property is extremely
effective. The main benefit of a joint estate can be found in the
doctrine of survivorship, which maintains that "when two or more persons
are seized of a joint estate, . . . the entire tenancy upon the decease
of any of them remains to the survivors, and at length to the last
survivor; and he shall be entitled to the whole estate, whatever it may
be."[^91] While either party can sever a joint tenancy, neither party
has the ability to bequeath property held by both parties in joint
tenancy.[^92] This aspect also incorporates a probate avoidance feature,
in that ownership of the property will pass to the surviving joint
tenant as an operation of law without becoming part of the estate of the
decedent.[^93] Whether used as a method of holding real estate or as the
preferred choice for checking, savings, and investment accounts, holding
property jointly has become commonplace.[^94]

Despite this ubiquity, joint ownership of property can have adverse
effects on the taxability of the property both for estate and income tax
purposes. For instance, half the value of any property owned by a
husband and wife as joint tenants[^95] with right of survivorship shall
be included in the gross estate of the first spouse to die.[^96] The
effect of this is that title to the property will transfer to the
surviving spouse, but the estate of the decedent will be increased by
half of the value of that property even though the decedent has no
control over the disposition of that property. The end result is that
the decedent's estate suffers a tax burden without the decedent getting
any of the benefit of control of the property.

With regard to income taxation, a major consideration is the effect on
the income tax basis of the property acquired after the death of the
first joint tenant. Generally, the income tax basis of property acquired
from an individual by inheritance is its fair market value on the date
of the individual's death.[^97] A spousal joint tenancy, which is
included in the gross estate of a decedent, receives a new tax basis for
income tax purposes.[^98] The calculation of that basis has been the
subject of some confusion. Currently, for any spousal joint tenancies
the rule has the same application as the rule pertaining to the gross
estate of a deceased joint tenant. Since half of the value is included
in the gross estate of the decedent, the basis of the property is
adjusted so that the new basis of the property is equal to half of the
original value of the property plus half of the current value of the
property.[^99]

This approach was challenged by a taxpayer in *Gallenstein v. United
States*.[^100] In 1955, Mrs. Gallenstein and her husband, as joint
tenants, purchased real property for \$38,500; an amount totally derived
from Mr. Gallenstein's earnings. After Mr. Gallenstein's death in 1987,
Mrs. Gallenstein became the sole owner of the property. She subsequently
sold some acreage of the property in 1988 for the amount of \$3,663,650.
After filing one federal income tax return and reporting a taxable gain
of \$3,556,596, she then amended that return two different times
resulting in a final return which reported no gain on the sale of the
property. Mrs. Gallenstein's position was that since her husband had
provided all the consideration for the property, the contribution test
that was in place when they purchased the property should be
applied.[^101] That contribution test was used to track the amount a
survivor contributed to the purchase of joint property. The test, very
simply, stated that any amount paid toward the property by the survivor
would not be included in the decedent's gross estate.[^102] She argued
that since she had contributed nothing to the purchase of the property,
the value of the property should be included in her husband's estate and
subject to estate tax, and that she should inherit the property at its
fair market value at the date of her husband's death. Having then
inherited the property at its fair market value, she should not be
required to pay taxes on the subsequent sale of the property. Mrs.
Gallenstein argued further that the tax law changes that mandated
application of the current test to certain joint interests of a husband
and wife was not appropriate.[^103] The test mandated by the new tax
laws required that half the value of the property owned jointly would be
included in the decedent's gross estate without regard to the amount
actually paid to purchase the property by the survivor or the
decedent.[^104] Under this test, she would have been required to pay a
substantial tax on the sale of the property because half the ten-fold
increase in the value of property would have been attributed to her as a
joint tenant.

The court held that because the effective date provisions of the
Economic Recovery Tax Act of 1981[^105] did not expressly or by
implication repeal the effective date of the Tax Reform Act of
1976,[^106] and since the Tax Reform Act stated that it did not apply to
joint interests created before 1977, the fifty percent inclusion rule of
section 2040(b) of the new tax law did not apply.[^107] Since this
provision was not applicable, the property was controlled by the old
joint property rule relied upon by Mrs. Gallenstein. This meant that the
entire value of the property was included in the husband's gross
estate[^108] and subject to a step up in basis equal to the fair market
value of the property at the time of the decedent's death.[^109] Since
the husband died only six months prior to her selling the property, the
fair market value of the property was so close to the actual sale price
there was no taxable gain on the sale of a property that had actually
grown substantially in value. This approach has been followed in other
cases resulting in a kind of safe-harbor for spousal joint tenancies
created prior to 1977, in that those individuals enjoy the benefit of
the old contribution test.[^110]

**C. Trusts**

The inter vivos or revocable living trust permits an individual to
transfer property to a trust during his or her life, while still
maintaining the ability to control the disposition of the property,
including the power to terminate the trust and have the title revert to
the original owner.[^111] A revocable living trust will transfer legal
title to property from one party (the grantor/testator) to a third party
(the trustee) who will then manage the property (the corpus or
principal) for the beneficiary until some stated time when ownership of
the property will be transferred to the beneficiaries.[^112] Functioning
as a will substitute, the revocable living trust effects the intent of
the grantor to transfer assets to surviving beneficiaries, while
retaining all of the beneficial rights to the property of the
trust.[^113] This includes the right to receive income and, perhaps most
importantly, the power to amend or even revoke the trust prior to
death.[^114] While the revocability of this trust is valuable to the
grantor because of its flexibility and control, there is a major
drawback to this type of trust. The power to revoke the trust indicates
the grantor has dominion over the property and, as a result, the assets
of the trust are included in the gross estate of the decedent making the
assets subject to estate taxation.[^115]

