Federal Estate

<div class="Section1">The gift tax applies to a transfer by way of gift whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. For example, a taxable transfer may be effectuated by the creation of a trust; the forgiving of a debt (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="897">897</a>); the assignment of a judgment; the transfer of cash, certificates of deposit, federal, state, municipal, or corporate bonds, or stocks.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> All transactions whereby property or property rights or interests are gratuitously passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax.<a href="#_ftn2" name="_ftnref2">²</a> Donative intent on the part of the transferor is not an essential element in the application of the gift tax to the transfer. The application of the tax is based on the objective facts of the transfer and the circumstances under which it is made, rather than on the subjective motives of the donor.<a href="#_ftn3" name="_ftnref3">³</a> Generally, if property is transferred gratuitously or for an inadequate consideration, a gift (of the full value of the property transferred or the portion in excess of the consideration given) will be considered a gift.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Shareholders of nonparticipating preferred stock in profitable family held corporations have been held to have made gifts to the common stockholders (typically descendants of the preferred shareholder) by waiving payment of dividends or simply by failing to exercise conversion rights or other options available to a preferred stockholder to preserve his position.<a href="#_ftn5" name="_ftnref5">⁵</a> The Tax Court has held that the failure to convert noncumulative preferred stock to cumulative preferred stock did not give rise to a gift, but that thereafter a gift was made each time a dividend would have accumulated. However, the failure to exercise a put option at par plus accumulated dividends plus interest was not treated as a gift of foregone interest.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> A transaction involving the nonexercise of an option by a son under a cross-purchase buy-sell agreement followed by the sale of the same stock by the father to a third party when the fair market value of the stock was substantially higher than the option price was treated as a gift from the son to the father.<a href="#_ftn7" name="_ftnref7">⁷</a> Also, a father indirectly made a gift to his son to the extent that the fair market value of stock exceeded its redemption price when the father failed to exercise his right under a buy-sell agreement to have a corporation redeem all of the available shares held by his brother-in-law&rsquo;s estate and the stock passed to the son.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> With respect to a trust, the grantor/income beneficiary may be treated as making additional gifts of remainder interests in each year that the grantor fails to exercise his right to make nonproductive or underproductive property normally productive.<a href="#_ftn9" name="_ftnref9">⁹</a> A mother made gifts to her children to the extent that the children were paid excessive trustee fees from the marital deduction trust of which the mother was a beneficiary.<a href="#_ftn10" name="_ftnref10">¹⁰</a> Where a trust was modified to add adopted persons as beneficiaries, the beneficiaries with trust interests prior to the modification were treated as making gifts to the newly added beneficiaries.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> However, a grantor of a trust does not make a gift to trust beneficiaries by paying the income tax on trust income taxable to the grantor under the grantor trust rules (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="797">797</a>).<a href="#_ftn12" name="_ftnref12">¹²</a> Therefore, trusts that are disregarded for income tax purposes but not for transfer tax purposes can provide a significant opportunity for trust principal to grow without the reduction of tax.