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MANNING ON

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MANNING ON

ESTATE PLANNING

Seventh Edition

Jerome A. ManningAnita S. Rosenbloom

Seth D. SlotkinKevin Matz

Incorporating Release #4March 2018

#237709

Practising Law InstituteNew York City

#37416

This work is designed to provide practical and usefulinformation on the subject matter covered. However, it issold with the understanding that neither the publisher northe author is engaged in rendering legal, accounting, orother professional services. If legal advice or other expertassistance is required, the services of a competent profes-sional should be sought.

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Copyright © 1980, 1982, 1988, 1991, 1995, 2004, 2005, 2006, 2007, 2008, 2009,2011, 2012, 2013, 2014, 2015, 2017, 2018 by Practising Law Institute.

First edition 1980, Jerome A. ManningSecond edition 1982Third edition 1988Fourth edition 1991Fifth edition 1995, Jerome A. Manning, Anita S. Rosenbloom, Alan S.HalperinSixth edition 2004, Jerome A. Manning, Anita S. Rosenbloom, Seth D.SlotkinSeventh edition 2013, Jerome A. Manning, Anita S. Rosenbloom, Seth D.Slotkin, Kevin Matz

All rights reserved. Printed in the United States of America. No part of thispublication may be reproduced, stored in a retrieval system, or transmitted inany form by any means, electronic, mechanical, photocopying, recording, orotherwise, without the prior written permission of Practising Law Institute.

LCCN: 2004094466ISBN: 978-1-4024-2124-2

About the Authors

JEROME A. MANNING draws on more than fifty years of estate plan-ning practice. Since 1961 he has been with the New York City lawfirm of Stroock & Stroock & Lavan LLP, where he is currently OfCounsel. Mr. Manning was an adjunct professor with NYU School ofLaw for forty years, teaching estate planning for the last twenty-fiveyears. A member of the New York and Florida bars, Mr. Manning is agraduate of NYU School of Law and Yale’s Master of Laws program.

ANITA S. ROSENBLOOM is a partner with the New York City law firm ofStroock & Stroock & Lavan LLP. She has practiced in this field for overthirty years, concentrating in the areas of estate planning, businesssuccession planning, and estate and trust administration andlitigation. Ms. Rosenbloom has lectured at the New York City BarAssociation, New York State Society of Certified Public Accountantsand the Practising Law Institute and has written articles on numerousestate planning subjects, including the use of life insurance and othertrust vehicles to reduce tax liability and special planning considera-tions for the succession of closely held business interests. Her articlesappear in publications such as the New York Law Journal, the NewYork University Institute on Federal Taxation, New York State BarAssociation N.Y. Real Property Law Journal and the New York State BarAssociation Trusts and Estates Law Section Newsletter, as well as thePractising Law Institute’s Tax Law and Estate Planning Series. She is amember of the New York State Bar Association and of the Trusts &Estates Tax Committee, Association of the Bar of the City of New York.She is also a Fellow of the American College of Trust and EstateCounsel. Ms. Rosenbloom received both J.D. and LL.M. (Tax) degreesfrom N.Y.U. School of Law.

SETH D. SLOTKIN is a partner with the New York City law firm ofStroock & Stroock & Lavan LLP. He has practiced in this field for overtwenty years, counseling clients in all aspects of the trusts and estatesarea, including estate planning and estate and trust administrationand litigation. Mr. Slotkin is Chair of the Trusts and EstatesCommittee of United Jewish Appeal–Federation of Jewish Philanthro-pies. He is also a member of the Planned Giving Advisory Committee

vii(Manning, Rel. #4, 3/18)

of New York Presbyterian Hospital and the Trusts, Estates &Surrogate’s Courts Committee, Association of the Bar of the City ofNew York. Mr. Slotkin is a graduate of NYU School of Law, both theJ.D. and LL.M. (Tax) programs. He is a member of the New York andNew Jersey bars. He lives in New York City with his wife Lisa and hischildren Asher and Sylvie.

