Case Study: D's Life Insurance Policy

1328 Words 6 Pages
PART A-SHORT ANSWERS

1. D’s Life insurance policy
a. Per 2042(1) since the proceeds of the life insurance are being paid to the estate they are subject to the estate tax.
b. No, 2042(b) since D still has the ability to designate the beneficiary the gift is not complete and he is deemed to retain “incident of ownership” and the policy will be included in the estate.
c. D should transfer the policy to another individual or an irrevocable trust. D must divest himself the incidents of ownership. D must give up the right the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy,
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A only, since he passes half of his income (the interest) to Sonny that half of the interest will be subject to the gift tax. Mr. A is allowed a $14K exemption yearly and assuming the interest is less than $14K a year there will be no gift tax consequence on the interest either.

b. Having made no contributions to the joint account, the entire $100K will be passed on to Mr. A’s gross estate. 2040(a)

3. When valuating real estate comparable method sales and capitalization of income methods are used. Capitalization of income method is the common method used for rental properties. Historical cost does come into play if the property recently changed hands, replacement or reproduction costs may be taken into consideration when it comes to the buildings. Regs state that property will not be valued at assessment value for local tax purposes unless the assessed value is fair representation of FMV. Reg. 20.2031-1(b) and 25.2512-1.

4. Parcel joint tenancy

a. $400K would be included in Parent’s GE 2040(a) “except clause” for it to be included in Child GE because his share must show “to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money’s
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The gift will be complete when he resigns as trustee of the trust. Even if he does not exercise his right, he has the ability to do so. 25.2511-2

Yogi cannot take an exclusion (2503) because gifts with future interest do not apply for the exclusion.

Transfer to YLP: Transfers to partnerships and other entities are indirect gifts to its members, but the transfer of his royalties, residual rights, checking account, portfolio of stocks and bonds are also not gifts as Yogi did not relinquish control. The residence will also not be a gift under 2036 as he retained a “present enjoyment” by living rent free in the home.

Jr is deemed to have been gifted his share in YLP as he received it for less than an adequate and full consideration.

b)YLG and Family Trust Estate: Royalty and residual rights, it seems like those are the only items Yogi did not retain some sort of control in and are actually gifted.
The IRS will probably argue the same and tax Yogi’s estate. I could argue that Yogi did not own the trust but 2036 may come in since Yogi retained the rights to it, that he had no interests in the trust, did not receive income from the trust.

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