Source: https://matthewminer.name/law/outlines/3L/1st+Semester/LAW+615-001+%E2%80%93+Taxation+of+Estates+and+Gifts/Gross+Estate
Timestamp: 2020-01-22 21:22:27
Document Index: 535737341

Matched Legal Cases: ['§ 2038', '§ 2036', '§ 2033', '§ 2036', '§ 2036', '§ 2038', '§ 20', '§ 2036', '§ 2035', '§ 20', '§ 20', '§ 20', '§ 20', '§ 20', '§ 20', '§ 20', '§ 20', '§ 20', '§ 2036', '§ 2038', '§ 2038', '§ 2036', '§ 2036', '§ 2042', '§ 2042', '§ 2035', '§ 2040', '§ 2036', '§ 2035', '§ 2035', '§ 2035', '§ 2043', '§ 2041', '§ 2041', '§ 2041', '§ 2038', '§ 2036', '§ 2041', '§ 20', '§ 20', '§ 2038', '§ 2041', '§ 1014', '§ 2514', '§ 2035', '§ 2041', '§ 2035', '§ 814', '§ 2041', '§ 2041', '§ 2041', '§ 2041']

§§ 2038 & 2033 discount; § 2036 does not.
Unlike §§ 2033 & 2038, § 2036 does not discount. Include the entire value of the retained property at the date of the death.
The amount included in the decedent's gross estate is the value, as of the decedent's date of death, of the property transferred during life to which the retained interest relates.
26 U.S.C. § 2036 is only intended to include the powers over the property that actually affect it while the decedent is alive. It does not include a power over the transferred property itself which does not affect the enjoyment of the income received or earned during the decedent's life. (See, however, [26 U.S.C. § 2038] for the inclusion of property in the gross estate on account of such a power.) 26 CFR § 20.2036-1(b)(3). E.g., remainders. It has to be sure to not affect him during his life.
Property is only included under 26 U.S.C. § 2036 if the decedent still had the "string" at the date of his date. However, 26 U.S.C. § 2035 will capture interests transferred away within 3 years of one's death.
Joint Power, i.e., act of D and another person is necessary to exercise the power ✔ 26 CFR § 20.2036-1(b)(3) text(i) ✔ 26 CFR § 20.2038-1(a)
Capacity, i.e., D holds power as a fiduciary, like a trustee ✔ 26 CFR § 20.2036-1(b)(3) text(ii) ✔ 26 CFR § 20.2038-1(a)
Contingency beyond D’s control is condition precedent to D’s having the power ✔ 26 CFR § 20.2036-1(b)(3) text(iii) ❌ 26 CFR § 20.2038-1(b)
Contingency within D’s control is condition precedent to D’s having the power ✔ Implied from 26 CFR § 20.2036-1(b)(3) text(iii) ✔ Implied from 26 CFR § 20.2038-1(b)
Power relates only to time and manner of enjoyment, e.g. income and remainder beneficiary is the same person ❌ Implied from 26 CFR § 20.2036-1(b)(3) text(iii) ✔
There is, in fact, significant overlap between § 2036 and § 2038. If a decedent retains the right to designate who gets the income generally, usually both with apply (and 2036 will be the one that matters). However, if the decedent only has the power to change who gets the income after he dies, it only falls under § 2038, not § 2036, and they therefore get the discounting. (Which makes sense. You only are taxed on the remainder because all you can control is the remainder.)
This is not the case if it's the remainder after someone else dies—then it all is included under § 2036.
Unless the other actually dies first, then I think nothing's included.
Inclusion Amount = value × 1 − others' contributions total cost of acquisition
If a mortgage was used to pay for the property, it also includes any mortgage payments paid and half of any outstanding mortgage at the time of death.
If a second mortgage is taken and partially used to pay off the first mortgage, the portion of the second mortgage used to pay off the first is includable the same way. (If $100,000 is taken out, $60k of it is used to pay off the first mortgage, the surviving partner pays off $10k, and then the other partner dies, $33k will be includable. [($60k / $100k) × ($10k + ($90k / 2)) = $33,000])
Especially if planning for a non-portability regime, you do not want this with valuable because you cannot necessarily apportion it well. A better type of property ownership would be better.
Although, the applicable exclusion amount would probably go down too if non-portability returned, so you might want to get it over with with the higher amount.
26 U.S.C. § 2042(1) says if you are the insured and your estate receives the benefit of that, it is includable in the gross estate.
26 U.S.C. § 2042(2) says if there is a life insurance policy on your life but the beneficiary is someone else and you have the power to exercise power over who gets the benefits of it, the amount that you can control is includable in your estate.
If bank takes out insurance on the decedent for his mortgage, that policy is includable.
Life insurance whose ownership is transferred within three years of death is includable under 26 U.S.C. § 2035.
However, if it can be shown that someone other than the decedent paid premiums, that portion of the life insurance is not includable. Liebmann v. Hassett.
