Understanding Estate, Gift and Generati

ROBERT E. MCKENZIE, ESQ.
ARNSTEIN & LEHR LLP
120 SOUTH RIVERSIDE PLAZA, SUITE 1200
CHICAGO, IL 60606
312-876-6927
312-876-7318 fax

Gross estate includes the value of all property to extent of interest of decedent at time of death.

c. Uncollected dividends payable because decedent was shareholder on record date.

d. Notes or other claims held by decedent even if forgiven or cancelled in Will.

f. Unpaid bonuses. Bonuses accrued prior to death are includible in the gross estate of the employee. Rev. Rul. 65-217.

g. Employee death benefits - if decedent had vested right to receive at death, benefits are includible; benefits are not includible where decedent:

i. only had hope or expectancy that survivor might get death benefit payment. Barr's Estate, 40 T.C. 227 (1960).

ii. had no right to discretionary or optional payments which were actually made by employer.

ii. If right to deferred compensation terminates on or before death, deferred compensation not includible. Goodman v. Granger, 243 F.2d 264.

i. Potential damages in pending litigation. Damages for wrongful death of decedent not includible in estate of decedent because cause of action accrues in favor of survivors. Damages for pain and suffering of decedent are includible. Connecticut Bank and Trust, 465 F.2d 760.

Gross estate includes any interest the decedent had at the time of death in the property of decedent's spouse, such as dower or curtesy.

a. Old Rule - Section 2035(a). The value of all gifts made by a decedent within 3 years of death were includible in decedent's estate except that:

ii. bona fide transfers for adequate and full consideration were not includible.

b. New Rule - Section 2035(d)(1). Section 2035(a) not applicable to gifts made after 1981 except that:

i. Section 2035(a) continues to apply to gifts made within 3 years of death which would have been included in estate under Sections 2036, 2037, 2038 and 2042 if the interest had been retained by decedent;

ii. If decedent exercises or releases a general power of appointment within 3 years of death, value of property subject to the power is includible in decedent's estate;

The gross estate includes all property transferred inter-vivos by the decedent where decedent retained at death:

i. For example, transfer of partnership interests where decedent (transferor) deposited partnership income in own account and there was an intent that transferor manage partnership assets - included in decedent's estate Estate of Dorothy Morganson Schauerhamer v. Comm., T.C. Memo 1997-242.

b. the right (alone or in conjunction with others) to designate who would possess or enjoy the property or income therefrom:

Note: Termination of irrevocable trust by grantor and all beneficiaries pursuant to statute (e.g.: NY EPTL 7-1.9(a) does not make trust includible in grantor's estate under Sec. 2036. PLR 9815023.

c. Section 2036 does not apply where transfer was in money or money's worth for adequate and full consideration.

i. 3rd Circuit - sale of remainder interest - Consideration should be evaluated as of date of transfer and not at date of death. Estate of Rose D'Ambrosio v. Comm'r, 101 F.3d 309 (3rd Cir. 1996).

ii. 5th Circuit - adequate and full consideration should be determined with respect to the value of interest transferred (based on actuarial tables) and not full fee simple interest. John Michael Wheeler v. U.S., 116 F.3d 749 (5th Cir. 1997).

iii. 2nd Circuit - sale of residence to son where mother continued to live and mortgage interest payment was offset by rent, annual exclusion amount of debt was forgiven each year and balance forgiven by will was not bona fide sale and residence is includible in gross estate. Estate of Maxwell v. Comm'r, 3 F.3d 591 (2nd Cir. 1993).

i. Donor can remove and replace trustee so long as the instrument specifically states that the new trustee cannot be the donor, or a related or subordinate party. Rev. Rul. 95-58; Estate of Wall v. Comm'r., 101 T.C. 300 (1993).

ii. But retaining only right to determine trustee's compensation will not make trust includable. PLR 9809032

iii. If donor puts property in trust to discharge a legal obligation, including support of minor, e.g. upon divorce.

iv. If parent establishes a custodial account under the UGMA or UTMA naming himself or herself as custodian and dies while acting as custodian, the value of the account will be includible in parent's estate under Section 2036 (or Section 2038). Rev. Rul. 57-366, 1957-2 C.B. 618. In addition, if parent resigns as custodian of such account within 3 years of his/her death, the value of the account would be includible in parent's estate under Section 2035.

v. PLR 9638036 - Service ruled that trusts established by decedent to settle lawsuit with U.S., which passed to U.S. upon death, should be included in gross estate because decedent, during life, retained right to an annuity, right to reside in trust property and right of reimbursement of defense costs. Note: this would be allowed as a deduction under §2053 as a debt.

e. Retention of right to vote directly or indirectly shares of a controlled corporation is the retention of the enjoyment of property.

i. A controlled corporation is one where the donor has the right alone or with others to vote 20% of the combined voting power of all classes of stock.

ii. For purposes of Section 2035, the relinquishment or cessation of voting rights is treated as a transfer made by a decedent i.e, includible if made within 3 years of death.

Gross estate includes the value of property transferred by a decedent where its possession or enjoyment can be obtained only by surviving the decedent/transferor or the decedent/transferor retained a reversionary interest in the property.

a. A reversion is defined as possibility that property transferred by the decedent:

iii. does not include possibility that income alone may return to the decedent or become subject to power of disposition by the decedent.

b. Value of reversion determined without regard to fact of decedent's death using the usual methods of valuation, including mortality and actuarial principles.

c. Value of reversion is included if it is equal to 5% or more of value of property immediately before death of the decedent.

d. A transferred interest is not included under Section 2037 if possession or enjoyment could have been obtained by any beneficiary during life of decedent through exercise of a general power of appointment and the general power of appointment was in fact exercisable immediately before death of donor.

e. Reversion does not include possibility that decedent will receive back an interest in property transferred through inheritance.

f. Property not included in decedent's estate if enjoyment could have been obtained by surviving decedent or occurrence of some other event.

i. But if other event is unrealistic and death occurs before the other event - disregard other event and Section 2037 may apply.

ii. Example: Income to be accumulated for 20 years or until donor's earlier death, then principal and income to X if living; donor dies in 5 years.

B. If donor is 75 at time of transfer, Section 2037 applies because 20 year term unrealistic for 75 year old.

Gross estate includes the value of property transferred by decedent where enjoyment subject at decedent's date of death to change through exercise of power to alter, amend, revoke or terminate by decedent alone, or by decedent in conjunction with any other person, or pursuant to Section 2035 where such power was relinquished within three years prior to decedent's death.

a. Section 2038 not applicable where power of decedent to alter, amend or revoke can be exercised only with consent of all parties having an interest (vested or contingent) in transferred property adverse to decedent.

b. Section 2038 may be applied where power to alter, amend or revoke held solely by person other than decedent but decedent has retained an unrestricted power to remove trustee and appoint himself/herself as trustee.

c. The power to alter, amend or revoke must be demonstrable, real, apparent or evident and not merely speculative; a power to persuade does not cause includibility. Tulley, 528 F.2d 1401.

e. PLR 9634004 - $10,000 annual gifts made under a durable power of attorney that doesn't specifically grant the power to make gifts are included in decedent's estate under §2038, even when decedent had history of making such gifts.