Living trusts may also be irrevocable, in that the trust cannot be
changed even if personal or family circumstances change.[^116] If
property is irrevocably transferred to a trust, the trust becomes the
owner of the property as opposed to the original grantor.[^117] A
disadvantage of the irrevocable trust becomes obvious when compared to a
revocable trust. Once a transfer is made to an irrevocable trust, the
grantor loses the ability to control the assets in the trust. However,
the tradeoff is that as long as the grantor renounces his interest in
the property by transferring the assets irrevocably to the trust, the
property will not be included in the gross estate of the decedent.[^118]

A remarkably efficient method for taking advantage of this favorable
estate tax treatment is the irrevocable life insurance trust. The life
insurance trust works in one of two ways. The first method permits the
grantor to purchase life insurance and then transfer ownership of the
policy to a trust. The second approach allows the grantor to transfer
assets to a trust that can then be used to purchase life insurance on
behalf of the grantor. In either case, provided the grantor retains no
incidents of ownership, the trust will be the owner of the policy. Upon
the death of the grantor, the trust will pay the proceeds of the policy
to the trust beneficiaries in accordance with the specifications of the
grantor.[^119] Two of the more common uses for these trusts include the
ability to provide liquid assets for the beneficiaries and to have cash
available in the event any estate taxes are owed.

Issues to be considered with an irrevocable life insurance trust center
on the gift tax treatment of transfers made to the trust. Normally, the
transfer of funds to a trust to purchase insurance or the transfer of an
insurance policy to the trust would be considered a gift of a future
interest. Generally, a transfer of a future interest would not qualify
for the annual \$10,000 gift tax exclusion and would, as a result, be
subject to the gift tax.[^120] A *future interest* is defined as
"reversions, remainders, and other interests or estates, whether vested
or contingent, and whether or not supported by a particular interest or
estate, which are limited to commence in use, possession, or enjoyment
at some future date or time."[^121] Contrast that with the definition of
a *present interest*, which is "\[a\]n unrestricted right to the
immediate use, possession, or enjoyment of property or the income from
property."[^122] The important question is when enjoyment begins.[^123]
If there is any substantial period of time between the time the gift was
made and the beneficiary's enjoyment of the gift, it is a gift of a
future interest.[^124] Since a transfer to an irrevocable life insurance
trust does not contain a right to use, possess, or enjoy the property,
it is not a gift of a present interest.[^125] Seemingly then, such a
transfer would be considered a gift of a future interest and would not
qualify for the gift tax annual exclusion.[^126]

This view was tested in *Crummey v. Commissioner*.[^127] The Crummeys,
as grantors, created an irrevocable living trust for the benefit of
their four children. The Crummeys then began making contributions to the
trust. They filed gift tax forms for the 1962 and 1963 tax years and
claimed an annual exclusion (for some of the contributions) for each
beneficiary consistent with the amount allowable at that time. The IRS
did not allow the exclusions claimed for the gifts made to the Crummeys'
children then under the age of 21 based on the position that the gifts
were of a future interest.[^128] The Crummeys contended that, as
guardians of their minor children, they had the right to demand on
behalf of each child a distribution each year and that the transfer
should be treated as a gift of a present interest qualifying for the
annual exclusion.[^129] The court sided with the Crummeys. The demand
power[^130] given to the minor children enabled them as donees to be
legally and technically capable of immediately enjoying the
property.[^131] In making its decision, the court relied on the result
in *Perkins v. Commissioner,*[^132] where the tax court found that if
the parents could make a demand on behalf of their children and there
was no indication that it could be resisted, the gift was of a present
interest.[^133] The result of the Crummey case is that when trust
beneficiaries are given unrestricted right to demand immediate
distribution of trust property, the beneficiaries are generally treated
as having a present interest in the property.[^134]

Because of the control granted to the holder of this kind of general
demand power, there are some estate taxation effects. First, the value
of the property subject to such a power of appointment (or demand power)
is included in the value of the gross estate of the decedent.[^135] By
contrast, a power to invade the principal of a trust (as opposed to a
power of appointment like that used by the Crummeys which was limited to
payment of the amount of a gift made during the year) would not result
in the inclusion of the value of the principal of the trust in the gross
estate. Provided the power to invade the principal of the trust is
limited by an "ascertainable standard relating to the health, education,
support, or maintenance of the decedent," it will escape inclusion in
the gross estate of a decedent who held such a power.[^136] A second
qualification on the beneficiary's power to demand a distribution is
that as long as the lesser of \$5,000 or five percent of the trust
assets are subject to the demand power, a transfer to the trust can
qualify for the gift tax annual exclusion.[^137] With tax benefits such
as these, it's no wonder that individuals use varying trust techniques
to maximize the assets of an estate.

