I was wondering if you would look at the attached lesson 4 assignment. I have done the work I just need help with citing.

Lesson 4 Tax 526

1. Explain the concept of gross estate.

The concept of the gross estate is two-fold: What the decedent owned on the date of death, and what the decedent was deemed to have owned on the date of death. The former piece is straightforward. The latter is governed by the statutes set forth in IRC §§2301-2046 which defines what property is considered to be part of the gross estate of the decedent despite transfers prior to, or subsequent to the owner’s death. This is called the constructive estate because it looks at many the many factors that define ownership, including retained interest, amount of transfer, time of transfer, retained control, and enjoyment of the property. These statutes are useful to review in estate planning when anticipating what will be included in the gross estate and how to structure transfers in a manner consistent to avoid inclusion when that is the intended outcome.

1. Who is primarily responsible for payment of the estate tax?

The executor is responsible for ensuring that the tax is paid1. The estate is primarily responsible for the payment of the estate tax, however if the estate does not have sufficient means to pay the tax, the beneficiaries may be obligated to pay the estate tax based on the value of the property they specifically inherit.

3. Sam Mason. The decedent, owned a 600-acre farm outright at his death. Sam and his wife Sarah were domiciled in a state that retains dower rights. Explain what effect Sarah’s dower rights will have on

1. the inclusion of the farm in Sarah’s gross estate for estate tax purposes.

Dower rights and estate inclusion are addressed under IRC §2034 and IRC §2056(b)(4). Since Sarah and her husband reside in a state where dower rights have not been abolished, Sarah has a right to a life estate in Sam’s farm. This means that she would retain an interest in the farm until her own death. Upon her death, the property would be transferred to their children or according to state law. The farm would be included in Sarah’s estate because at her time of death she had an interest in the farm and continued enjoyment of the property.

1. the value of the farm in Sam’s gross estate for estate tax purposes.

Although Sarah has a dower interest in the property, the entire value of the farm would be included in Sam’s gross estate2. The dower interest has no effect on the inclusion of this value in the gross estate. If part of the farm were transferred to Sarah, the dower interest might qualify for the marital deduction and reduce the gross estate.

4. Mitchell Mellen gave his niece, Margaret, his townhouse in New York City. By unwritten

understanding, he continued to live in the house until his death 5 years later. Is any of the

property includible in his gross estate? If so, under what theory is it includible?

Under IRC §2036, transfers with retention of life interest, the value of the townhouse would be included in Mitchell’s gross estate, despite making Margaret the legal title holder more than 3 years prior to his death. This is because by continuing to live in the townhouse, this behavior implies a continued interest in the property. By having a continued interest, Mitchell constructively still owns the townhouse at his death.

5. When is the value of an annuity included in a decedent’s gross estate?

The value of an annuity is included in a decedent’s gross estate when it is considered a receivable by the decedent3. So long as the decedent had a right to payment after death then it is included in the gross estate. If a person transfers property and retains an income interest in it, IRC Section 2036 will cause that property to be included in the transferor's gross estate for estate tax purposes.4 If payments are required to terminate at death, then there is nothing to include in the gross estate.

6. What are the different types of annuities that are includible in a descendant’s gross estate?

Under IRC §2039, an annuity is one or more payments over a period of time that are payable to the decedent as stipulated by a contract or agreement. Types of annuities includible are:

• contracts that payments to decedent before death for the duration of life and will continue after death to a chosen beneficiary

• payments under a joint and survivor annuity contract in which payments to the decedent will continue to the survivor

• payments from an employee benefit plan in which the employer established a plan for the employee to receive annuity payments after retirement which would continue to beneficiaries upon the death of the decedent or also as a lump sum payment to a beneficiary if the decedent dies prior to retirement

• any contract in which the decedent was eligible or was receiving annuity payments that would be payable to beneficiaries upon the decedent’s passing.

7. What is the general rule for determining the valuation of annuities in the gross estate?

The amount included in the gross estate is the value of the payments to the surviving beneficiary that represent the proportionate part of the purchase price paid by the decedent. For employer purchased annuities, the amount that the employer paid is treated as though it was made by the decedent.5 If the estate owner purchased a joint and survivor annuity, the entire portion of the survivor annuity is included in the decedent’s gross estate. If the funds to purchase the annuity were not paid entirely by the decedent, only the amount proportionate to the funds contributed by the decedent would be includible in the gross estate. Annuities sold as commercial annuity contracts are valued according to fair market value of comparable contracts as of the date of death. Annuities purchased under private contracts are valued according to federal estate and gift tax valuation actuarial tables. Any lump-sum payments are valued at full value for the gross estate.

8. What are 3 advantages for a married couple of owning property as joint tenants with right of survivorship?

• Holding property as joint tenants with right of survivorship allows transfer of property to the surviving spouse outside of the estate administration which allows the estate to potentially save on probate costs since the transfer is an automatic function of law.

• Only half of the property interest is attributed to the decedent and can then be deduction in full under the marital deduction, thereby decreasing the estate tax

• It creates a security of ownership between spouses by establishing a joint tenancy

9. Explain the general rule for estate taxation of life insurance proceeds.

The general rule for estate taxation of life insurance proceeds follows whether or not the decedent had control over the policy. If the decedent had the power to name of change beneficiaries, or assign, revoke, or cancel the policy, then there it is determined that the decedent had control and therefore the full value of the policy is included in the gross estate. An employee’s ability to terminate an insurance policy through unemployment does not count as control however if the employee has power to name or change beneficiaries, purchase the contract outright to prevent cancellation, or otherwise terminate the policy, then it would be counted in the employee’s estate. If the decedent was merely acting as a trustee and had no beneficial interest in the policy, this excludes the value from being included in the gross estate. A policy who has the estate as the named beneficiary or uses the proceeds to pay estate taxes would include proceeds as part of the gross estate.6

10. If the decedent owns life insurance on another party’s life, will any part of the value of

these policies be includible in the descendant’s gross estate? If so, how will it be valued?

The rules governing insurance policies the decedent owns on the life of another are set forth in IRC §2033. Those rules are as follows:

• For new policies, the amount included in the estate is value of the gross premium paid

• For policies paid in full or paid by a single premium, the replacement cost as of date of death is the value included in the gross estate

• For policies requiring regular premium payments, a calculation is required to make an adjustment between the previous reserve amount and the next reserve upon next premium payment and adding in the unearned portion of the last premium to this amount.

• Term life insurance policies are valued at any unused premium amounts

11. What taxes are deductible on a decedent’s funeral estate tax return?

Taxes that are deductible on the estate tax return are:

• federal income taxes owed to the date of death

• state death taxes (but not city)

• gift taxes

• real property taxes accrued prior to the date of death

State, local, foreign, or property taxes can be deducted on either the estate income tax return or the estate tax return. No federal income tax on estate income is ever deductible.

12. If an executor is also a beneficiary of the estate, when would it be wise for the executor to waive the fee?

As an executor, a choice must be made whether to take the executor fee which would be a deduction on the decedent’s estate tax return and taxable income to the executor, or to waive the executor commission and take it instead as a bequest. When taken as a bequest, it is not a deduction for the estate which means the estate may be subject to higher taxation. As a bequest, the executor will receive the bequest tax free. The executor is a fiduciary and must act on behalf of the estate and in its best interest. The option should be weighed to see the tax impact as a deduction or a bequest.