This is an attempt to avoid "Retained Strings" of Sections 2036-2038 by having A hold B's "strings" and vice-versa.

i. B gets income for life from trust set up by A, remainder to A's children; A gets income for life from trust set up by B, remainder to B's children; B dies.

B. No inclusion under Section 2036 - B did not make the transfer resulting in life estate.

ii. C gets income for life from trust set up by A, remainder to A's children; B has power to revoke. D gets income for life from trust set up by B, remainder to B's children; A has power to revoke; B dies.

B. No inclusion under Section 2038 - B did not make the transfer resulting in retained power.

iii. C gets income for life from trust set up by A, remainder to B. D gets income for life from trust set up by B, remainder A; B dies.

B. No inclusion under Section 2037 - B did not make the transfer resulting in reversion.

b. But doesn't work if essentially equivalent trusts are set up by A and B - treat B as grantor of trusts set up by A in above examples (and vice-versa). Sections 2036, 2037 or 2038 would apply to include value of trusts when B dies. Grace, 395 U.S. 316 (1969).

Gross estate includes the value of an annuity or other payment received by a beneficiary by reason of surviving the decedent under any form of contract or agreement if payable to decedent or decedent possessed the right to receive payment either alone or with another for life, for a period not ascertainable without reference to death or for a period which does not in fact end before decedent's death.

a. "Annuity or other payment" defined as one or more payments extending over any period of time; payments may be equal or unequal, conditional or unconditional, periodic or sporadic.

b. "Contract or agreement" defined in regulations as any arrangement, understanding or plan, or any combinations thereof arising by reason of decedent's employment.

d. "Possessed right to receive payment" defined as possessing immediately before death an enforceable right to receive payment at some point in the future.

- a right is "enforceable" if decedent complied with all obligations under contract up to the time of death.

e. Amount includible by any beneficiary by reason of surviving decedent limited to proportionate share of annuity paid for by decedent; contributions of decedent's employer deemed made by decedent if made by reason of decedent's employment.

a. Spousal joint property. Include 50% of value of property in estate of first decedent spouse.

i. Joint property acquired before 1976 amendment to §2040 is subject to the "contribution" rule. Surviving spouse entitled to stepped-up basis on 100%. Gallenstein v. United States, 975 F.2d 286 (6th Cir. 1992) Marvin H. Anderson v. U.S., 96-2 U.S. Tax Cas. (CCH) P60,235 (D. Md. May 29, 1996); Joy B. Patten v. U.S., 97-2 U.S. Tax Cas. (CCH) P60,279 (4th Cir. 1997)

b. Non-spousal joint property acquired by gift, bequest, devise, inheritance. Include in estate of decedent a fraction of the value of the joint property - the numerator of which is 1 and the denominator of which is the total number of persons who acquired an interest by gift etc. (times F.M.V. of property).

c. Non-spousal joint property not acquired by gift, bequest, devise, inheritance. Include in estate a fraction of the value of the property - the numerator of which is the amount originally contributed to the purchase price by the decedent and the denominator of which is the total original purchase price of the property (times F.M.V. of the property).

i. Portion paid by survivor does not include any amount contributed by the survivor towards the purchase price if the consideration was acquired by gift from the decedent.

Gross estate includes value of property subject to a general power of appointment.

a. A general power of appointment is a power exercisable in favor of the decedent, the decedent's estate, the decedent's creditors or the creditors of decedent's estate, except:

i. a power to consume or invade not includible if limited by an ascertainable standard;

ii. property subject to a general power created on or before 10/21/42 not includible unless power is exercised;

iii. a general power only exercisable in conjunction with creator of power not includible;

iv. a general power only exercisable in conjunction with person having a substantial adverse interest in the property subject to the power not includible.

ii. power to affect beneficial enjoyment of property by altering terms of trust;

ii. power not exercisable in favor of decedent, decedent's estate, decedent's creditors and the creditors of decedent's estate.

g. A lapse of a general power of appointment is treated as a release. Taxable only to extent the property subject to lapse exceeds greater of: $5,000 or 5% of assets subject to the power.

i. Tax Court - If decedent does not exercise power to withdraw 5% of trust principal and power does not lapse at death - included 5% of F.M.V. of trust at date of death in gross estate under §2041. This is true even though decedent had no testamentary powers over final year's amount. Estate of Myrtle V. Dietz v. Comm'r. T.C. Memo 1996-471.

h. A power which may be exercised to discharge a legal obligation of a parent is a general power of appointment. Support is a legal obligation. The IRS, applying this reasoning, has taken the position that custodial property in an UGMA account for the benefit of a child may be included in the estate of the parent-custodian even though that parent neither established the account nor made contributions to it. GCMs 37299 and 37590; contra, Estate of Chrysler, 361 F.2d 508 (2nd Cir. 1966), rev'g, 44 T.C. 55 (1965) where the Second Circuit did not include the value of custodial property in decedent's estate since the custodial property was not purchased by decedent from his own funds or from funds over which he retained control.

i. What constitutes a parent's obligation of support is determined by local law, and it may be difficult to determine whether a particular use of custodial funds discharges a parental obligation of support. Bittker, Federal Taxation of Income Estate and Gifts, § 80.44 n.37 (1991).

ii. There is authority that custodial funds may not be used to relieve a parent of an obligation of support. Sutliff v. Sutliff, 528 A.2d 1318 (Pa. 1987).

iii. The Uniform Transfers to Minors Act, which has been widely adopted in place of the Uniform Gift to Minors Act, provides that a custodial expenditure for a minor "is an addition to, not in substitution for, and does not affect any obligation of a person to support the minor."

b. Amounts paid to all other beneficiaries on the life of decedent where decedent possessed at death any incidents of ownership over the policy whether exercisable alone or in conjunction with any other person.

C. power to assign policy (even if no practical opportunity to make assignment);

G. Ability to withhold consent to exercise of policy rights (policy owned by trustee) PLR 9349002.

ii. Incidents of ownership include reversions if the reversion is worth more than 5% of value of policy immediately before the death of the decedent.