One way that some of these trust concepts are put to use to make the
most of favorable tax treatments is through the *bypass* or *credit
shelter trust*. Taking advantage of the unified credit and marital
deduction provisions in the Tax Code, a credit shelter trust allows a
married couple to shield up to \$1,300,000 from estate taxes.[^138] In
practice, a general credit shelter trust would consist of up to
\$650,000 (the unified credit exclusion amount) of a grantor's assets
transferred into the trust.[^139] The purpose of the trust is to provide
income for the surviving spouse as the beneficiary. The remaining assets
above the exclusion amount would then be transferred to the surviving
spouse at death. The amount transferred to the trust is not subject to
estate taxes because the decedent's unified credit applies to the
transfer.[^140] Also, the amount transferred to the spouse is not
taxable to the decedent's estate because of the unlimited marital
deduction.[^141] Upon the death of the surviving spouse, the assets of
the trust would pass to the successor beneficiaries named by the
grantor, and if those assets were less than \$650,000, the first
decedent's unified credit could be used to avoid estate tax liability on
those assets.[^142] The surviving spouse's remaining assets could be
transferred upon her death to her heirs and the unified credit would
still apply to that transfer because every decedent is allowed unified
credit.[^143] This method makes great use of applicable tax
considerations while utilizing estate planning tools to bring about the
desired estate distribution.

[]{.mark}

**III. Estate Distribution**

Notwithstanding the efforts of an individual to manage their estate and
avoid probate using the appropriate will substitute, the starting point
for controlling the disposition of one's estate is still the last will
and testament. Indeed, when considering how best to use the varied
estate planning tools, the will should be the foundation upon which the
estate plan is built. Even after using joint tenancy or other probate
avoidance vehicles to transfer assets upon death, the will is still
critically important. For example, a will is the only way for the
testator to identify the desired guardian of any minor children that
survive.[^144] A will is also the main way to distribute personal
property that cannot be transferred through some other manner according
to the testator's wishes (e.g., ensuring that a particular beneficiary
receives a specific family heirloom).[^145] In addition to these
functions of a will, there are a number of ways to further enhance the
testator's ability to control the estate.

The first of these is the *contingent* or *testamentary trust*.
Fundamentally the same in principle as any trust,[^146] the testamentary
trust is distinguished because it does not come into operation until the
testator's death.[^147] These trusts have the advantage of giving the
testator the benefit of controlling the trust without the costs
associated with the creation and maintenance of the trust during his
lifetime.[^148] To illustrate, if a minor child inherits an estate
through a will, most states would create a trust for the minor child and
then appoint a custodian or a conservator to manage the assets of the
child.[^149] By having the foresight to place a contingent trust for
minors in the will, the parents can appoint this trustee themselves and
dictate the terms of the trust.[^150] An additional benefit of this
approach is that the testator determines the course of action for
support of a minor child free from the influence of family or friends
who may lack the ability to adequately perform as a fiduciary for the
benefit of the child.

Another testamentary trust used to protect estate assets for the benefit
of the surviving children is the *simple family trust*. Like the
contingent trust, this trust is also created in the will and becomes
effective only upon the death of the testator.[^151] The major benefit
of this type of trust is that while the principal is retained to provide
for the long-term support of the children, the trust can also create
income for the surviving spouse. A testator may wish to avoid leaving
the property to the surviving spouse for a number of reasons, including
concerns about the surviving spouse's mental capacity or inability to
manage the assets of the estate. The testator may also be worried that
if the surviving spouse remarries, the assets could be transferred to
the new spouse, frustrating the testator's intention of passing on the
estate to the surviving children. This simple trust allows the testator
to name a trustee who will then manage the assets to provide income to
the spouse and preserve the corpus of the trust for the benefit of the
children.[^152] As previously mentioned, there are potential estate tax
issues raised by this type of terminable interest.

Yet another method for using the will to achieve the management needs of
the testator, is the *pour-over will*. With this instrument, the
testator makes a bequest of the residue of the estate into a revocable
living trust, essentially "pouring over" the remaining unspecified
assets of the estate into a living trust.[^153] The trust must be
identified in the testator's will and the terms of the trust must be in
a written document executed before or concurrently with the execution of
the testator's will.[^154] One of the benefits of the pour-over will is
that if the trust is not funded during the life of the testator the
difficulty of maintaining the trust during his or her lifetime can be
avoided. Regardless of whether the trust is funded, the pour over to the
trust as a result of the will does not exempt the assets from probate.
The assets not previously transferred to the trust will still pass
through probate.[^155]

**IV. Conclusion**

The tools and techniques available for use in planning an estate are as
plentiful and individualized as the estate owners themselves.[^156]
There are many elements to be considered when determining how an estate
owner chooses to incorporate the use of such methods in his or her
estate plan. Without careful planning and consideration, property
ownership and distribution decisions can have a significant, and
sometimes conflicting, effect on the objectives of the person planning
an estate. An individual who is making decisions of this kind without
considering a comprehensive estate plan will likely be uninformed as to
how the interplay of ownership arrangements, disposition alternatives,
and federal estate taxation is key to effectively managing an estate
consistent with one's goals. The consideration of all of these factors,
coupled with and governed by the estate owner's individual concerns
regarding management and control, is vital to effective estate planning.