KEVIN MATZ is a partner with the New York City law firm of Stroock &Stroock & Lavan LLP, where his practice is principally devoted todomestic and international estate and tax planning, estate adminis-tration and related litigation. Mr. Matz earned his J.D. from FordhamUniversity School of Law (where he was a Notes & Articles Editor ofthe Fordham Law Review) and his LL.M. in Taxation from New YorkUniversity School of Law. He is a Fellow of the American College ofTrust and Estate Counsel (ACTEC), Co-Chair of the TaxationCommittee of the Trusts and Estates Section of the New York StateBar Association, Chair of the Estate Planning Committee of the NewYork State Society of Certified Public Accountants (NYSSCPA) and amember of the New York City Bar Association, among otherprofessional organizations, and has helped to draft several of the CityBar ’s, the State Bar ’s and the NYSSCPA’s comment letters to both theU.S. Department of Treasury and the New York State legislative andexecutive branches. Mr. Matz has written and spoken extensivelyabout the use of family limited partnerships and various otherleveraged transfer techniques, as well as estate planning strategies forgroups ranging from private equity fund managers to professionalathletes, and has been frequently cited in the professional literature(including at the Heckerling Institute on Estate Planning) for hisinnovative solutions and analysis. In addition, Mr. Matz is a certifiedpublic accountant, in which connection he is the current Chairman ofboth the NYSSCPA’s Estate Planning Committee and its Foundationfor Accounting Education’s Curriculum Committee, a past Chairmanof the NYSSCPA’s Entertainment, Arts and Sports Committee, andcurrently a member of the Foundation for Accounting Education’sBoard of Trustees, of which he is currently the President-Elect. Further,Mr. Matz currently serves as Vice Chair of the UJA–Federation of NewYork’s Lawyers Division Trusts & Estates Group. Mr. Matz may becontacted at 212-806-6076 or [email protected].

MANNING ON ESTATE PLANNING

viii

Acknowledgments

The authors appreciate the contributions of Lee Slavutin, whoprovided invaluable assistance with chapter 8 on life insurance, andSteven Rabitz, Abbey Keppler and Marissa Holob of Stroock & Stroock& Lavan LLP, who provided invaluable assistance with chapter 9 onretirement benefits. The authors also appreciate the contributions tothis book of Etta Brandman of Stroock & Stroock & Lavan LLP.

ix(Manning, Rel. #4, 3/18)

Table of Chapters

Chapter 1 Getting Started

Chapter 2 The Marital Deduction

Chapter 3 The Nonmarital Share

Chapter 4 Providing for Children

Chapter 5 Making Gifts

Chapter 6 Generation Skipping

Chapter 7 Grantor Retained Interest Trusts,Combined Purchases, and Sales ofRemainder Interests

Chapter 8 Life Insurance

Chapter 9 Retirement Benefits

Chapter 10 Valuation and Other Estate and Gift TaxIssues Relating to Closely-Held Enterprises

Chapter 11 Business Interests: Family and PartnerConcerns

Chapter 12 Joint Interests

Chapter 13 Choosing Executors and Trustees

Chapter 14 Payment of Transfer Taxes

Chapter 15 Not to Be Overlooked

(Manning, Rel. #4, 3/18) xi

Table of Contents

About the Authors .........................................................................vii

Acknowledgments ..........................................................................ix

Table of Chapters............................................................................xi

Chapter 1 Getting Started

§ 1:1 Introduction.................................................................... 1-1§ 1:2 The Interview ................................................................. 1-3§ 1:3 Domicile ......................................................................... 1-6§ 1:4 Human and Family Problems....................................... 1-11§ 1:5 Family History.............................................................. 1-12

§ 1:5.1 The Need for Information ...................................... 1-13§ 1:6 The Family ’s Assets...................................................... 1-16

§ 1:6.1 Registration of Assets.............................................. 1-19§ 1:7 Tax Facts ....................................................................... 1-20§ 1:8 Summary of the Estate, Gift, and Generation-Skipping

Tax Provisions of the American Taxpayer ReliefAct of 2012..................................................................... 1-24