-- A reversion includes any possibility that policy or proceeds may return to decedent or be subject to power of disposition by the decedent.

iii. If decedent transferred all incidents of ownership rights in the policy within 3 years of death, the proceeds are includible in the decedent's gross estate under Section 2035.

iv. If decedent controls a corporation (ownership of more than 50% of stock) and corporation owns policy on life of decedent, the corporation's incidents of ownership may be attributed to decedent:

A. if insurance payable to corporation, proceeds are not included in gross estate of decedent (increases value of stock included in estate);

B. if insurance payable to third party for valid business purpose (e.g. security for loan), proceeds are not included in gross estate of decedent;

C. if insurance payable to a third party and no valid business purpose, proceeds included in gross estate of decedent.

v. Section 2042 does not apply to ownership of insurance policies on the life of anyone besides the decedent (but cash surrender value of policy may be included under Section 2033).

vi. Section 2042 may apply even if decedent has no incidents of ownership if the beneficiary of the insurance policy on the life of the decedent is under a legal obligation to pay any taxes, debts or other charges enforceable against the estate of the decedent.

vii. No incidents of ownership in life insurance policy on decedent's life if policy was purchased by trustees of credit shelter trust set up by decedent's husband. Proceeds not includible in decedent's gross estate as long as (a) she did not transfer any assets to the trust, (b)the premiums on the policy were paid from the principal of the trust, (c) she did not maintain the policy with personal assets, and (d) she was not a trustee of the trust. PLR 9748020

In addition, a lapse of $5,000 withdrawal power in trust does not make person a contributor of trust. PLR 9748029.

Gross estate includes the fair market value of a transfer described in Sections 2035, 2036, 2037, 2038 or 2041 if made for less than adequate and full consideration, reduced by the value of the consideration paid.

-- A transfer in exchange for the relinquishment of marital rights is not considered for full and adequate consideration.

Certain Property for Which Marital Deduction was Previously Allowed. Section 2044.

Gross estate includes the value of qualified terminable interest property for which either a gift tax marital deduction or an estate tax marital deduction was allowed.

Property included in the estate of a decedent is generally valued at its fair market value on the date of death. Treas. Reg. Sec. 20.2031-1(b).

a. Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of relevant facts.

b. Fair market value is not the assessed value of property for local tax (unless the assessed value equals fair market value).

i. Stock owned by decedent should be valued with regard to federal securities law restrictions on marketability that applied decedent/stockholder during his life, but did not apply to his estate. Estate of McClatchy, 147 F.3d 1089 (9th Cir. 1998)

d. Family Limited Partnership ("FLP"). In an FLP the donor contributes property to the partnership in exchange for general and limited partnership interests. By retaining the general partnership interests and making gifts of the limited partnership interests, the donor retains control while passing ownership interests to others. The FLP structure also provides substantial valuation discounts with respect to gifts of limited partnership interests. The IRS has ruled that because the general partner (donor) is a fiduciary with respect to the limited partners, the general partner's retained control over the partnership does not cause inclusion of the gifted limited partnership interests in the donor's estate. PLR 9310039.

Executor may elect to value assets included in the decedent's estate at the alternate valuation date. Section 2032.

a. If property is not distributed or sold within six months, the property may be valued at a date 6 months after the date of decedent's death;

b. If property sold or distributed within 6 months of date of death, property is valued on date of sale or distribution.

c. Election cannot be made unless both the value of gross taxable estate and federal estate tax due are reduced by the use of the alternate valuation date (to avoid step-up in basis where no transfer tax assessed currently, i.e. taxable estate under $675,000).

d. Any interest whose value is affected by mere lapse in time is included in estate at value on alternative valuation date with adjustment for change in value not due to mere lapse of time.

a. When the highest and best use of real property used as a farm or in a trade or a business is something other than its actual or current use, the fair market value of such qualified real property may be reduced by as much as $750,000.

i. The $750,000 is indexed for inflation occurring after 1997 by rounding to the next lowest multiple of $10,000.

b. If the special use ceases within 10 years, the benefits of Section 2032A are lost; the heir of the special use property has 2 options - recapture the estate tax and get no step up in basis or pay the estate tax (and interest) and get a step-up in basis.

a. Funeral expenses are deductible, such as expense for a tombstone, monument, mausoleum, burial plot and perpetual care.

i. Executor commission's, legal fees, appraisal fees, accounting fees, etc. are deductible. Includes attorney fees related to defending case involving disallowance of deductions.

ii. Administrative expenses may be deducted for estate tax or estate income tax purposes.

v. Can deduct expenses to continue business if needed to preserve estate. ex: cattle ranch. Estate of Edna Pearce Lockett v. Comm'r. T.C. Memo 1998-50.

vi. Third Circuit ruled that estate can deduct theft loss. Estate of Philip Meriano v. Comm'r. 142 F.2d 651 (3rd Cir. 1998).

i. unpaid income, real estate taxes are deductible; Note: may be double deductible, i.e., deductible for both estate tax and on estate's income tax return.

iii. Bona fide pledge which would be deductible as charitable deduction if it were a bequest.

- cannot be private trust - ex: scholarships at two universities solely for persons with decedent's surname is private trust PLR 9631004 - no deduction if bequest to charity is made at trustee's discretion - (could have given to non-charity). Estate of Edna Pearce Lockett v. Comm'r T.C. Memo 1998-50

ii. Corporations operated for religious, charitable, scientific, literacy or educational purposes, whether U.S. or foreign, are deductible;

-Different rule for income tax purposes; only gifts to U.S. charities are deductible.

i. Previously, charitable deduction allowed for a remainder interest where there was a life estate to X and remainder to charity.

ii. Now, charitable deduction allowed for the charitable part of a "split" gift only for certain gifts to:

A. Charitable remainder annuity trust. ("CRAT") Section 664(d)(1). Charitable deduction for remainder if:

- Annual payment of fixed sum equal to at least 5% of corpus to private beneficiary for life or term certain less than 20 years and remainder to charity

B. Charitable remainder unitrust. ("CRUT") Section 664(d)(2). Charitable deduction for remainder if:

- Annual payment of fixed percentage of corpus to private beneficiary for life or term certain less than 20 years and remainder to charity.

- Trust may provide for percentage of initial value or may provide for annual recomputation.

(a) a trust will not qualify as a CRAT or CRUT if its payout is greater than 50% of initial FMV of the trust (effective for transfers made after June 18, 1997)

(b) a trust will not qualify as a CRAT or CRUT unless the value of the charitable remainder equals at least 10% of the initial FMV of the trust (effective for transfers made after July 28, 1997).

(c) the 10% revaluation is reapplied in CRUTs when an addition is made but not when an unitrust recipient dies and there is a successor unitrust recipient(generally effective for transfers made after July 28, 1997).