[^1]: ^\*^ *Major Cole (B.S., University of Missouri-Columbia; J.D.,
    Saint Louis University) is Chief Circuit Trial Counsel, Eastern
    Circuit, Bolling AFB. He is a member of the Missouri Bar.*

[^2]: One way an estate plan has been defined is as "an arrangement for
    the use, conservation, and transfer of one's wealth." [Harold
    Weinstock, Planning an Estate 2]{.smallcaps} (3d ed. 1988 & Supp.
    1993).

[^3]: The purpose of this article is to introduce some basic estate and
    tax planning fundamentals. This is by no means intended to be a
    treatise on estate planning. Rather, it is intended to be a survey
    of some of the more prominent issues in this very broad and complex
    area of practice and an attempt to familiarize practitioners with
    the interplay between estate planning techniques.

[^4]: Although once commonly believed that each word (i.e., will and
    testament) had a separate meaning when used as an instrument to
    dispose of private wealth, there is no evidence to support such a
    finding. In fact, it appears that the words have been used
    interchangeably and together to mean the same thing. *See* [Jesse
    Dukeminier & Stanley M. Johanson, Wills, Trusts, and Estates 31
    (1990)]{.smallcaps}*.*

[^5]: For a thorough discussion of the issue of competency and mental
    capacity in general, see *id.* at 123-142*.*

[^6]: The origin of will formalities in the United States derives from
    provisions in two English sources, the Statute of Frauds, and the
    Wills Act. *See* John H. Langbein, *The Nonprobate Revolution and
    the Future of the Law of Succession*, 97 [Harv. L. Rev]{.smallcaps}.
    1108 (1984) \[hereinafter Langbein, *Revolution and the Future*\].
    At the core, the formalities are that the will is written, signed by
    the testator, and witnessed by two witnesses. Even if there is some
    debate as to what function these formalities play, all states have
    incorporated some version of the Wills Act into their jurisdictions.

[^7]: *See* Ashbel G. Gulliver & Catherine J. Tilson, *Classification of
    Gratuitous Transfers*, 51 [Yale L.J]{.smallcaps}. 1 (1941); John H.
    Langbein, *Substantial Compliance with the Wills Act*, [88 Harv. L.
    Rev.]{.smallcaps} 489 (1975) \[hereinafter Langbein, *Substantial
    Compliance*\].

[^8]: *See* Langbein, *Substantial Compliance, supra* note 6, at 491.

[^9]: *See* Melanie B. Leslie, *The Myth of Testamentary Freedom*, 38
    [Ariz. L. Rev]{.smallcaps}. 235 (1996), for a discussion of some of
    the theories behind Wills Act formalities, as well as a look at
    freedom of testation and the paradox existing between the competing
    goals of formalism, testamentary intent, and normative views of
    society on testate succession.

[^10]: Grayson M.P. McCouch, *Will Substitutes Under The Revised Uniform
    Probate Code*, 58 [Brook. L. Rev]{.smallcaps}. 1123, 1125 (1993)
    (citing [Max Rheinstein & Mary Ann Glendon, The Law of Decedents'
    Estates 478]{.smallcaps} (1971))[.]{.smallcaps}

[^11]: "The term *probate* originally applied only to the proceedings
    used to prove (*probare*) a will; it stood in contrast to
    *administration*, which comprised all subsequent proceedings winding
    up the estate." Langbein, *Revolution and the Future, supra* note 5,
    at 1108 (citing [Rheinstein & Glendon,]{.smallcaps} *supra* note 9).

[^12]: *See id.*

[^13]: *See* McCouch, *supra* note 9, at 1125. For an example of a
    standard provision, see [Unif. Probate Code]{.smallcaps} § 2-502
    (amended 1993).

[^14]: *See* McCouch, *supra* note 9, at 1125.

[^15]: If the testator's interest in property terminates at death, the
    property itself is not part of the probate estate. *See* Langbein,
    *Revolution and the Future*, *supra* note 5, at 1129-1130.

[^16]: *See id.* at 1109.

[^17]: Evidently, dissatisfaction with the cost of probating an estate
    is not a new phenomenon. "Probate fees were a subject of complaint
    against the church courts in the Commons\' Supplication against the
    Ordinaries of 1532. Fees which had previously been regulated by a
    provincial scale were set by statute." Lloyd Bonfield, *English
    Common Law: Studies in the Source: Article: Contrasting Sources:
    Court Rolls and Settlements as Evidence of Hereditary Transmission
    of Land Amongst Small Landowners in Early Modern England*, 1984 [U.
    Ill. L. Rev.]{.smallcaps} 639, 642 (1984) (citing [Ralph Houlbrooke,
    Church Courts and the People During the English Reformation
    1520-1570]{.smallcaps} 95 (1979)).

[^18]: [N. Dacey, How to Avoid Probate]{.smallcaps} (1965).

[^19]: *See generally* [Weinstock,]{.smallcaps} *supra* note 1, at
    125-28.