<br /> <br /> <hr><br /> <br /> Letter Ruling 9113009 (withdrawn without comment by TAM 9409018) had ruled that a parent who guaranteed loans to his children made a gift to his children because, without the guarantees, the children could not have obtained the loans or, at the very least, would have paid a higher interest rate.<br /> <br /> The gift tax is imposed only on completed gifts (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="894">894</a>), which is a facts and circumstances analysis.<br /> <br /> Where spouses enter into joint and mutual wills, the surviving spouse may be treated as making a gift of a remainder interest at the other spouse&rsquo;s death.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> The transfer of a qualifying income interest for life in qualified terminable interest property for which a marital deduction was allowed (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="847">847</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="912">912</a>) will be treated as a transfer of such property for gift tax purposes.<a href="#_ftn14" name="_ftnref14">¹⁴</a> If a QTIP trust is severed into Trust A and Trust B and the spouse renounces her interest in Trust A, such renunciation will not cause the spouse to be treated as transferring Trust B under IRC Section&nbsp;2519.<a href="#_ftn15" name="_ftnref15">¹⁵</a><br /> <br /> The spouse is entitled to collect from the donee the gift tax on the transfer of a QTIP interest. The amount treated as a transfer for gift tax purposes is reduced by the amount of the gift tax the spouse is entitled to recover from the donee. Thus, the transfer is treated as a net gift (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="900">900</a>). The failure of a spouse to exercise the right to recover gift tax from the donee is treated as a transfer of the unrecovered amount to the donee when the right to recover is no longer enforceable. If a written waiver of the right of recovery is executed before the right becomes unenforceable, the transfer of the unrecovered gift tax is treated as made on the later of (1) the date of the waiver, or (2) the date the tax is paid by the transferor. Any delay in exercise of the right of recovery is treated as an interest-free loan (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="896">896</a>) for gift tax purposes.<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> Where a surviving spouse acquires a remainder interest in QTIP marital deduction property in connection with a transfer of property or cash to the holder of the remainder interest, the surviving spouse makes a gift to the remainder person under both IRC Section&nbsp;2519 (disposition of QTIP interest) and IRC Sections 2511 and 2512 (transfers and valuation of gifts). The amount of the gift is equal to the greater of (1) the value of the remainder interest, or (2) the value of the property or cash transferred to the holder of the remainder interest.<a href="#_ftn17" name="_ftnref17">¹⁷</a> On the other hand, children would be treated as making a gift if the children transfer their remainder interest in a QTIP marital deduction trust to the surviving spouse.<a href="#_ftn18" name="_ftnref18">¹⁸</a><br /> <br /> Any subsequent transfer by the donor spouse of an interest in such property is not treated as a transfer for gift tax purposes, unless the transfer occurs after the donee spouse is treated as having transferred such property under IRC Section&nbsp;2519 or after such property is includable in the donee spouse&rsquo;s estate under IRC Section&nbsp;2044 (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="824">824</a>).<a href="#_ftn19" name="_ftnref19">¹⁹</a> Also, if property for which a QTIP marital deduction was taken is includable in the estate of the spouse who was given the QTIP interest and the estate of such spouse fails to recover from the person receiving the property any estate tax attributable to the QTIP interest being included in such spouse&rsquo;s estate, such failure is treated as a transfer for gift tax purposes unless (1) such spouse&rsquo;s will waives the right to recovery, or (2) the beneficiaries cannot compel recovery of the taxes (e.g., where the executor is given discretion to waive the right of recovery in such spouse&rsquo;s will).