- not invalid if trustees in sole discretion have power to select charitable org. PLR 9331015

IRS Final Regulations (T.D. 8791), effective December 10, 1998. For CRATs and fixed percentage CRUTs created before December 10, 1998, the annuity or unitrust amount may be paid within a reasonable time after the close of the tax year if the payout percentage is 15% or less.

a. Deduct from gross estate property which passes or has passed from decedent to surviving U.S. citizen spouse including:

iii. Property passing by operation of law, e.g. property held jointly with a right of survivorship, tenancy by the entirety.

iv. Life insurance proceeds; but, if not outright, must be payable at least annually beginning not later than 13 months after death of spouse; generally surviving spouse alone has power to appoint unpaid amount.

v. Property passing as a result of a disclaimer of an interest in property by another.

A. Spouse entitled to all trust income for life and has a general power of appointment over trust.

vii. Property passing as a result of a bona fide settlement of will contest. PLR 9347003.

A. Estate Trust - Income does not have to be paid annually but must be paid to spouse's estate upon spouse's death, along with trust principal.

B. Revocable trust providing that income "may" be paid to surviving spouse does not qualify. PLR 9644001.

i. Marital trust qualifies if includes incapacity provision (in event surviving spouse becomes incapacitated, trustee must distribute income and principal as deemed necessary for health, support and maintenance). PLR 051102.

C. Property passing to an irrevocable trust for benefit of surviving spouse did not qualify because (1) in the event of incapacity, income was paid to another trust for spouse's benefit and (2) spouse's right to receive income was delayed between date of death andfunding of trust. Service said this was not an unqualified right to all income for life. e.g.; Estate of Dorothy M. Walsh, 110 T.C. No. 29 (1998).

ix. In response to Estate of Hubert, 520 U.S. 93 (1997) the IRS December 15 issued proposed regulations (REG - 114663-97) on the effect of certain administration expenses on the estate tax marital or charitable deduction. The rules provide that estate "transmission" expenses, but not estate "management" expenses, reduce the marital or charitable deduction.

i. No marital deduction allowable for a terminable interest passing to a spouse, e.g. house to spouse until spouse remarries, then to X.

A. Spouse required to survive for a stated period not to exceed 6 months from date of decedent's death and, in fact, survives.

- surviving spouse must have a qualifying income interest for life in the property;

- surviving spouse must have right to all income from the property payable at least annually; this cannot be restricted to a determination by trustee to disburse principal and income for proper health, education and support. Estate of Bert B. Rapp, 140 F.3d 1211 (9th Cir. 1998).

- no one may have a power to appoint any part of the property except for the surviving spouse's benefit.

- the estate representative of the decedent makes an election on the decedent's estate tax return to treat the interest as a QTIP.

c. Property passing to a non-U.S. citizen spouse will qualify for the marital deduction only if in a Qualified Domestic Trust ("QDOT")

a. Deduct from gross estate the adjusted value of the decedents' qualified family-owned business interests.

c. There are certain eligibility and participation requirements to qualify for the deductions.

ii. Business must pass to a qualified heir who must materially participate in the business.

iv. Value of the business (including gifts of business interests made by decedent, including annual exclusion gifts, which have been held continuously by family members) must exceed 50% of the adjusted gross estate.

v. Decedent and "family" must own at least 50% percent, or alternatively 30% if business owned 70% by two families or 90% by three families.

A. "Family" includes a spouse, ancestors, lineal descendants of decedent, decedent's spouse or parents and spouses of any of the above lineal descendants.

vi. Decedent and family must have owned and materially participated in business for 5 of the 8 years prior to death.

vii. The business will not qualify if it is publicly traded or if 35% of its adjusted gross income is personal holding company income.

d. Benefit of the deduction is subject to recapture if, within 10 years, various "recapture events" occur, e.g., qualified heir ceases to meet the material participation requirements or disposes of his or her interest in the family-owned business.

a. For estates of decedents dying after December 31, 1997, executor may elect to exclude up to 40% of the value of land subject to a "qualified conservation easement."

i. A "qualified conservation easement" is one which has been granted for (1) preservation of land for recreational or educational use of the general public, (2) protection of a natural habitat, or (3) preservation of open space for the scenic enjoyment of the general public.

b. A post-mortem conservation easement may be placed on the property, provided the easement has been made no later than the date of the election, which is made on the estate tax return.

c. The exclusion ceiling is $200,000 in 1999, increasing by $100,000 each year until 2002 when the limitation is $500,000.

a. Generally expressed as an exemption equivalent, i.e. from federal transfer taxes, otherwise taxable transfers not exceeding $650,000 in 1999 will not be taxed.

i. The unified credit exclusion amount is increased as follows: $675,000 in 2000 and 2001; $700,000 in 2002 and 2003; $850,000 in 2004; $950,000 in 2005; and $1,000,000 in 2006.

c. Section 2010 credit indirectly affects requirement for an estate to file an estate tax return. If the gross estate is less than or equal to $650,000, federal estate tax return not required.

a. Section 2011 provides a limited credit against the federal estate tax for death taxes actually paid to any state or the District of Columbia with respect to property.

b. State taxes paid on property that is not subject to federal estate tax do not qualify for the Section 2011 credit.

ii. hypothetical state tax credit based on the "adjusted taxable estate"; the "adjusted taxable estate" is the taxable estate reduced by $60,000; the credit is the product of the adjusted taxable estate and the rates provided in Section 2011(b); and

d. The state tax credit, in conjunction with the unified credit, cannot result in a federal estate tax refund.

a. Section 2013 allows a credit against the estate tax of a decedent when includible property was previously taxed.

b. Credit available if decedent dies within 2 years before or 10 years after the transferor of the property.

i. Why allow credit for property transferred before the death of the decedent? In many situations the value of property transferred to decedent during a transferor's life was included in that transferor's gross estate at death.

i. The potential credit for tax on prior transfers is limited to the smaller of the following 2 amounts:

A. the amount of federal estate tax attributable to the transferred property in the transferor's estate; or

B. the amount of federal estate tax attributable to the transferred property in the decedent's estate.

ii. The potential credit is reduced as the span of time between the transferor's death and the decedent's death increases.

A. If transferor died within 2 years before or after decedent, the potential credit is allowed in full.

B. If the transferor's death occurred within the third or fourth year preceding the decedent's death, only 80% of the potential credit is allowed; within the fifth or sixth years, 60%; within the seventh or eighth years, 40%; and within the ninth or tenth years, 20%. If a transferor died more than 10 years before decedent's death, no credit is allowed.

a. The estate of a U.S. citizen may claim a credit against the federal estate tax for all or a part of the amount of death taxes actually paid to any foreign country with respect to property included in the decedent's gross estate to obviate the harsh effect of double taxation. Certain resident aliens may receive a similar credit.