[^20]: With eighteen states having adopted the Uniform Probate Code
    (UPC) and with the advent of small estate procedures to simplify the
    procedural requirements, the probate process has become somewhat
    less formalized. The following states have adopted the UPC in some
    fashion: Alaska, Arkansas, Colorado, Florida, Hawaii, Idaho, Maine,
    Michigan, Minnesota, Missouri, Nebraska, New Mexico, North Dakota,
    South Carolina, South Dakota, and Utah. *See generally* [Unif.
    Probate Code]{.smallcaps} (amended 1993). For a discussion of the
    reform issues in testate succession, see Leslie, *supra* note 8.

[^21]: *See* Langbein, *Revolution and the Future*, *supra* note 5, at
    1108.

[^22]: *Id*.

[^23]: Although certainly not an exhaustive list, these forms of
    nonprobate transfers are discussed because of the prevalence of life
    insurance and jointly held property, as well as the rise in use of
    the revocable living trust. See Langbein, *Revolution and the
    Future*, *supra* note 5, for a discussion of other will substitutes.

[^24]: For example, the value of a jointly held savings account
    transfers automatically to a surviving owner in an account that is
    owned jointly with a right of survivorship. See *infra* notes 90-93
    and accompanying text.

[^25]: *See* [Dukeminier & Johanson,]{.smallcaps} *supra* note 3, at 33.

[^26]: For example, someone may think that it would be a good idea to
    hold a large portion of their estate in life insurance since the
    proceeds would pass to the beneficiaries outside of the
    administration of probate. Even though the proceeds of those
    policies would be sheltered from probate, the value of the policy
    would be considered as a taxable asset of the decedent's estate for
    estate tax purposes. *See* I.R.C. § 2042 (1999).

[^27]: After the application of the unified credit, the initial rate for
    estate tax is 37 percent on the amount of the taxable estate greater
    than the applicable exclusion amount. There is a graduated tax rate
    schedule that eventually is capped at 55 percent on all estates
    greater than \$3,000,000. *See* *id*. § 2001(c).

[^28]: *See id*. § 2001.

[^29]: *See id*. § 2010(a).

[^30]: *See id*. § 2010(c).

[^31]: *See id*. § 2010(a).

[^32]: If an individual dies with a taxable estate (generally, the gross
    estate plus adjusted lifetime taxable gifts minus administration
    expenses and other deductions) greater than the applicable exclusion
    amount, the estate will be subject to estate taxes on the balance
    over the applicable exclusion amount. The applicable exclusion
    amount (and thus the applicable credit amount or unified credit) is
    found in I.R.C. § 2010(c). The Taxpayer Relief Act of 1997, Pub. L.
    No. 105-34, 1(a), 111 Stat. 788 (1997), increased the exclusion
    amount from the prior \$600,000 as follows:

    > Year Applicable Applicable
    >
    > Credit Amount Exclusion Amount
    >
    > 1998 \$202,050 \$625,000
    >
    > 1999 \$211,300 \$650,000
    >
    > 2000 & 2001 \$220,550 \$675,000
    >
    > 2002 & 2003 \$229,800 \$700,000
    >
    > 2004 \$287,300 \$850,000
    >
    > 2005 \$326,300 \$950,000
    >
    > 2006 & After \$345,800 \$1,000,000

    [Brown, Federal Estate and Gift Taxes Explained 9]{.smallcaps} (CCH
    Inc., 31st ed. 1998).

[^33]: I.R.C. § 2512.

[^34]: *See* 26 C.F.R. § 25.2511 (1999). "As to any property, or part
    thereof or interest therein, of which the donor has so parted with
    dominion and control as to leave in him no power to change its
    disposition, whether for his own benefit or for the benefit of
    another, the gift is complete." *Id*. § 25.2511-2(b).

[^35]: 38 F.3d 118 (4th Cir. 1994), *aff'g* 100 T.C. 204 (1993).

[^36]: *See id*. at 121. The Tax Court first applied the relation back
    doctrine to income tax deductions for charitable contributions
    finding that when checks had been unconditionally delivered,
    promptly presented for payment, and duly paid upon presentment, the
    payment of the checks related back to the date of delivery. *See*
    Spiegel v. Commissioner, 12 T.C. 524 (1949).

[^37]: *See* Metzger, 38 F.3d at 121.

[^38]: *Id*. at 123.

[^39]: Rev. Rul. 96-56, 1996-2 C.B. 161.

[^40]: *See* Metzger, 38 F.3d at 121.

[^41]: For each calendar year after 1998, the annual exclusion shall be
    increased by a cost-of-living adjustment. *See* I.R.C. § 2503(b)(2).

[^42]: *See id*.

[^43]: *See id*. § 2502(a). After deducting the annual exclusion from
    any gifts made during the tax year, the gift tax rate begins at 37
    percent and increases to 55 percent depending upon the amount of the
    gift. *See* *id*. § 2010(c)(1).

[^44]: *See* [Brown,]{.smallcaps} *supra* note 31, at 15.

    > Although the gift credit must be used to offset gift taxes on
    > lifetime transfers, regardless of the amount so used, the full
    > credit is allowed against the tentative estate tax. The rationale
    > for such full application is that, under Code Sec. 2001(b)(2), the
    > estate tax payable is calculated using the cumulative transfers at
    > life and at death as then reduced by the amount of gift tax paid
    > by a decedent. If a portion of the unified credit was used to
    > avoid the payment of gift taxes, the gift tax paid reflects the
    > amount subtracted under Code Sec. 2001(b)(2). The estate tax
    > payable is necessarily increased by the amount of the gift tax
    > credit used.

