9/30/15

Promissory Notes:
For ex: 10K note with 10% interest to buy a car from another invdividual for payments over 10
months
On the 8th month Individual 1 dies, Indivdidual 2 will only include the remaining months of
Original amount due, the interest will be discharged.

If Individual 2 dies as soon as the promissory notes starts, the invididual 2 will include the
primmsory notes in its trust/estate instead of the car, since they both equal the same value.
Adequate & Full Consideration
AFC: when will a BAD DEAL: Only when Inter-family transaction - it will cause IRS implications.
Mascro vs Commissioner: promissory notes to their son for college tutition, and forgive right
before they die, but didnt - tax implications
If its not a Adequate & Full Consideration, it is considered a gift.
SELF CANCELLING PROMISSORY NOTE - (SCIN)
Note include that when the issuer dies, the note itself is defaulted.
Special Rule: Must include Interest rate high then the federal interest rate inorder to contain the
SCIN per the ruling
RULE: If the SCIN feature of the note extinguished at the time of the person dies, is bargain for
in return for a high interest rate paid the face value of the note is not included in the decedent's
gross estate

Seller puts house on market for 400K,

Buyer says 400K with a SCIN with a 10% interest rate, FEDERAL Int Rate is 4% at then the
time
Payment: 40K/month for 10 month,
Seller dies in the 8th month
The payment 8, 9 , 10 get extinguish after the death of the seller
Buyer - received the house for a bargain below the market with the original basis of $400K

Costanza v Commissioner

Whenever you do a SCIN with family, we will assume that you knew the seller will die, and it will
automatically will be considered as a GIFT. However, if you are able to prove it otherwise, it will
be dismissed; under the follow options
1. Actual payments being made
2. Actual agreement stating the payments and etc.
Anything out of the natural death, it will be considered as a SCIN
Business Interest:
Closely held interest : value all the interest include goodwill and etc.
Partnership/Corporation Interest: Outside Basis : Putting a value on the assets,( AP,
Inventory, Assets, A/R and etc.)
Sole Proprietorship: Merely the value of all the assets since only one owner
Causes of action or claims: basis why you get to get to go to court to sue someone, thing you
must claim to go to court, negligence, why you hurt your leg, my patent is fringement and etc. as
well as claims in your representation
These type of claims have value, these have to be listed in the misc schedule statement the
description and what is the inherent value.
Wrongful death actions:
Ex. movie theater massacre, what is the estate of the all the people that died, suing the theater
stating the movie theater let this person in the premises.
It is fault of the location and the manufacture producer who will be sued into the wrongful death
action.
Ex. Person is shot in the chest and person doesnt die, the shooter comes bakc and shoots him
in the death, possible case of pain and suffering, if dies in hospital - medical
Wrongfull Death - 10
Pain & Suffering - 15
Medical - 10
What is added into your gross estate?
Pain & Sufferiing and Medical = 25 , they do not have a right to wrongful death unless they died
right away.
Beneficiary has the right to it - TAX FREE

Compensation Income : any income that you have a right to take, must be included in the
gross estaste, even if its not paid before you die.
Ex. Paid by motnthly. you die before the payday, the income is included in the estate
Bank Interest: if accured, it is included into the estate
Contigent Fee: accrued, it is included into the estate
Employment Benefit:
Three:
SS: - never included
do not have the right to direct where the money goes
can only be paid out to - person who earned or their spouse
if the spouse - due to operation of law, not due to will or etc.
Pension
Private Compensation:
Life Estate - right to something (home/car/income) for life, never included in the gross estate
only have right during your alive, once you die it cannot be part of your gross estate

Chapt 7
Problem 1.
1. Home - vermont - Fee interest - included in gross estate (100K) - valued at FMV
2. Mortgage - As is on gross estate
3. Condo - Mexico - Tenancy in Common - 50% share - any property owned anywhere in the
world must be reported on their estate as long as they are a domicile of the US - FMV
4. Business Bulding - APT: -Fee Simple - Use the market approach - FMV - look for comparble
5. Every property need to have a probate done in every single different location

TO AVOID PROBATE
1.
Gross Estate Trust
2.
Joint Tenancy
3.
Hold it in a Entitys interest (building under a Inc.)

7.
Tagliable property - if US must report all on the 706 form
Car, Furniture, Household furnishing, Cemertry pot, bonds,
Real Property will be reported on SCH A
CAR and SALE BOAT - will be reported at FMV on the estate - MISC SCH (SCH L)
CEMETERY POT - intent to use for burial - do not include it, otherwise should be
included
Furniture/cloths/household/art collection/ruby ring - will be included

- Furniture/Household - can be included into the estate by ROOM

as long as the value isnt greater than $3000 follar-SCH L
PUREBRED ANIMALS - can be included into the estate

8.