The credit cannot exceed an amount that bears the same ratio to the foreign death tax as the value of the property bears to the value of all property subject to such tax;

Value of property in foreign country subject to foreign tax and included in gross estate Value of all property subject to foreign tax

c. In effect, the formula gives the amount of foreign tax attributable to the property being subjected to both foreign and U.S. death taxes.

Estate - The total property owned by an individual prior to the distribution of that property under the terms of a will, trust or inheritance laws. An individual's estate includes all assets and liabilities.

Property - Property is described as either real or personal. Real property is real estate, and personal property is everything else. Personal property includes physical assets such as automobiles, equipment, household items, etc. Personal property also includes financial property, such as securities, notes or loans receivable, bank accounts, cash and insurance policies.

Lifetime gifts and assets that are included in one's estate are taxed using the same graduated rate schedule. The applicable rate at which any gift or asset in the estate is taxed is based upon the cumulative taxable transfers of an individual during life and at death. The benefits of graduated rates and the unified credit are phased out for cumulative taxable transfers that are greater than $10,000,000 because of the imposition of an additional tax equal to 5% of the cumulative taxable transfers that exceed $10,000,000 but do not exceed the amount at which the average tax rate on the cumulative transfers is 55%. Therefore, in 1999, the 5% additional tax is imposed on cumulative taxable transfers that exceed $10,000,000 but do not exceed $17,184,000. Cumulative taxable transfers of $17,185,000 or more will have an average tax rate of 55%.

Prior to the Taxpayer Relief Act of 1997 (P.L. 105-34; the "1997 Act"), a unified credit of $192,000 was allowed against the gift and estate tax imposed on cumulative taxable transfers. This credit was equivalent to exempting from gift and estate taxes the first $600,000 of cumulative taxable transfers.

The 1997 Act increases the amount that is exempt from gift and estate taxes. The 1997 Act uses the terms "applicable credit amount" and "applicable exclusion amount." A credit of the applicable credit amount is allowed against gift and estate taxes on cumulative taxable transfers. The applicable credit amount is the amount of the tentative tax which would be determined under the rate schedule if the amount with respect to which such tentative tax is to be computed were the applicable exclusion amount. The applicable exclusion amount is the amount of cumulative taxable transfers that are exempt from gift and estate taxes.

For gifts made and decedents dying in 2000, the first $675,000 of cumulative taxable transfers are exempt from gift and estate taxes. The amount of cumulative taxable transfers that are exempt from gift and estate taxes gradually increases until 2006 when the applicable exclusion amount is $1,000,000. The applicable exclusion amounts for each of the following years are as follows (IRC s 2010(c):

It is important to understand the difference between income that must be included on the decedent's final tax return and income in respect of decedents (IRD), which is not included on the decedent's final return. A decedent's final return only includes items of gross income for the period prior to death under the appropriate method of accounting used by the decedent during life (IRC Sec. 691(a)(1)).

IRD is any item of gross income that cannot properly be included in the decedent's final return, but to which the decedent had a right and the decedent would have received if he had not died (IRC Sec. 691(a)). These amounts are included in the gross income of:

Anybody to whom the estate properly distributed the right to receive the IRD (IRC Sec. 691(a)(1); Reg. Sec. 1.691(a)-2).

^{salary and fringe
benefits accrued at death (e.g., salary or wages which a cash
basis decedent earned, but which were not included in the last
paycheck received before his or her death);}

^{fees and commissions
based on services performed during life which are indefinite in
amount at the time of death or are measured by transactions
occurring after death;}

^{an enforceable right to
receive amounts under a deferred compensation arrangement;}

^{dividends both declared
and payable to a shareholder of record before death, but paid
after death;}

^{cash rental payments in
respect of an asset owned by a decedent attributable to the
portion of the lease term which expired before his or her death;}

^{the capital gain element
of proceeds received after death from a sale completed before
death (installment sale proceeds;}

^{certain payments due
from business interests (i.e., sole proprietorships and
partnerships); and}

^{The character of the IRD is the same as
it would have been if the deceased person had actually received
the money (IRC Sec. 691(a)(3)).}

^{Estates and other beneficiaries are
allowed to claim on Form 1041 an income tax deduction for certain
deductions in respect of a decedent that are the payments of an
obligation the decedent left unpaid at death and not properly
allowable as a deduction on decedent's income tax returns.}

^{A deduction in respect of decedent
(DRD) is a business or nonbusiness expense, interest, tax or
foreign tax credit for which the decedent or a prior decedent was
liable and which was not properly allowable in his last tax year
or for prior years. (}^{Code
Sec. 691(b)}^{.) These amounts are
allowed as a deduction or credit when paid either:}

^{if the estate is not liable to pay the
obligation, by the person who acquires by bequest, inheritance,
or by reason of the death of the decedent, an interest in the
property subject to the obligation. (}^{Reg. § 1.691(b)-1(a)}^.)

^{Whether these deductions are allowable
for estate tax purposes does not prevent them from being
deductible also for income tax purposes. (}^{Code Sec. 642(g)}^.)

^{Only specific categories of deductions
generate deductions in respect of a decedent (DRD). (}^{Code Sec. 691(b)(1)}^{.)
There are five classes of deductions and one credit that qualify:}

^{foreign tax credits for certain foreign
income tax liability accrued before death under IRC Sec. 691(b).
The decedent's successor in interest will claim the credit.}

^{Note: deductions attributable to a
decedent for a period before death that do not fall within one of
these categories do not qualify for deduction as DRD.}

^{If you die with any property titled in your personal
name, there must be a probate process for that property. Probate
is the state's legal procedure for handling two major functions
for your estate.}

^{(1) Identification of the rightful heirs to the estate
and the share size that each heir will receive, and}

^{(2) getting the legal title of the property out of
your name and into the name of the heirs.}

^{Having a will drawn up in advance
of your death will take care of the first function,
identification of the rightful heirs and their share. With no
valid will for your estate the state will use its own formula for
determining heirs and their share. Even with a will the
re-titling of your property still must be handled through a court
administered probate procedure. When someone is dead the only way
that their property can be legally re-titled in the heirs' names
is by a court order in a court-supervised process.}

^{A probate proceeding will not be
required if the gross value of the decedent's real and personal
property located in California does not exceed in the aggregate
$100,000. (CA Prob. Code Sec. 13100 et seq; $60,000 prior to
January 1, 1997.) If this requirement is met, and 40 days have
elapsed since death, the "successor" of the decedent ca
obtain possession of certain property or have it transferred. The
property that can be collected or transferred without a probate
proceeding under these sections of the Probate Code includes
money due the decedent, tangible personal property of the
decedent, and evidence of a debt, obligation, interest, right,
security or chose in action, regardless of security. (CA Prob.
Code Sec. 13100.)}