    *Id.* at 9.

[^45]: *See* I.R.C. § 2001(b).

[^46]: *See* 26 C.F.R. § 25.2503-3(b). For a discussion of the
    application of the gift tax annual exclusion to gifts of future
    interests, see *infra* notes 119-133 and accompanying text.

[^47]: The process of gift making in order to take advantage of
    favorable tax rules.

[^48]: *See* I.R.C. § 2523(a).

[^49]: *See id*. *But see* 26 C.F.R. § 25.2503-2(f) (gifts to a
    noncitizen spouse are treated differently and are limited to
    \$100,000 annually).

[^50]: *See* I.R.C. § 2513(a).

[^51]: *See id*.

[^52]: "A tax is hereby imposed on the transfer of the taxable estate of
    every decedent who is a citizen or resident of the United States."
    *Id.* § 2001(a).

[^53]: *Id.* § 2031.

[^54]: *Id.* § 2033.

[^55]: *See id*.

[^56]: *See id.* § 2042.

[^57]: *See id.* § 2040.

[^58]: *See id.* § 2038.

[^59]: *See id*. § 2051.

[^60]: For example, funeral expenses, estate administration expenses,
    casualty and theft losses, bequests to qualified charities, and
    debts and enforceable claims against the estate are all deductions
    from the gross estate. *See* *id*. §§ 2051-2056.

[^61]: For a discussion of the unified credit, see *supra* notes 28-31
    and accompanying text.

[^62]: This unlimited deduction is only available for spouses who are
    United States citizens. *See* I.R.C. § 2056(d)(1). While this
    disallows the marital deduction where the surviving spouse is not a
    United States citizen, the qualified domestic trust (QDT) option
    under section 2056(d)(2) allows the marital deduction if the
    decedent used a QDT as defined in section 2056(A), or one is created
    prior to the date of the tax return.

[^63]: *See* I.R.C. § 2056.

[^64]: Beneficiary determinations refer to decisions by the grantor as
    to the amount of property to be transferred and to whom.

[^65]: *See* McCouch, *supra* note 9, at 1148 (citing Roberta R. Kwall &
    Anthony J. Aiello, *The Superwill Debate: Opening the Pandora\'s
    Box?*, 62 [Temp. L. Rev]{.smallcaps}. 277, 285 (1989) (noting that
    courts uniformly find that revocable life insurance is a
    nontestamentary asset which cannot be revoked by will)).

[^66]: [Brown,]{.smallcaps} *supra* note 31, at 107.

[^67]: *See* Johnny C. Parker, *Does Lack of an Insurable Interest
    Preclude an Insurance Agent from Taking an Absolute Assignment of
    his Client's Life Policy?,* 31 [U. Rich. L. Rev]{.smallcaps}. 71
    (1997).

[^68]: *See* [Brown,]{.smallcaps} *supra* note 31, at 107.

[^69]: Life insurance benefits are generally not taxable to the
    recipient. I.R.C. § 101(a).

[^70]: The amount of the life insurance policy on the life of the
    decedent is included in the gross estate of the decedent if death
    benefits are either receivable by the decedent's estate or
    receivable by other beneficiaries and decedent retained any
    incidents of ownership in the policy at death. *See* I.R.C. § 2042.

[^71]: *See id.*

[^72]: 26 C.F.R. § 20.2042-1(c)(2) (1999).

[^73]: *See id*.

[^74]: *See Id*. § 20.2042-1(c)(2)-(6).

[^75]: *See* I.R.C. § 2042.

[^76]: 355 F.2d 7 (1st Cir. 1966).

[^77]: *See id*. at 13.

[^78]: *See id*. at 10.

[^79]: *Id.*

[^80]: I.R.C. § 2035(a).

[^81]: *See* Headrick v. Commissioner, 918 F.2d 1263 (6th Cir. 1990),
    *aff'g* 93 T.C. 171 (1989); Leder v. Commissioner, 893 F.2d 237
    (10th Cir. 1989), *aff'g* 89 T.C. 235 (1987); Schnack v.
    Commissioner, 848 F.2d 993 (9th Cir. 1988); Detroit Bank & Trust Co.
    v. United States, 467 F.2d 964 (6th Cir. 1972); Bel v. United
    States, 452 F.2d 683 (5th Cir. 1971).

[^82]: 893 F.2d 237.

[^83]: *See id*. at 240.

[^84]: This timing is significant because property transferred within
    three years of decedent's death may be included in the gross estate
    of the decedent if the transferred property itself would have been
    included in the gross estate. *See* I.R.C. § 2035.

[^85]: *See* Headrick, 93 T.C. 171, *action on decision*, 1991-012 (July
    3, 1991).

[^86]: *See id*.

[^87]: *See* Bel, 452 F.2d at 692.

[^88]: 893 F.2d 237.

[^89]: For a discussion of this issue, see *infra* notes 118-136 and
    accompanying text.

[^90]: *See* 26 C.F.R. § 25.2512-6 for valuation methods for certain
    life insurance and annuity contracts.