Intangible Propeties - if US must report all on the 706 form

STOCKS - Averge of the highest or lowest of the day of death

BOND - same as stock
CLOSELY HELD - start with appraisley of assets,ar, inventory, THEN identify similar
company and how much they are sold, book value of the company and condition of the
company
BANK ACCTS - checking/savings/mmd - unpaid salaries - included in the estate
BONUS CHECK - depends - reason for the doing good work, way to compensate for
premuturity,
RENT CHECK - incldued during your life
AUTOMOBILE ACCIDENT - wrongful death - since didnt died
PATENT INFRIGEMENT - cause of action - it didnt start until after she died - get
appraised
in order to have 2031 & 2033 - must have interest/income from the property at the death of
the individual

PROPERTY INTEREST - by law you do not own

IRS CODE: 2035-2038 - something that you do not have interest, can be included into the gross
esate - if you have a economic benefit from the property it is must be included in the estate.
whether from use or other way of getting the income
2035(A) - Any gift within three year of death is included in gross estate, so long as it would be
included under 2036-2038 if not under 2036-2038 it does not need to be included
2035(B) - GIFT Tax Gross UP - Any gift tax you pay within three years of your death must be
included into your gross estate.
2036-2038 giving up a property however after giving away, individual still takes an economic
benefit/control or interest from the property (IRS - even though given away, technically you
are stll the owner of the property based on the economic benefit
2036(A1) - enjoying an economic benefit from the property gifted away
2036(A2) - you can dictate who get to enjoy the property for economic benefit
2038 - revocable authority of the gift property - one is able to give it to one person, however has
the power to take it back and give it away to someone else

2036(A)(1) - FIND THE STATUE

IF DECEDENT MAKE A TRANSFER DURING LIFE, to be applicable to 2036-2038
IF DECEDENT RETAINED INTEREST IN
FOR Life
FOR a period not ascertainable without reference to death
i.
8 out of 10 period is enjoyed - included in G.E - period did not in fact end before her death, if
enjoyed for 11 years - not included
c. FOR period that does not end before their death
i.
A minute before you die, the interest is given up, - NOT INCLUDED - only under expressed
agreement - can be overruled by IRS
3. RIGHT TO INCOME OR RIGHT TO ENJOY POSSESS PROPERTY
1.
2.
a.
b.

No Annual Exclusion IRS 7502 - in order to revalue the remainder - need to look at the age and interest = the gift
value

HW.
CHAP 9
1.

a.

10/7/2015

DONALD TAKES THE INCOME FOR LIFE

Qualified Interest/income You have a right to receive the income at least once a year, you
have the right to receive the fmv of the property income at least once a year of a percentage of
the interest of the trust - if the donee takes qualified interest from the trust - they are applicable
to file under 7520
When you have a remainder interest, first ask who is their remainder interest is given to ,
second - IRS wanted to know that you made a gift, now you need to value it, to value it - have to
see who was the gift made to - related or unrelated Unrelated Party - under 7520 if given to unrelated is based on how long the donee will life
expectancy multiply by the interest and will value the remainder based on that Related Party - if receiver is a related party - irs code - the interest is calculated under section
2702 - IRS will indirectly value the remainder - with is automatically is zero based on the
retained interest - related will assume the full value of the interest
2036 (A)(1)
1.
Transfer over life
a. Income cost- deduction
2.
Retained Right to the Income for Life
a. Bonds, rental and etc.
3.
Time Component
Therefore something is included in his gross estate - income in the 2702
DONALD TAKES THE INCOME FOR 10 YEARS, SURVIVES FOR 12 OR 8
Nothing is included if he dies after 10 year, no trust - no tax liability, no interest is retained

It is included in his estate if he dies before 10 years Ex. In Year 9, he makes a gift of his interest income to BILL -> Bill would enjoy the income the
income for another 10 year per Donald - Donald now dies in year 11
a.Section 2035
1.
Transfer during life
2.
Transfer must be made w/ 3 years of death
3.
At time of transfer interest would be included under
2036-2038
4.
2035 only applies if 2036-38 would have applied within 3 yrs
Trust #3
INCOME TO ANN FOR LIFE - Donald made a gift to Ann #1
INCOME TO DONALD FOR LIFE - Donald dies before Ann- Interest is called a Reversion
REMAINDER TO BOB - Donald made gift to Bob, after Ann dies #2

What gets included in estate and gift tax return?