^{In determining whether the $100,000
limit has been exceeded, property outside of California and
property described in Prob. Code Sec. 13050 are excluded. This
definition includes joint tenancy property, property in which the
decedent had a life interest, property passing to the surviving
spouse without administration under Prob. Code Sec. 13500,
multiple party or pay-on-death accounts, vehicles, registered
vessels, truck campers, mobile or floating homes, amounts due the
decedent from the U. S. government for service in the armed
forces, and salary or other compensation (up to $5000) due the
decedent relating to employment. It also excludes property held
in a revocable trust at the time of death.}

^{The transfer of motor vehicles or
registered boats can be accomplished directly through the
Department of Motor Vehicles using Form Reg. 5 ("Affidavit
For Transfer Without Probate - California Titled Vehicle or
Vessels Only").}

^{Avoiding probate is desirable
because it can be a time consuming and expensive process. On a
national average probate costs run from 6% to 10% of the value of
the estate, based on reliable estimates. This means that an
estate worth only $200,000 could cost $12,000 to $20,000 to
probate. These costs are based on the fair market value of the
property, and not on just the net worth or equity. In some cases
probate ends up in litigation that drags on for years. Frequently
it leads to family battles, and it often causes or allows the
decedent's wishes to be ignored. In addition, probate procedures
are all made public, causing family privacy to be lost.}

^{One good way to avoid probate is
through the use of a family estate planning trust, either a
living trust or a life estate trust. Think of the trust as a
bridge that will allow a trustee to haul your assets safely
across the intestacy chasm to your heirs on the other side. The
way a trust avoids probate is by titling your property in the
name of the trust before your death. You have complete control of
the property during your life, but the trust is considered to be
the legal owner of the property for title transfer purposes. Upon
your death a trustee that you pre-selected will simply handle the
transfers or payments to your heirs that you specified in the
trust.}

^{You have a great deal of
flexibility in specifying the details of these payments and
transfers. After your death the trustee can handle everything
quickly and simply without lawyers, court supervision, excessive
costs or delays.}

^{Brother John was a software engineer
who had spent the last 18 months prior to his death working
80-hour weeks inside a process server facility. He celebrated the
critical completion date of his firm's major product (prior to
their initial public offering) with a trip to Las Vegas.
Unfortunately, he died quite suddenly in a mysterious hotel
incident, apparently with a smile on his face.}

^{He was single, having been divorced two
years. He had two adult children. Your client was his twin, and
has assumed the responsibilities of winding-up and resolving his
brother's affairs. You ask him to assemble all the usual annual
tax documents (W-2, Forms 1099, etc.) and an
"inventory" of his brother's assets and liabilities at
the time of his death, and to indicate how title to each of the
assets was held. This is what he includes with the items he
brings you:}

^{2. Employer provided life insurance
policy: $50,000 former wife is beneficiary.}

^{Roth IRA account, converted in 1998,
naming your client as beneficiary: $80,000.}

^{Vested but not exercised Incentive
stock options for 5000 shares of Dot.com, Inc. His strike price
is .05 per share; the most recent sale his firm can document
prior to John's death was at 1.50 per share. (Three weeks after
his death the stock went public and is currently trading for $70
per share.)}

^{Non-qualified Deferred Compensation
from Dot.com, Inc. in the amount of $60,000.}

^{An agreement or declaration
incorporating many of the features of a will, the living trust is
created by a person while living as opposed to a testamentary
trust which is created upon death. A living trust names successor
trustees to succeed the original trustee in the event of the
trustee's incapacity or death. The successor trustee takes over
the trust immediately upon the death or disability of the
trustee, thereby avoiding any delay in the flow of income to
beneficiaries following death. A living trust avoids the costs
and problems of administering an estate in Probate Court; such
proceedings are notorious for delays - sometimes lasting years!}

^{A living trust allows financial
affairs and transfers to remain private. There is no public
disclosure of the amounts of bequests or the names of
beneficiaries as there is no inventory of assets or inheritance
provisions filed with the Probate Court.}

^{The trustor can protect children or
other beneficiaries of the estate against their own inexperience
while providing for their care and custody. Further, a trust is
not as easily attacked by dissatisfied heirs on grounds of fraud,
incompetency or undue influence because the living trust exists
before death.}

^{Probate drawbacks include delays in
distribution, administrative expenses, and publicity. Contending
with ancillary probate in other jurisdictions is also a factor. A
living trust becomes irrevocable at death and avoids probate,
unless assets are distributed to the grantor's estate.}

^{Another complication of probate
administration arises when real property is owned in more than
one county or state. Often, the executor is required to open
ancillary or additional probate proceedings in each county and/or
state where real property is located. Living trusts may be used
to overcome this problem.}

^{The living trust expedites asset
distribution. There is great hardship on heirs awaiting
distribution of an estate through probate. If your beneficiaries
will have liquidity problems that may be occasioned by probate
administration - bills to pay or a business to continue - then a
living trust may be for you.}

^{When a surviving spouse remarries,
the new spouse automatically gains inheritance rights in the
assets owned by the survivor. While this can be prevented by an
antenuptial agreement between the survivor and the new spouse,
such an arrangement is frequently hampered by embarrassment, if
not outright distaste. However, if the marital deduction property
was placed into a suitable trust by the decedent, no future
spouse of the survivor will acquire any rights in such property.}

^{Where minors are beneficiaries, the
need for court-appointed guardians involves restrictions and
expenses that could be avoided with a trust arrangement.}

^{It is much more difficult for a
dissatisfied heir to challenge a living trust than a will.
Arguments in will contests pertaining to undue influence or
testamentary capacity carry little weight where the grantor
established a living trust and allowed it to remain in effect
over a period of time. This is particularly true where the trust
was funded and had an active role in the grantor's finances.}

^{A living trust can be designed to
last a lifetime and beyond. With the benefit of a corporate
fiduciary, professional supervision can continue uninterrupted.
Continuity is maintained notwithstanding the grantor's
incapacity, and the trust can be used to invest and distribute
assets after the grantor's death as well. Indeed, the grantor may
consider the living trust's lifetime operation as a blueprint for
how it can continue after death and how the trustee will perform.}

^{As discussed hereafter, many
funding options are available for living trusts. Insofar as the
living trust establishes guidelines for assets supervision and
distribution, other assets may be added to the trust during life
or upon the grantor's incapacitation or death.}