[^91]: United States v. Jacobs, 306 U.S. 363, 370 (1939).

[^92]: *See* Sullivan v. Commissioner, 175 F.2d 657 (9th Cir. 1949).

[^93]: State property law governs the manner in which property may be
    "jointly titled" (title held by more than one individual or entity)
    and whether a particular form of joint ownership provides the "right
    of survivorship" (the automatic transfer of a decedent's share of
    jointly owned property to the surviving joint owner(s)). *See*
    *generally* Robert Danforth, *Taxation of Jointly Owned Property,*
    823 [Tax Management Portfolio]{.smallcaps} (BNA, Inc. undated).

[^94]: *See generally* Langbein, *Revolution and the Future, supra* note
    5.

[^95]: Although property can be jointly held by individuals who are not
    spouses, issues arising from spousal joint tenancies are most
    prevalent in estate planning situations. Community property
    considerations are beyond the scope of this article and will not be
    addressed.

[^96]: *See* I.R.C. § 2040(b) (1999). This section only applies to a
    surviving spouse who is a United States citizen. In the case of a
    surviving non-U.S. citizen spouse, (for the estates of decedents
    dying after November 10, 1988) the full value of the joint tenancy
    property is included in the decedent's gross estate except to the
    extent that that the spouse can prove contribution to the purchase
    or improvement of the property. *See* *id*. § 2056 (d)(1)(B).

[^97]: *See id*. § 1014(a)(1).

[^98]: *See id*. § 2040(b).

[^99]: *See id*. §§ 1014, 2040(b).

[^100]: 975 F.2d 286 (6th Cir. 1992).

[^101]: *See id*. at 288 (citing the original version of I.R.C. § 2040).

[^102]: *See id*.

[^103]: *See id*. at 287*.*

[^104]: *See* I.R.C. § 2040(b).

[^105]: Pub. L. No. 97-34, 95 Stat. 172 (1981).

[^106]: Pub. L. No. 94-455, 90 Stat. 1520 (1976).

[^107]: *See* Gallenstein, 975 F.2d at 292.

[^108]: *See* I.R.C. § 2040(a).

[^109]: *See id*. § 1014(a).

[^110]: *See, e.g.,* Patton v. United States, 116 F.3d 1029 (4th Cir.
    1997); Anderson v. United States, No. WMN-95-1182, 1996 U.S. Dist.
    LEXIS 7713 (D. Md. 1996).

[^111]: *See generally* Berall et al., *Revocable Inter Vivos Trusts,*
    468-2nd [Tax Management Portfolio]{.smallcaps} (BNA, Inc.
    undated)*.* See 1A A[ustin]{.smallcaps} [Scott, Scott On
    Trusts]{.smallcaps} ¶ 54.3 (4th ed. 1987 & Supp. 1998), for a
    discussion of the issues and potential problems regarding the
    disposition of property by will in accordance with an inter vivos
    trust.

[^112]: *See* 1A [Scott,]{.smallcaps} *supra* note 110, ¶ 2-4, regarding
    the elements of, parties to, and terms of a trust.

[^113]: *See* Berall et al., *supra* note 110, at A-27.

[^114]: *See id*.

[^115]: *See* I.R.C.§ 2038.

[^116]: *See* 1A [Scott,]{.smallcaps} *supra* note 110, ¶ 2-4.

[^117]: *See id*.

[^118]: Since the grantor will no longer have an interest in the
    property that is the principal of the trust, it will not be subject
    to consideration as part of the gross estate. *See* I.R.C. § 2033.

[^119]: See Slade, *Personal Life Insurance Trust,* 210-4th [Tax
    Management Portfolio]{.smallcaps} (BNA, Inc. undated), for a
    detailed explanation and analysis of the use of life insurance
    trusts in estate planning. See also 1A [Scott,]{.smallcaps} *supra*
    note 110, ¶ 57.3, for a discussion of the general validity of
    insurance trusts irrespective of the tax implications of such
    trusts.

[^120]: *See* I.R.C. § 2503(b).

[^121]: 26 C.F.R. § 25.2503-3(a) (1999).

[^122]: 26 C.F.R. § 25.2503-3(b).

[^123]: *See* Fondren v. Commissioner, 324 U.S. 18, 20-21 (1945). The
    Fondrens made gifts to their minor grandchildren in trust with the
    income and the corpus available if necessary for the support of the
    grandchildren. The corpus of the trust would be distributed to the
    grandchildren in installments after each reached the age of
    twenty-five.

[^124]: *See id*. The court does not, however, explain how much time
    comprises a substantial period of time.

[^125]: *See* I.R.C. § 2503(b).

[^126]: If the same gift was made to a revocable living trust it would
    not be considered a gift at all for gift tax purposes. The asset and
    any income generated from it would be treated as belonging to the
    donor because of the control retained over the asset due to the
    revocable nature of the trust.

[^127]: 397 F.2d 82 (9th Cir. 1968).

[^128]: *See id*. at 83.

[^129]: *See id*. at 84. The lower court found that because of the broad
    rights given to minors under California law, a minor beneficiary had
    the right to demand a partial distribution of the trust and that
    such a distribution would constitute a present interest. *See*
    Crummey v. Commissioner, 25 T.C.M. (CCH) 772, 780 (1966). As natural
    guardians, the Crummeys asserted that they could also make such a
    demand.