Ann - take the interest and apply the life expectancy rate to get the rate of tax
Bob - remainder is valued at the full value of the corpus (donald)
Reversion - once Ann is done with receiving the income, once she dies he gets back the
interest Since Donald dies, Donald loses the life estate, He is still included. its called a Secondary Life
Estate which include Entire amount of the trust Less Anns interest

2036 (A)(1)
1.
Transfer over life
b. Income cost- deduction
2.
Right to Possession or Enjoyment
a. Bonds, rental and etc.
3.
Time Component
Therefore something is included in his gross estate - income in the 2702

Right to Possession or Enjoyment (SEE CASE: ESTATE MAXWELL v. Commissioner)

a. Explicit Right - Right that is in a agreement able to be displayed and proved
b. Implicit right - assumed right
i. Continued Occupancy in the house
1.
if not, rights are transfers
2.
Exclusive Possession
3.
Non-Exclusive - Only have the occupancy, or other are people leaving
a. Must display its non-exclusive
b. Adverse - other should have a different interest in the property
i. tenants in common - one person can have more interest than the other

c.
i.
ii.
d.
i.
ii.
iii.

Non-Adverse
Spouses Joint tenants Payment - there must be some type of payment
cash,check, etc.
If payments shown - IRS will be comfortable with it
Rent, Mortgage, Utilities and etc.

Ex. CASE: ESTATE MAXWELL v. Commissioner)

Parent -> Son/Wife - $270K

$20K forgiveness as gift from moth
Son -> Mother (mortgage) for $230K
Mother Paid Rent $1800
Son Pays Expenses
$270K to $230K Adequate and Full Consideration
IRS - triggered 2036(A)(2) by the Rent payment
READ PAGE 244

1. Donald transfers trust to

Ann and BOB
-Trustee has discretion to security or use for HEMS
-

2036((b)(2)
Nothing is included in Donalds estate cause he transferred everything for the life and education
for his kids
2.
Donald transfers trust to trustee
Donald is trustee
Trustee shall distribute to husbands wfor life
everything less the appropriate amount to provide applicable normal life
for the spouse
3.
Trustees discretion can only accumulate the income or pay it out, cannot use it for their
self unless it is specifically stated in the trust agreement

10/14/2015
Midterm - Post at 6:30 - 12:30 - 5 hrs to do it
4-5 questions (2033-2038)
Answer with explanation
236(a)(1) - theoretically transferred property over your life and somehow retained the right to
over the property and/or receive an economic benefit from the property
-Trust (Grantor - Settlor - issuer of the trust)
1. Income beneficiaries

2. Remainder Beneficiary

236(a)(2) - Same criteria as 2036(a)1 1.Transfer

2.Time Component - period for life , period that is not sustainable t
to death and etc
3. RIght to control possession or enjoyment
1.
2.

Use, possessor enjoy property

The income from the property

If it's in your will, that means you owned it - if you owned it then it's part of your property
2038 - Retained the right to alter, amend, terminate or distribute and REVOKE

1.Alter - bond with income

son gets 10K unless grantor decided otherwise and alter the agreement
retain the right to alter, amend and distribution the whole or part of the trust to one or more
beneficiaries
IF IT'S A 2038 POWER, the transfer is NEVER CONSIDERED A GIFT, there is never a
dominion and control when it can always be revoked by the grantor
Dominion & Control IF 2036(a) along with 2038
2.Value - value of the interest 2038 applies to both the income and remainder
If grantor only has the right to alter the distribution of the corpus only 2038 applies to the
distribution, however grantor does not have any right to alter the income(interest) to the
beneficiary, only the remainder of the corpus so 2038 does not apply to the income
if grantor retains for 10 year to direct distributions of corpus to ann, AFTER 10 years
(Beneficiary) is independent make changes.
Ex.
X ------------> Trust
Income to B for Life; - 2038 does not apply
Remainder to C - 2038 Applies
X reserves the right to replace C w/ D

Since X reverses the right to direct the remainder of the corpus to another beneficiaries - use
the entire value that is subject to that power - EVERYTHING

It will included in his estate because he still retained to power to revoke the trust. However only
with the consent of Emma or Ben. 2038 and 2036(a) applies. Under the adverse interest rule which is inapplicable under all trusts
Adverse Interest rule is a gift tax rule - it is a completed gift and the only way to get the
property is with the proper consent of the person with adverse interest.

Ascertainable Standard Rule- some type of objective way to limit the power of the trustee - it
tells the trusts what they can and cant do - whatever the retained interest that is not under this
rule will not apply to 2038 and 2036(a)
If a trusteee is bound to do something, they must do it and they are bound by the rule - doesnt
retain the right to revoke alter or etc. (if they have the power to retain more under the trust he/she can change or alter the right)
1.
2.
3.
4.
5.