^{A revocable living trust is a
flexible tool. Like a will, it is subject to revocation or
amendment at any time prior to death. There are no restrictions
whatsoever on adding or removing trust assets, changing
beneficiaries, or in buying, selling or exchanging assets.
Trustees have the same freedom of action as if they held the
property in their individual names. Further, there is no expense
in creating or terminating a living trust, excepting legal
preparation costs and nominal fees for transferring property to
oneself as trustee. In addition, the trust has great latitude
insofar as the trust remains effective wherever the grantor may
move and may provide a choice of state laws in some instances.
Residency requirements that apply to other arrangements do not
generally affect trustees.}

^{Substantial Federal estate taxes
can be saved through use of the A, B, or C sub-trusts.}

^{The revocable living trust does not
generally qualify as a separate taxable entity. All income is
taxable to the grantor, regardless of how income is distributed.
Based on current income tax rates, having income taxed to an
individual will be preferable to having income taxed to a trust
under certain instances.}

^{This compared with the funding of
an irrevocable trust, which involves a completed transfer, use of
a revocable trust allows appreciated capital assets to remain in
the grantor's estate so that a stepped-up basis may be obtained
at death.}

^{A Federal taxpayer identification
number (TIN) is not required for the trust while it is revocable,
nor is filing of separate Federal trust income tax returns
[Regulation 1.671-4(b); 1.6012-3 (a)(9); 301.6109-1 (a)(2)].
Assets can be titled in the name of the trust while using the
grantors social security number. California requirements are
comparable (Letter, Franchise Tax Board, January 22, 1982).}

^{At the time the trust (or a portion
of it) become irrevocable or an individual or entity other than
the grantor becomes trustee, a TIN should be assigned and annual
trust returns should be filed.}

^{There is no Proposition 13 tax
reassessment on real property transferred to a living trust
(R&TC SS62(d)). Also, the homeowner's exclusion still applies
(R&TC SS218).}

^{Whether a revocable trust can avoid
creditors or spousal election rights depend on state laws and
circumstances. But irrevocable trusts are generally a better
choice and, even then, remain subject to statutory limits and
factual determinations.}

^{One of the big benefits of
pre-death estate planning is the ability to name your heirs,
specify the share of your estate they will receive, and dictate
the manner and timing at which they get their share. Generally
speaking this part of estate planning may be done with either a
will or a trust. But as mentioned above it takes a trust to avoid
probate, protect the estate from judgments, liens and Medicaid,
and to minimize estate taxes. Some of the heir-planning issues to
consider are:}

^{Whether the heirs are to receive
equal or unequal shares. There are several factors that can cause
the estate owners to vary the share sizes they leave to each
heir. At what age should the heirs get their share, or should
their share be paid in two or three installments at different age
milestones. Whether or not to leave specific property to certain
heirs, such as the family home to one child and certain other
property to another child.}

^{Whether or not to omit or
disinherit any heirs. How to deal with situations where a married
couple each have different children from former marriages, but
they want to setup one comprehensive estate plan. This may
require dealing with issues such as one spouse having more
children, or one spouse having made a larger contribution to the
estate.}

^{Dealing with a marriage after you
have built your own separate estate, which you may want your
spouse to benefit from, but then you want the remainder of the
estate to go to your heirs and not to your spouse's heirs.}

^{What to do in a case where a child
has reckless spending habits and the parents}^_f^{fear that child will blow the inheritance
quickly.}

^{How to deal with mentally or
physically disabled heirs. Assuring that the heirs will use their
share to pay for a college education, and do so in a prudent
manner.}

^{What happens if an
heir predeceases you? How to deal with specific gifts to special
heirs, such as grandchildren, nieces and nephews, charities, etc.}

^{Client:
__________________________________________ Date:
____________________}

^{INSTRUCTIONS: The sample
goals on this worksheet are a starting point from which
customized goals can be stated. Feel free to customize or
personalize any of the goals listed.}

^{11. Maintain control over
or ensure competent management of assets. 1 2 3 4 5}

^{12. Minimize exposure to
liabilities that could consume one's assets. 1 2 3 4 5}

^{Case Study: Jean-Luc and Beverly
Picard - Marital Deduction/With-Without Gifts}

^{BASIS OF PROPERTY -
The value used to determine gain or loss for income tax purposes.
The basis may be original cost or some different amount,
depending on the law affecting the transaction.}

^{BENEFICIARY - The
person (individual or corporation) receiving the benefit of a
transaction. (E.g., beneficiary of a life insurance policy,
beneficiary of a trust, beneficiary under a will).}

^{CODICIL - An addition to
a will. A codicil may modify, add to, subtract from, qualify,
alter, or revoke provisions in the will instrument. A codicil is
a separate document. It must be signed with the same formalities
as the will. A testator can change, revoke, cancel or destroy a
codicil at any time.}

^{COMMUNITY PROPERTY -
Property, whether real property or personal property, owned in
common by husband and wife as a kind of marital partnership.
Husband and wife have management and control, but neither can
dispose of ownership without the other's consent. Community
property includes all property acquired during the marriage from
earnings; earnings are also community property. (This is an
oversimplification of the law.)}

^{ERTA - ECONOMIC RECOVERY TAX ACT
OF 1981 - A comprehensive revision of the estate, gift and other
tax laws which made broad sweeping changes, including the
"Unlimited Marital Deduction" and increased
"Unified Tax Credits."}

^{ESTATE - The total
property owned by an individual prior to the distribution of that
property under the terms of a will, trust or inheritance laws. An
individual's estate includes all assets and liabilities.}

^{ESTATE TAXES-FEDERAL - The taxes
imposed by the U.S. Government on the transfer of assets upon
death.}

^{EXECUTOR - The person (an
individual or a corporation) nominated in a Will by the Testator
to take care, during probate, of the Testator's property. Also
called "personal representative," the Executor is
appointed by the Probate Court, has legal and business
responsibilities, and functions under the jurisdiction of the
Probate Court. The executor selects the attorney who performs the
legal work for the estate.}

^{EXEMPTION EQUIVALENT -
The dollar amount of a decedent's estate that can be left by will
or operation of law to anyone, free of Federal estate taxes. The
current exemption equivalent equals $675,000, which corresponds
to a "Unified Tax Credit" of $220,550 (See Unified Tax
Credit). The exemption equivalent amount is scheduled to be
increased as follows:}

^{FIDUCIARY - A person charged
with a duty of trust on behalf of a beneficiary. Executors and
Trustees are fiduciaries.}

^{GIFT TAX ANNUAL EXCLUSION - The
Federal government allows a donor to exclude up to $10,000 per
year of gifts that create a present interest gift in a specific
individual donee. A present interest gift is one in which the
donee has an immediate unrestricted right of use, benefit and
enjoyment. For example, if father gives son $5.00 and son can use
it now, then father has made a present interest gift. The State
of California has a similar rule. The Taxpayers Relief Act of
1997 indexes this for inflation but rounds to the nearest
$1,000.00.}