<a href="#_ftn20" name="_ftnref20">²⁰</a><br /> <br /> The gift tax is not applicable to a transfer for a full and adequate consideration in money or money&rsquo;s worth, or to ordinary business transactions (i.e., transactions which are bona fide, at arm&rsquo;s length, and free from any donative intent). A consideration that cannot be reduced to a value in money or money&rsquo;s worth (such as love and affection, promise of marriage, etc.) is wholly disregarded, and the entire value of the property transferred constitutes the amount of the gift. Similarly, a relinquishment or promised relinquishment of dower or curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the spouse&rsquo;s property or estate, is not considered to any extent a consideration &ldquo;in money or money&rsquo;s worth.&rdquo;<a href="#_ftn21" name="_ftnref21">²¹</a><br /> <br /> Transfers of property or interests in property made under the terms of a written agreement between spouses in settlement of their marital or property rights are deemed to be for an adequate and full consideration in money or money&rsquo;s worth and, therefore, exempt from the gift tax (whether or not such agreement is approved by a divorce decree), if the spouses obtain a final decree of divorce from each other within the three-year period beginning on the date one year before the agreement is entered into.<a href="#_ftn22" name="_ftnref22">²²</a><br /> <br /> For recapture rules applicable where distributions are not timely made in connection with the transfer of an interest in a corporation or partnership which is subject to the Chapter&nbsp;14 valuation rules, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="935">935</a>. For deemed transfers upon the lapse of certain voting or liquidation rights in a corporation or partnership, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="944">944</a>.<br /> <br /> A gift may be made of foregone interest with respect to interest-free and bargain rate loans (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="896">896</a>).<br /> <br /> A United States citizen or resident who receives a covered gift from certain expatriates may owe gift tax on the transfer.<a href="#_ftn23" name="_ftnref23">²³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 25.2511-1(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 25.2511-1(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 25.2511-1(g)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <em>Hollingsworth v. Comm.</em>, 86 TC 91 (1986).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; TAMs 8723007, 8726005.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <em>Snyder v. Comm.</em>, 93 TC 529 (1989).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9117035.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; TAM 9315005.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 8945006.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp;&nbsp; TAM 200014004.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp;&nbsp; Let. Rul. 200917004.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp;&nbsp; Rev. Rul. 2004-64, 2004-27 IRB 7.<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp;&nbsp; <em>Grimes v. C.I.R.</em>, 851 F.2d 1005, 88-2 USTC &para; 13,774 (7th Cir. 1988).<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2519.<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp;&nbsp;&nbsp; Let. Ruls. 200116006, 200122036.<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&sect; 25.2207A-1(b), 25.2519-1(c)(4).<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.&nbsp;&nbsp;&nbsp; Rev. Rul. 98-8, 1998-1 CB 541.<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>.&nbsp;&nbsp;&nbsp; Let. Rul. 199908033.<br /> <br /> <a href="#_ftnref19" name="_ftn19">19</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2523(f)(5).<br /> <br /> <a href="#_ftnref20" name="_ftn20">20</a>.&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 20.2207A-1(a).<br /> <br /> <a href="#_ftnref21" name="_ftn21">21</a>.&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 25.2512-8.<br /> <br /> <a href="#_ftnref22" name="_ftn22">22</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2516.<br /> <br /> <a href="#_ftnref23" name="_ftn23">23</a>.&nbsp; IRC &sect; 2801.<br /> <br /> </div></div><br />