Support - they provide support its an ascertainable standard

Reasonable Support
Maintenance and SUpport
Education, Medical and etc.
In Emergencies
Effect of Contingencies
-Derrick has the right to revoke the trust when Giants wins the super bowl
Giants dont wins and Derrick dies - 2038 will never require inclusion because at the time
of the death, Derrick didnt has the power to revoke the trust - 2036 a 2 because have power of
right to control but since it never occurred but he always retained the right until death
2038-1(b)
Reg 2036 - 20.2036-1(b)(3)(iii)

1.
2.
a.
b.
c.

Three Rules to replace the successor trustee

Ability to replace the successor trustee at any time and name your self as grantor, trustee will
also require an inclusion of the trust from the estate
Remove self as trustee and name an independent trustee - exclusion from estate
cant name spouse
parents or sibling or children
cant name an employee

d. cant name an corp with controlling interest (<80%)

e. If any of above is the trustee - included in the estate
3. If the grantor or settlor can remove the trustee only on the occurrence of some event or
contingency -

Purpose of 2038 would be to avoid PROBATE.

IF ever two provisions apply, irs will say everything applies.

Court of Law - abide by law

Court of Equity - does not follow by the law - basis on the situation and whether it's wrong or
right

Managerial Rights in a Trust - power to replace or change the asset

10/28/2015
Jointly owned property
3 Different way to own property with multiple owners
1. Joint interest
2. Tenancy in Common
3. Community Property (When owners are husband and wife in the same state)

1. Tenancy in Common equal right to use and own the property, to possess the property and
can do anything with the property just like any other owner
2. There can be unequal property, not always 50/50. Include your fractional share in the
property.
Ex. Only fractional share is include in the income state, even if the other owner dies.
3. Joint Interest:
a. When you die, the other owner obtains the remaining interest so nothing gets included
in the decedents estate under 2033.
4. 2040(a) entire value of the joint interest is included in the estate, however if other owners
an show the surviving joint tenancy contributed to the purchase of the property.
a. Consideration of money or moneys worth
b. Ex. Bob and Sally buy $1mil for 50% 50 Investments
1. Bob dies so sally gets the 1 mil as a stepped basis
2. Bob and Saly
Tax for real esate = $1mil
Residue goes to Saly
4. Without the realization event, (until the property is sold) there cannot be any
realization
1. Joint Interest avoids PROBATE
2. Use the mechanism of joint interest to protect from the property from Creditor.
a. NY rule it other owner is not your boyfriend/wlife, credit can lian on the joint property,
but nothing on the property, however when Saly sells it , IRS gets half of it, if Saly dies, IRS gets
the entire amount.
b. if Spouse IRS cant lian it, only thing they can get is when Saly dies.
c. Spousal Election rule under state the spouse understand that he/she is getting
that, but that is not enough, they want what is entitled under the statue, depending on the statue
they can elect out of what they will get out of the estate. Usually Half of the property.
d. Tenancy by the Entirety under 2040(b) if one spouse dies the remaining gets 50% of
the joint property
e. Credit Shelter Trust=
f. Portability
Credit Joint Tenancy
Credit Joint tenancy Bob owns 100% of Property, Bob gives joint tenancy interest to Jill, It
MAY be considered a gift, did Jill give anything back in order for it to be considered a joint
tenancy.

If Joint Tenancy did not give CONSIDERATION, Bob has to pick it as a GIFT in the 709 tax
form.
NY Rule : You will include the fractional share of the Interest (if Bob gives 50% of the property,
include 50% of the property as gift)
Can Jill sell the property after obtaining the Joint Tenancy?
- In NY, Jill is allowed to severe your interest. Some state may not allow without
the concent of the other owner.
Ex. Property $1Mil Joint Interest from Bob to Jill, not consideration from Jill to BOB, Bob will
pick it up as gift for the 50% of the transfer.
One Exception : Bank Accounts If you give another individual a joint interest in a bank
account, only an interest after a transfer of $$.
Terminatiing the Joint tenancy
If you terminate the joint tenancy at the death of one of the owner, tax affect (TRACY RULE)
TRACY Exclusion Amt = FMV * (Surviving Interest Contribution/Total Purchasing Price)
If you can show the survivor has made a contribution and it is consideration in the money or
moneys worth, if can be excluded from the gross estate.
1. Money or Property is the easiest form of valuation
2. Services Rendered
3. Assumptions of Mortgage taking on the mortgage or are named on the contract
4. Payments for Improvements (Capital Improvement are better than simple improvements)
1. Gift from other Joint owner/ Any appreciation from property is a contributions
2. Any Income

Joint Interest By Gift or Bequest (get the property because someone dies in will)
1. Only pick up their fraction of the interest
Page 221

1A.