^{GRANTOR - The person (individual
or corporation) who makes a grant of property to another person
(e.g., grantor of a trust; grantor of a deed of property).}

^{GUARDIAN - The entity
(individual or corporation) legally charged with responsibility
for the care and management of the person and/or property of (1)
a child during minority, which ends at age 18 in California; or
(2) an incompetent individual.}

^{INHERITANCE TAXES - The
taxes imposed by the State of California according to the
relationship of the person who receives property upon the death
of a person. These taxes have been repealed by referendum. Many
states still have such taxes on individuals or property subject
to their jurisdiction.}

^{INTER-VIVOS TRUST - A trust
created "between the living," also known as a
"living trust." The grantor (settlor, trustor) is a
living person. Compare this to a testamentary trust. It can be
either revocable or irrevocable.}

^{IRREVOCABLE TRUST - A
trust whose terms and provisions cannot be changed, modified,
altered, amended, or revoked. Under certain limited
circumstances, a court may make limited changes.}

^{JOINT TENANCY - A form of
ownership of property by two or more persons, expressed as
"joint tenants with right of survivorship." When a
joint tenant dies, his or her interest in the property
automatically passes to the surviving joint tenant outside of and
beyond the power of the will of the deceased joint tenant; the
property passes outside probate. However, joint tenancy has
dangers. Consult your attorney before taking title to property in
joint tenancy.}

^{MINOR - A person who is under
the age of legal competence. In California that age is 18.}

^{POUR-OVER WILL - A will
that provides for transfer, during or at the conclusion of
probate court proceedings, of the net assets of the deceased
person from the control of the executor to a trust that was in
existence immediately before the testator's death. The executor
"pours over" the assets into the open vessel of the
existing trust.}

^{PROBATE - Court proceedings in
which the probate court has jurisdiction over (a) the executor,
and (b) the assets of the deceased person. The purposes of
probate are:}

^{(2) to protect the federal, state, and
local government interests in taxes that are to be paid by the
estate; and}

^{Probate begins with (a) the will
being admitted to probate and (b) the executor being granted
"letters testamentary." Probate concludes when all
assets have been accounted for, taxes and creditors paid and any
residue distributed as provided in the will.}

^{PROPERTY - Property
is described as either real or personal. Real property is real
estate, and personal property is everything else. Personal
property includes physical assets such as automobiles, equipment,
household items, etc. Personal property also includes financial
property, such as securities, notes or loans receivable, bank
accounts, cash and insurance policies.}

^{Q-TIP TRUST -
(Qualified Terminable Interest Property Trust) A special type of
living trust that permits use of the "unlimited marital
deduction." The beneficiary spouse is entitled to all of the
income from the trust property for life, but no person has the
power to appoint any part of the property to any person other
than the surviving beneficiary spouse during that spouse's
lifetime. This has the effect of protecting the ultimate
beneficiaries of the trust from having the trust property given
away to or taken by another person.}

^{REVOCABLE TRUST - A
trust whose terms and provisions can be changed, modified,
altered, amended, or revoked. Such power is usually reserved by
the person who created the trust (the "trustor"), but
it can also be assigned by the trustor to a second person. The
revocable trust is a popular means of avoiding probate, but a
will should be used with it. The revocable trust can be used by
aged people to protect themselves and their assets from the
expense and delay of conservatorship. Before using a revocable
trust, a person should consult an attorney who is experienced
with revocable trusts.}

^{SETTLOR - Another
word for "grantor" or "trustor" of a trust.
The person who "settles" the assets into the trust.}

^{SPENDTHRIFT TRUST - A
trust that provides a fund for the maintenance of a beneficiary,
while, by its terms, insulating the beneficiary's interest from
any improvidence or incapacity of the beneficiary, as well as
from claims of the beneficiary's creditors.}

^{TENANCY IN COMMON - A
form of title to real or personal property held by two or more
persons. The legal relationships and results are very different
from those of joint tenancy. The best form of property title
should be decided only after consulting with an attorney because
the effects on income tax, estate, tax, death rights, etc. vary
greatly.}

^{TESTAMENTARY TRUST -
A trust hat comes into being only as a result of the death of the
person whose will provides for its creation; hence, the term
"testamentary."}

^{TRUST - A legal
entity established either (1) by a trust agreement signed by a
living person (inter-vivos trust or living trust) or (2) arising
after death from a will (testamentary trust). The trust is
governed by the terms in the document. Trusts can last as long as
50 years or more. Thus, they must be written with great care.}

^{TRUSTEE - A person
(individual or corporation) who, in a given trust, has bare legal
title to the assets and has the power given in the trust to carry
out the wishes of the trustor. The trustee has a fiduciary
obligation to the beneficiaries of the trust and is subject to
strict legal regulation. Although the trustee has legal title for
convenience, the beneficiary owns the beneficial or equitable
title.}

^{TRUSTOR - A person
who establishes a trust. There can be more than one trustor.}

^{UNIFIED ESTATE AND GIFT TAX
RATES - Effective January 1, 1977, the separate estate
and gift tax schedules were combined into a single new tax
schedule. Now the cumulative value of taxable gifts made during
life is added to the value of the decedent's estate when
determining the applicable estate tax rates. The same tax rates
apply to both lifetime gifts and to the estate left at death.}

^{EXCLUSION AMOUNT - A
specific dollar amount that can be deducted from the Federal
estate taxes a decedent's estate would have to pay in a given
year, but for the existence of the credit. For 2000, the Unified
Tax Credit is equal to the amount of $220,500, which corresponds
to an "Exemption Equivalent" of $675,000. IRC § 2001
& 2010.}

^{UNLIMITED MARITAL DEDUCTION -
A special provision of the estate tax laws that permits a
surviving spouse to receive all or any portion of the property of
a deceased spouse's estate without any Federal estate tax
liability.}

^{WILL - A signed
document that provides for the orderly disposition of assets
after death in accord with the person's wishes. Wills are
important tools to provide for family security and protection and
to minimize death taxes.}

^1.¹^{Defining Income
in Respect of a Decedent, by William P. Streng, Esq.
Paragraph 6150 BNA Tax Practice Series on CD, Tax Management ©
1999.}^{www.bnatax.com}

^2.²^{An excellent
resource for this subject is the California Estate Practice
Series published by Matthew Bender, specifically "California
Trust Practice" by Hartog & Dirkes. © 1999.}

^3.³^{Adapted from The
PPC "Guide to Practical Estate Planning," Practitioners
Publishing Company. For additional information contact
1-800-323-8724. http://www.ppcnet.com/}