§ 1:9 Planning and Drafting Considerations ......................... 1-25§ 1:10 2017 Tax Reform Act.................................................... 1-28

Chapter 2 The Marital Deduction

§ 2:1 Introduction.................................................................... 2-2§ 2:2 Size of the Deduction ..................................................... 2-5

§ 2:2.1 Setting Aside a Bypass Trust..................................... 2-7§ 2:2.2 Exploiting the Spouse’s Credit .................................. 2-8

§ 2:3 Factors Favorable to Deferral ........................................ 2-14§ 2:4 Factors Unfavorable to Deferral.................................... 2-18§ 2:5 Portability of Exemptions ............................................. 2-26

§ 2:5.1 Portability Election.................................................. 2-27§ 2:5.2 Calculating the Deceased Spousal Unused

Exclusion Amount .................................................. 2-27§ 2:5.3 Simplified Method for Certain Taxpayers to

Make a Late Portability Election............................. 2-31§ 2:5.4 Planning with Portability ........................................ 2-33

(Manning, Rel. #4, 3/18) xiii

§ 2:6 Specific Bequests........................................................... 2-34§ 2:7 The Pecuniary Legacy ................................................... 2-36§ 2:8 The Fractional Share Legacy......................................... 2-40§ 2:9 Choosing the Formula .................................................. 2-43§ 2:10 Eligible Bequests ........................................................... 2-45

§ 2:10.1 Outright Bequests ................................................... 2-45§ 2:10.2 Bequests in Trusts................................................... 2-46§ 2:10.3 The Classic Marital Deduction Trust ..................... 2-46§ 2:10.4 The Estate Remainder Trust ................................... 2-50§ 2:10.5 The Income-Only Trust .......................................... 2-50

§ 2:11 Disclaimers................................................................... 2-63§ 2:12 Eligible Portions............................................................ 2-66§ 2:13 The Noncitizen Spouse ................................................ 2-67§ 2:14 The Qualified Domestic Trust...................................... 2-70§ 2:15 Simultaneous Death ..................................................... 2-77§ 2:16 The Arithmetic ............................................................. 2-77

Chapter 3 The Nonmarital Share

§ 3:1 Introduction.................................................................... 3-1§ 3:1.1 The Exemption Equivalent of the Unified Credit ...... 3-2§ 3:1.2 Source of Payment of Estate Taxes and

Administration Expenses .......................................... 3-5§ 3:2 Sprinkling Trusts ............................................................ 3-9

§ 3:2.1 Generation-Skipping ............................................... 3-13§ 3:2.2 Power of Appointment............................................ 3-13§ 3:2.3 Basis Considerations............................................... 3-15

§ 3:3 Invasion of Principal..................................................... 3-18§ 3:3.1 5-and-5 Power......................................................... 3-19

§ 3:4 Further Use of Sprinkling Trusts .................................. 3-20§ 3:4.1 Generation-Skipping Tax ........................................ 3-21

§ 3:5 Charitable Provisions.................................................... 3-21§ 3:5.1 Form of Bequest ...................................................... 3-22

[A] Pooled Income Fund ............................................. 3-22[B] Charitable Remainder Trust ................................. 3-22[C] Charitable Lead Trust ........................................... 3-27

§ 3:5.2 Private Foundation Rules ........................................ 3-29§ 3:5.3 Taxation .................................................................. 3-31

Chapter 4 Providing for Children

§ 4:1 Fundamental Considerations.......................................... 4-1§ 4:1.1 The Lawyer ’s Role .................................................... 4-3

[A] Use of Trusts .......................................................... 4-4[B] Provisions for Flexibility ......................................... 4-8[C] Picking the Right Age ............................................. 4-9


xiv

§ 4:1.2 Guardianships......................................................... 4-11§ 4:1.3 Uniform Transfers to Minors Act ........................... 4-12

[A] The Family Business ............................................ 4-14[B] Section 2503(c) Trusts .......................................... 4-17[C] Straight Income Trusts ......................................... 4-20