[^130]: This power is a general power of appointment and is the power to
    determine who will become the owner of the property. As such, it is
    defined as "a power which is exercisable in favor of the decedent,
    his estate, his creditors, or the creditors of his estate." I.R.C. §
    2041(b)(1)(A). It is now also known as the *Crummey* power.

[^131]: *See* Crummey, 397 F.2d at 88.

[^132]: 27 T.C. 601 (1956).

[^133]: *See id*. at 603.

[^134]: *See* Estate of Cristofani v. Commissioner, 97 T.C. 74, 84-85
    (1991).

[^135]: *See* I.R.C. § 2041.

[^136]: *See* *id.* § 2041(b)(1)(A).

[^137]: *See id.* § 2041(b)(2).

[^138]: *See id.* § 2010(c).

[^139]: Although this is a more simplified example of the bypass trust,
    a more complex variation of the same approach would be to have two
    trusts where the marital deduction portion of one spouse's estate
    would go into one trust and the residue of that spouse's estate
    would go into another trust. The first trust qualifies for the
    marital deduction; the second trust could pay income to the
    surviving spouse while keeping the principal of the estate separate
    from the surviving spouse's estate. *See* [Weinstock,]{.smallcaps}
    *supra* note 1, at 90.

[^140]: *See* I.R.C § 2010(a).

[^141]: A shortcoming in this use of the marital deduction arises when a
    lifetime benefit, such as the right to receive income, occurs in the
    trust. When a spouse's interest in property terminates upon his or
    her death, this type of transfer could be seen as a terminable
    interest, thereby disqualifying the asset for the marital deduction.
    If the interest that passes to the surviving spouse will terminate
    because of a lapse of time or the occurrence of an event or the
    failure of an event to occur and then pass to some other person, no
    marital deduction will generally be allowed with respect to such
    interest. *See id*. § 2056(b). To avoid this occurrence, a trust can
    be set up so that such a lifetime benefit would be considered as
    qualified terminable interest property (QTIP). This practice results
    in the so-called "QTIP" trust. *See* *id.* § 2056(b)(7)(B).

[^142]: *See id.* § 2010(c).

[^143]: *See id.* § 2010(a).

[^144]: *See* [Dukeminier & Johanson,]{.smallcaps} *supra* note 3, at
    102-103.

[^145]: *See id*. at 32.

[^146]: *See generally* 1A [Scott,]{.smallcaps} *supra* note 110.

[^147]: *See id*.

[^148]: *See* Jay D.Waxenberg & Henry J. Leibowitz, C*omparing the
    Advantages of Estates and Revocable Trusts*, [Estate
    Planning]{.smallcaps} (Sept./Oct. 1995).

[^149]: Commonly, a will directs the named executor to appoint a
    custodian under the applicable "Uniform Transfers to Minors Act" or
    similar applicable statute for any transfer to a minor from the
    estate. *See* Uniform Transfers to Minors Act, [Unif. Transfers to
    Minors Act]{.smallcaps} (1969 & Supp. 1994) some form of which has
    been adopted in most states.

[^150]: The contingent trust functions in the following manner: the
    parent bequeaths the property to a trust to be administered by a
    trustee for the benefit of the children (in the event their spouse
    does not survive them). The trustee then manages the assets for the
    children until the youngest child reaches the age of majority or the
    age specified in the trust. At that time, the principal of the trust
    would be paid to the beneficiaries equally. The role of the trustee
    up to the time the children reach the appropriate age is to use
    income from the trust, as specified in the will, to provide for the
    needs of the children. Of course, the trustee must exercise their
    authority in a manner consistent with state law. *See generally*
    [Stephan R.]{.smallcaps} [Leimberg et al., The Tools and Techniques
    of Estate Planning]{.smallcaps} (1998).

[^151]: *See generally* 1A [Scott,]{.smallcaps} *supra* note 110.

[^152]: This device places a restraint on the surviving spouse's ability
    to consume the principal of the trust. Such "spendthrift" provisions
    protect the corpus of the trust for the surviving beneficiaries.
    *See generally* 1A [Scott,]{.smallcaps} *supra* note 110.

[^153]: *See generally* V. Woerner, Annotation, *\"Pour-Over" Provisions
    from Will to Inter Vivos Trust,* 12 A.L.R. 3d 56 (1967)*.* See also
    Berall et al, *supra* note 110, at A-27, for a discussion of the use
    of a revocable trust as a receptacle for pour-over from a probate
    estate. See 1A [Scott,]{.smallcaps} *supra* note 110, ¶ 54.3, for a
    discussion of the issues and potential problems regarding the
    disposition of property by will in accordance with an inter vivos
    trust.

[^154]: *See generally* 1A [Scott,]{.smallcaps} *supra* note 110.

[^155]: *See* [Weinstock,]{.smallcaps} *supra* note 1, at 162.

[^156]: There are a host of other estate planning mechanisms such as
    qualified personal residence trusts, disclaimers, powers of
    attorney, charitable remainder trusts, and family limited
    partnerships to name just a few.