<div class="Section1">With respect to property transferred after October&nbsp;13, 1987, the GST tax exemption inclusion ratio for any charitable lead annuity trust (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8104">8104</a>) is to be determined by dividing the amount of exemption allocated to the trust by the value of the property in the trust following the charitable term. For this purpose, the exemption allocated to the trust is increased by interest determined at the interest rate used in determining the amount of the estate or gift tax charitable deduction with respect to such a trust over the charitable term. With respect to a late allocation of the GST exemption (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="880">880</a>), interest accrues only from the date of the late allocation. The amount of GST exemption allocated to the trust is not reduced even though it is determined at a later time that a lesser amount of GST exemption would have produced a zero inclusion ratio.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2642(e), Treas. Reg. &sect; 26.2642-3.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> 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&rsquo;s death; and (2) if such a donor dies before the end of a five-year gift tax proration period (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="902">902</a>), the gross estate of the donor will include the portion of contributions allocable to periods after the death of the donor.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="902">902</a> for the gift tax treatment and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="687">687</a> for the income tax treatment of qualified tuition programs.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 529(c)(4).<br /> <br /> </div></div><br />

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.

<div class="Section1">For decedents dying before 2005, if a GST (other than a direct skip) occurs at the same time as and as a result of the death of an individual, a credit against the GST tax imposed is allowed in an amount equal to the GST tax paid to any state in respect to any property included in the GST, but the amount cannot exceed 5 percent of the GST tax.<a href="#_ftn1" name="_ftnref1">¹</a> The amendments made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001) sunset after December 31, 2012 so that this provision is no longer applicable. Transfers made to estates of decedents, gifts, or GST transfers are treated as if the amendments were never enacted.<a href="#_ftn2" name="_ftnref2">²</a> However, under 2010 TRA, the GST tax rate for 2010 was zero, 35 percent for 2011 and 2012 and 40 percent for 2013 and beyond. The GST exemption was $5.49 million in 2017, and was raised to $11.18 million in 2018, $11.4 million in 2019, $11.58 million in 2020, $11.7 million for 2021, $12.06 million for 2022, $12.92 million in 2023, $13.61 million in 2024 and $13.99 million in 2025 under the 2017 Tax Act.<a href="#_ftn3" name="_ftnref3">³</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRC § 2604.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.    IRC §§ 2604(c), 2664, as added by EGTRRA 2001.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.    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, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> </div>

<div class="Section1">Apparently, they are valued at their redemption value on the applicable valuation date. In Revenue Ruling 55-278,<a href="#_ftn1" name="_ftnref1">¹</a> A, in 1948, bought Series E bonds with his own funds and had them registered in the names of A and B in the alternative as co-owners. In 1953, A had the bonds reissued in the name of B alone in order to effect a gift to him of A’s co-ownership therein. The IRS held that the value of the gift made by A to B in 1953 was the redemption value of the bonds at the time they were reissued. The Service found that, “since Series E United States savings bonds are generally nonnegotiable and nontransferable, they are nonmarketable and, accordingly, have no particular ‘market’ value. Although ownership therein is transferable by death and by reissue in certain cases…, their only definitely indicated or ascertainable value is the amount at which they are redeemable by the United States Treasury.” Presumably, the same would be true of Series H/HH bonds, since they are likewise nonnegotiable and nontransferable.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    1955-1 CB 471.<br /> <br /> </div>

<div class="Section1">In the case of a taxable distribution, the tax is paid by the transferee. In the case of a taxable termination or a direct skip from a trust, the tax is paid by the trustee. In the case of a direct skip (other than a direct skip from a trust), the tax is paid by the transferor. Unless the governing instrument of transfer otherwise directs, the GST tax is charged to the property constituting the transfer.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRC § 2603.<br /> <br /> </div>

<div class="Section1"><br /> <br /> 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.<a href="#_ftn1" name="_ftnref1">¹</a> The deduction is available for tax years beginning in 2005 and thereafter. A credit for state death taxes (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="861">861</a>) was available before 2005.<br /> <br /> 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) 60 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) 60 days of the mailing of a notice of disallowance by the IRS, (b) 60 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.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2058, as added by EGTRRA 2001.<br /> <br /> </div></div><br />

<div class="Section1">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.<a href="#_ftn1" name="_ftnref1">¹</a> 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.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRC § 2014.<br /> <br /> </div>

<div class="Section1">Any transfer of property to a minor under either of the Uniform Acts constitutes a complete gift for federal gift tax purposes to the extent of the full fair market value of the property transferred. Generally, such a gift qualifies for the gift tax annual exclusion (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="905">905</a>).<a href="#_ftn1" name="_ftnref1">¹</a> The allowance of the exclusion is not affected by the amendment of a state&rsquo;s Uniform Act lowering the age of majority and thus requiring that property be distributed to the donee at age 18.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> These rulings base the allowance of the exclusion on the assumption that gifts under the Uniform Acts come within the purview of IRC Section&nbsp;2503(c). Gifts to minors under IRC Section&nbsp;2503(c) must pass to the donee on his attaining age 21. If a state statute varies from the Uniform Act by providing that under certain conditions custodianship may be extended past the donee&rsquo;s age 21, gifts made under those conditions would not qualify for the exclusion. For tables of state laws concerning the Uniform Acts, see Appendix D.</div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; Rev. Rul. 56-86, 1956-1 CB 449; Rev. Rul. 59-357, 1959-2 CB 212.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp; Rev. Rul. 73-287, 1973-2 CB 321.<br /> <br /> </div></div><br />