§ 4:2 Child As Trustee........................................................... 4-21§ 4:3 When Parents Die......................................................... 4-22

§ 4:3.1 One Trust for Children ........................................... 4-25§ 4:3.2 Choice of Guardian ................................................ 4-25

§ 4:4 Further Tax Aspects ...................................................... 4-28§ 4:4.1 Distributable Net Income ....................................... 4-28§ 4:4.2 Capital Gains.......................................................... 4-29§ 4:4.3 The Kiddie Tax........................................................ 4-30§ 4:4.4 Withheld Income .................................................... 4-32

§ 4:5 Support ......................................................................... 4-33§ 4:5.1 Items of Support ..................................................... 4-35

§ 4:6 Generation-Skipping Transfers ..................................... 4-38

Chapter 5 Making Gifts

§ 5:1 Introduction.................................................................... 5-1§ 5:1.1 The Applicable Credit Amount ................................ 5-2

§ 5:2 Advantages of Gifts......................................................... 5-5§ 5:3 Contemplation of Death............................................... 5-12§ 5:4 A Transfer That Is Not a Gift ....................................... 5-17§ 5:5 What the Children Would Like .................................... 5-18§ 5:6 Gifts with Strings to Children...................................... 5-21§ 5:7 Interplay of Taxes ......................................................... 5-21

§ 5:7.1 When Tax Savings Are Subordinate ........................ 5-26§ 5:8 Discretionary Trusts ..................................................... 5-28§ 5:9 The Private Annuity ..................................................... 5-30§ 5:10 Installment Sale............................................................ 5-37§ 5:11 Short-Term Trusts......................................................... 5-41§ 5:12 Trust and Leaseback ..................................................... 5-42§ 5:13 Loans ............................................................................ 5-43§ 5:14 Net Gifts....................................................................... 5-48§ 5:15 Personal and Household Effects.................................... 5-52§ 5:16 The Residence............................................................... 5-54§ 5:17 Transfers to Charity and Family................................... 5-56§ 5:18 Charitable Remainder Trusts ........................................ 5-56§ 5:19 Charitable Lead Trusts.................................................. 5-63§ 5:20 Gifts for Conservation and Historic Purposes .............. 5-67§ 5:21 Stock of Family Corporations ....................................... 5-68§ 5:22 Tangible Personal Property............................................ 5-70§ 5:23 Valuation of Gifts ......................................................... 5-71

(Manning, Rel. #4, 3/18)

Table of Contents

xv

Chapter 6 Generation Skipping

§ 6:1 Introduction.................................................................... 6-2§ 6:2 Statutory Framework ...................................................... 6-3§ 6:3 Taxable Terminations...................................................... 6-4

§ 6:3.1 Requirements for Taxable Terminations ................... 6-5§ 6:3.2 Taxable Amount........................................................ 6-6§ 6:3.3 Basis Adjustment ...................................................... 6-7

§ 6:4 Taxable Distributions...................................................... 6-7§ 6:4.1 Requirements for Taxable Distributions ................... 6-7§ 6:4.2 Taxable Amount........................................................ 6-8§ 6:4.3 Income Tax Consequences........................................ 6-8

§ 6:5 Direct Skips .................................................................... 6-9§ 6:5.1 Requirements for Direct Skips .................................. 6-9§ 6:5.2 Crummey Withdrawal Powers ................................ 6-10§ 6:5.3 No Trust Look-Through.......................................... 6-11§ 6:5.4 Taxable Amount...................................................... 6-12§ 6:5.5 Basis Adjustment .................................................... 6-12

§ 6:6 Skip Persons and Generation Assignments .................. 6-12§ 6:6.1 General Rules.......................................................... 6-13§ 6:6.2 Persons with a Deceased Parent.............................. 6-13§ 6:6.3 Trusts As Skip Persons ........................................... 6-17

§ 6:7 Interest in Property....................................................... 6-17§ 6:7.1 Statutory Rules........................................................ 6-17§ 6:7.2 Charitable Split-Interest Trusts............................... 6-19