E.g., with a $100,000 policy that D pays for for nine years, then his sister pays for for one year, then D dies, $90,000 is includable.
This is very similar to what happens with joint interests in 26 U.S.C. § 2040.
The actual current value of a life insurance policy is called "the interpolated terminal reserve value." (We won't have to know how to calculate it (The life insurance company would do it.), but know the term.)
There are no inclusions with irrevocable life insurance trusts (ILITs), where cash is given to the trust sufficient to generate interest equal to the premiums on the policy, which will pay to the desired persons. These are very common and optimal.
Anything transferred within three years of one's death that would have been included under §§ 2036, 2037, 2038, or 2042 if he had kept it is included in his gross estate. 26 U.S.C. § 2035.
26 U.S.C. § 2035 does not apply if the property was bought for "adequate and full consideration". 26 U.S.C. § 2035(d). This usually means fair market value, but if one transfers a retained life estate, it is the full value of the retained and then transferred property at the time of the decedent's death minus the consideration because it really means the amount that would have been included in the estate tax had the transfer not happened. Allen.
If less than adequate and full consideration is paid, the rest of the consideration still must be included, but the amount paid can be excluded under 26 U.S.C. § 2043 so as to avoid double-tax.
If property is transferred from a revocable trust, it is treated like the decedent transferred it directly himself.
A power of appointment is a right to order the transfer of property owned by someone else.
A donor gives power to a donee who can exercise the power to appoint the appointive property to the permissive appointees. When he does so, the person given the property is the appointee.
A donee can release a power by a writing evidencing such intention.
A donee can also disclaim a power (usually must be within 9 months) to be treated as if he never had the power of appointment.
Power of appointment can be contingent or not, joint or not, and limited in time or not (in which case, the power lapses).
If the decedent is a donee of general powers of appointment, the appointive property is included in his estate tax. 26 U.S.C. § 2041(a)(2).
A general power of appointment is one that has one of the following as permissive appointees:
The decedent's creditors
The decedent's estate's creditors
Except the following are not general powers of appointment:
A power to consume, invade, or appropriate property for the benefit of the decedent that is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent. 26 U.S.C. § 2041(b)(1)(A).
A power exercisable by the decedent only in conjunction with the creator of the power. 26 U.S.C. § 2041(b)(1)(C)(i).
Except on the flip side, it is then includable in the creator's estate tax if he predeceases under 26 U.S.C. § 2038. (And § 2036 could also apply.)
A power exercisable by the decedent only in conjunction with a person having a substantial interest in the property subject to the power, which is adverse to the exercise of the power in favor of the decedent. 26 U.S.C. § 2041(b)(1)(C)(ii).
Substantial Adverse Interest
A substantial adverse interest is one where one has a not insignificant proportion of the power "after the decedent's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate." 26 CFR § 20.2041-3(c)(2).
If one's interest does not pass on death to his fellow joint donees, they do not have substantial adverse interests. 26 CFR § 20.2041-3(c)(3).
Aliquot Rule
If decedent has a joint general power of appointment with another person for whom it is also a general power of appointment, the estate tax inclusion is the aliquot share—the amount divided by how many people have a general power of appointment. 500-Rev. Rule 76-503.
Like with § 2038, it does matter whether the power is subject to a contingency beyond the decedent's control. § 2041 is only triggered when the decedent has the power at the time of his death. If it was subject to a condition not satisfied, nothing is included.
Property required to be included in the decedent's gross estate because of the power of appointment is also included in the estate's income tax. 26 U.S.C. § 1014(b)(9).
If the decedent exercises or releases property, treat it as if he transferred the property instead. 26 U.S.C. § 2514(b).
Thus, check §§ 2035–2038 to see if transferring the property would make it includable under 26 U.S.C. § 2041(a)(2). (26 U.S.C. § 2035 is the most likely, especially if nothing is retained.)
If a power of appointment requires the consent of another, it goes away when that other person dies first. It cannot be exercised because he is already dead.
Trusts are also subject to state law.
If in a UTC state, trustees must have an ascertainable standard for giving himself benefits. UTC § 814(b)(1).
Under the UTC, "ascertainable standard" means "a standard relating to an individual’s health, education, support, or maintenance within the meaning of [26 U.S.C. § 2041(b)(1)(A)]".
A lapse of power of appointment is generally considered a release. The exception is if it is a lapse of a 5-or-5 power. 26 U.S.C. § 2041(b)(2).
5-or-5 Power
A 5-or-5 power is one where a person can appoint to anyone the greater of $5,000 or 5% of the principle. 26 U.S.C. § 2041(b)(2).
If the amount one has power over is greater than the limit, the percentage of the trust principle he had power over that is greater than the limit when it lapsed is included.
E.g., if someone has power over $75,000 of a million dollar trust when it lapsed, he would have to include 2.5% of the trust when he dies (within 3 years) because $75,000 is 7.5% of $1 million. If it then became worth $2 million before he died, $50,000 would have to be included under 26 U.S.C. § 2041.