§ 6:8 Excluded Transfers ........................................................ 6-20§ 6:9 The Rate of Tax ............................................................ 6-23§ 6:10 The GST Exemption .................................................... 6-24

§ 6:10.1 Separate Trusts........................................................ 6-24§ 6:10.2 Exemption for Both Spouses ................................... 6-28§ 6:10.3 Allocating the GST Exemption............................... 6-32

§ 6:11 The Inclusion Ratio...................................................... 6-40§ 6:11.1 General Rules.......................................................... 6-40§ 6:11.2 Charitable Lead Trusts............................................ 6-42§ 6:11.3 Recalculating the Inclusion Ratio ........................... 6-43

§ 6:12 Estate Tax Inclusion Period .......................................... 6-43§ 6:13 When There Are Multiple Skips................................... 6-46§ 6:14 Planning for the Generation-Skipping Transfer Tax....... 6-47

§ 6:14.1 Protecting Exempt Trusts........................................ 6-47§ 6:14.2 Exploiting the GST Exemption............................... 6-51§ 6:14.3 Choosing Between the GST Tax and Estate Tax ...... 6-53§ 6:14.4 Drafting Concerns .................................................. 6-54

§ 6:15 Nonresident Aliens ....................................................... 6-55


xvi

Chapter 7 Grantor Retained Interest Trusts,Combined Purchases, and Sales ofRemainder Interests

§ 7:1 Introduction.................................................................... 7-2§ 7:2 Historical Perspective...................................................... 7-3§ 7:3 Overview of Section 2702............................................... 7-5

§ 7:3.1 Chapter 14 Generally ............................................... 7-5§ 7:3.2 Grantor Retained Income Trust................................ 7-6§ 7:3.3 Section 2702 ............................................................. 7-7

§ 7:4 Grantor Trusts with Retained Payments ...................... 7-11§ 7:4.1 Qualified Interests .................................................. 7-11§ 7:4.2 Satisfying the Annuity or Unitrust Obligation

with Notice ............................................................. 7-12[A] Prior to Regulations .............................................. 7-13[B] Regulations Proscribing Payment of Annuity

with a Note ............................................................ 7-16§ 7:4.3 Valuing the Retained Interest.................................. 7-17§ 7:4.4 Measuring the Effectiveness of a GRAT ................. 7-20§ 7:4.5 Selecting the Term of the GRAT............................. 7-23§ 7:4.6 Estate Tax Consequences ........................................ 7-24§ 7:4.7 GST Tax Consequences .......................................... 7-27§ 7:4.8 Income Tax Consequences...................................... 7-28§ 7:4.9 Comparing a GRAT to Other Planning

Techniques............................................................. 7-29[A] Outright Gift ........................................................ 7-29[B] Loan...................................................................... 7-30[C] Sale to Family Member......................................... 7-30[D] Sale to Intentionally Defective Grantor Trust........ 7-31

§ 7:5 Qualified Personal Residence Trust............................... 7-35§ 7:5.1 Personal Residence.................................................. 7-36§ 7:5.2 Other Assets ........................................................... 7-39§ 7:5.3 Conversion to a GRAT ........................................... 7-40§ 7:5.4 Estate and Gift Tax Consequences.......................... 7-41§ 7:5.5 Practical Considerations ......................................... 7-43§ 7:5.6 Prohibition Against Reacquisition .......................... 7-45§ 7:5.7 Joint Ownership...................................................... 7-48§ 7:5.8 Measuring the Effectiveness of a QPRT.................. 7-49

§ 7:6 Joint (Combined) Purchases ......................................... 7-50§ 7:7 Sales of Remainder Interests......................................... 7-55§ 7:8 The Private Annuity ..................................................... 7-61

Appendix 7A Qualified Personal Residence Trust............ App. 7A-1


Table of Contents

xvii

Chapter 8 Life Insurance

§ 8:1 Introduction.................................................................... 8-1§ 8:1.1 Impact of the 2012 Tax Law on the Use of

Life Insurance in Estate Planning ............................. 8-4§ 8:1.2 Life Insurance Products ............................................ 8-6

§ 8:2 Transfer the Policy?......................................................... 8-8§ 8:2.1 Collecting the Proceeds........................................... 8-10§ 8:2.2 Transferring the Policy ............................................ 8-13

§ 8:3 Insurance Trusts ........................................................... 8-16§ 8:4 Payment of Estate Tax .................................................. 8-18§ 8:5 Second-to-Die Insurance............................................... 8-20§ 8:6 Owner of Policy Dies .................................................... 8-23§ 8:7 Premium Payments and Estate Tax .............................. 8-27

§ 8:7.1 Premium Payments As Gifts .................................. 8-31§ 8:8 Loans ............................................................................ 8-39§ 8:9 Dissolving Old Borrowing Plans................................... 8-42§ 8:10 More About Borrowing Against the Policy ................... 8-43§ 8:11 Group Policies and Premiums ...................................... 8-44§ 8:12 Corporate-Owned Insurance......................................... 8-45§ 8:13 Split-Dollar Policies ...................................................... 8-47§ 8:14 Life Settlements ............................................................ 8-58

Chapter 9 Retirement Benefits

§ 9:1 Introduction.................................................................... 9-1§ 9:2 Estate Tax ....................................................................... 9-3§ 9:3 Income Tax Rules ........................................................... 9-6

§ 9:3.1 Rollovers ................................................................... 9-7[A] Rollovers by Participant or Surviving Spouse.......... 9-7[B] Rollovers by Nonspouse Beneficiary ....................... 9-9

§ 9:3.2 Lump-Sum Distributions—Capital Gainsand Averaging Rules (applicable to participantsborn before January 1, 1936) .................................... 9-9

§ 9:3.3 Lump-Sum Elections (Pre-1987 Rules) ................... 9-13§ 9:3.4 Taxable Amount of Lump-Sum Distributions

(Pre-1987 Rules)...................................................... 9-14§ 9:3.5 Income Tax Treatment of Employee

Contributions ......................................................... 9-16§ 9:3.6 Roth IRAs ............................................................... 9-17§ 9:3.7 Income in Respect of a Decedent ........................... 9-18§ 9:3.8 Penalty Taxes on Premature Distributions,

Failure to Make Minimum Distributions,and Excess Distributions and Accumulations ........ 9-19


xviii

[A] Tax on Premature Distributions ........................... 9-20[B] Minimum Distributions ....................................... 9-22[C] Excess Distributions and Accumulations ............. 9-24

§ 9:4 Selecting the Beneficiary ............................................... 9-24§ 9:5 Funding the Applicable Credit Amount Trust with

Retirement Benefits ...................................................... 9-31§ 9:6 Use of Retirement Benefits for Charity ........................ 9-33§ 9:7 Payment of Estate Taxes Attributable to Retirement

Benefits ......................................................................... 9-34§ 9:8 Retirement .................................................................... 9-35§ 9:9 Nonqualified Plans ....................................................... 9-36

Chapter 10 Valuation and Other Estate andGift Tax Issues Relating to Closely-HeldEnterprises

§ 10:1 Introduction.................................................................. 10-3§ 10:2 Preliminary Comments Concerning Valuation............. 10-3

§ 10:2.1 Penalty for Understatement of Value ...................... 10-4§ 10:2.2 Revenue Ruling 59-60............................................. 10-5§ 10:2.3 Statute of Limitations and Adequate

Disclosure ............................................................... 10-5§ 10:2.4 Anticipating the IRS’s Response ............................. 10-7§ 10:2.5 Valuation When No Estate Tax Is Due ................... 10-8

§ 10:3 Valuation Discounts ..................................................... 10-9§ 10:3.1 Minority Discount .................................................. 10-9§ 10:3.2 Discount for Lack of Marketability....................... 10-10§ 10:3.3 Market Absorption/Blockage Discount ................. 10-12§ 10:3.4 Fractional Interest Discount ................................. 10-12§ 10:3.5 Planning for Discounts and QTIP Trusts ............. 10-14§ 10:3.6 Key Person Discount............................................. 10-15§ 10:3.7 Discount for Securities Law Restrictions .............. 10-15§ 10:3.8 Discount for Built-In Capital Gains ..................... 10-16§ 10:3.9 Substantiating Valuation Discounts...................... 10-20

§ 10:4 Valuation Premiums ................................................... 10-21§ 10:4.1 Control Premium.................................................. 10-21§ 10:4.2 Swing Vote Premium ............................................ 10-23

§ 10:5 Transfers Soon Before Death to Achieve MinorityPosition....................................................................... 10-24

§ 10:6 Family Limited Partnerships....................................... 10-25§ 10:6.1 Discounted Gifts with Retained Control .............. 10-26§ 10:6.2 Economic Substance Doctrine and

Section 2703 ......................................................... 10-28§ 10:6.3 Gift on Formation................................................. 10-37


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§ 10:6.4 Section 2704(b) ..................................................... 10-43§ 10:6.5 Section 2704(a) ..................................................... 10-47§ 10:6.6 Potential Estate Tax Inclusion—Section 2036 ...... 10-51

[A] Estate of Powell................................................... 10-60[A][1] Facts of Powell ................................................. 10-61[A][2] IRS Position and Tax Court Analysis .............. 10-61[A][3] Methodology for Estate Tax Inclusion and

Application of Section 2043 ............................ 10-62§ 10:6.7 Annual Gift Tax Exclusion ................................... 10-63§ 10:6.8 Planning Considerations....................................... 10-66§ 10:6.9 Summing Up FLPs................................................ 10-68

§ 10:7 Section 2704 Proposed Regulations ............................ 10-69§ 10:7.1 Disregarded Restrictions ....................................... 10-70§ 10:7.2 Applicable Restrictions.......................................... 10-74§ 10:7.3 Lapses of Certain Rights and the Three-Year

Clawback Upon Death ......................................... 10-75§ 10:8 Family-Owned Business Deduction............................ 10-77§ 10:9 Special Valuation of Farms and Qualifying Real

Property ...................................................................... 10-78§ 10:10 Estate Freezes.............................................................. 10-78

§ 10:10.1 Prior Attacks on Estate Freezes ......................... 10-79§ 10:10.2 Overview of Section 2701 ................................. 10-80§ 10:10.3 Statutory Prerequisites ...................................... 10-83§ 10:10.4 Transfer of Equity Interest ................................ 10-83§ 10:10.5 Family Relationships......................................... 10-84§ 10:10.6 Applicable Retained Interest ............................. 10-85

[A] Distribution Right .............................................. 10-86[B] Extraordinary Payment Rights ............................ 10-88

§ 10:10.7 Exceptions to Section 2701............................... 10-89§ 10:10.8 Valuation of Applicable Retained Interests........ 10-91

[A] Extraordinary Payment Rights ............................ 10-91[B] Distribution Rights............................................. 10-91[C] Qualified Payment Rights Combined with

Extraordinary Payment Rights ............................ 10-93[D] Ten Percent Threshold........................................ 10-95

§ 10:10.9 Subtraction Method of Valuation...................... 10-95[A] Step One ............................................................. 10-95[B] Step Two ............................................................. 10-96[C] Step Three .......................................................... 10-97[D] Step Four ............................................................ 10-97

§ 10:10.10 Cumulative, but Unpaid, Distributions............ 10-98§ 10:10.11 Adjustments to Avoid Double Taxation.......... 10-100§ 10:10.12 Income Tax Concerns ..................................... 10-101§ 10:10.13 Summing Up Estate Freezes ........................... 10-107

§ 10:11 Formula Transfers..................................................... 10-108


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Chapter 11 Business Interests: Family and PartnerConcerns

§ 11:1 Introduction.................................................................. 11-2§ 11:2 Continuing the Business .............................................. 11-2

§ 11:2.1 Will the Business Survive? ..................................... 11-2§ 11:2.2 Instructions to Fiduciaries ..................................... 11-3

§ 11:3 Family Problems ........................................................... 11-4§ 11:3.1 Income for Dependents........................................... 11-6§ 11:3.2 Corporate Redemption............................................ 11-8§ 11:3.3 Different Classes of Stock....................................... 11-9

[A] Section 2701 Concerns....................................... 11-10[B] Satisfying Family Members Not in Business ...... 11-11[C] Post-Death Reorganization ................................. 11-12

§ 11:3.4 S Corporation ....................................................... 11-14[A] Qualified Subchapter S Trusts ............................ 11-15[B] Electing Small Business Trusts ........................... 11-16

§ 11:3.5 Partnership and Limited Liability Company......... 11-19§ 11:3.6 Nonbusiness Assets .............................................. 11-20§ 11:3.7 Sibling Rivalry....................................................... 11-21

§ 11:4 The Deceased Co-Owner............................................ 11-22§ 11:5 The Surviving Co-Owner ........................................... 11-24§ 11:6 The Buy-Sell Agreement ............................................. 11-25

§ 11:6.1 Tax Law Requirements.......................................... 11-27[A] Case Law ............................................................ 11-27[B] Pre-October 9, 1990 Agreements........................ 11-31[C] Three-Pronged Test Under Section 2703............ 11-32

§ 11:6.2 Price Formula........................................................ 11-36§ 11:6.3 Funding Through Insurance ................................. 11-38§ 11:6.4 Basis...................................................................... 11-41§ 11:6.5 Dividend Considerations ...................................... 11-42§ 11:6.6 Partnerships .......................................................... 11-44§ 11:6.7 Other Considerations ........................................... 11-46

Chapter 12 Joint Interests

§ 12:1 Introduction.................................................................. 12-1§ 12:2 Nature of Ownership Interests ..................................... 12-2

§ 12:2.1 Property Rights ....................................................... 12-2§ 12:2.2 State Law ................................................................ 12-3

§ 12:3 Gift Tax......................................................................... 12-4§ 12:3.1 Creation of Joint Tenancy....................................... 12-4

[A] Annual Exclusion and Gift Splitting .................... 12-4[B] Value of Gift ......................................................... 12-5


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[C] Joint Bank Accounts ............................................. 12-6[D] U.S. Savings Bonds............................................... 12-7[E] Family Residence .................................................. 12-7

§ 12:3.2 Termination of Joint Tenancy ................................. 12-7§ 12:4 Estate Tax ..................................................................... 12-9

§ 12:4.1 General Rule ........................................................... 12-9§ 12:4.2 Qualified Joint Property ........................................ 12-13

§ 12:5 Generation-Skipping Transfer Tax .............................. 12-14§ 12:6 Advantages and Disadvantages ................................... 12-15

§ 12:6.1 Income Tax Considerations .................................. 12-15[A] Cost Basis ........................................................... 12-15[B] Spousal Joint Tenancies Created

Before 1977 .......................................................... 12-18§ 12:6.2 Controlling Disposition of Property...................... 12-19§ 12:6.3 Exploiting the Unified Credit ............................... 12-20§ 12:6.4 Disclaimers ........................................................... 12-20§ 12:6.5 Other Considerations ........................................... 12-23

Chapter 13 Choosing Executors and Trustees

§ 13:1 Introduction.................................................................. 13-1§ 13:2 Investment Responsibilities .......................................... 13-6§ 13:3 Family Members As Fiduciaries.................................. 13-12§ 13:4 Other Fiduciaries ........................................................ 13-18

§ 13:4.1 Banks As Fiduciaries............................................. 13-20§ 13:5 Multiple Fiduciaries .................................................... 13-22

§ 13:5.1 Limitation of Powers............................................. 13-23[A] Sprinkling Trusts ................................................ 13-25[B] Life Insurance ..................................................... 13-26

§ 13:6 Successor Trustees ...................................................... 13-27§ 13:6.1 Appointment......................................................... 13-28§ 13:6.2 Removal ................................................................ 13-29

[A] Scope of Power.................................................... 13-31

Chapter 14 Payment of Transfer Taxes

§ 14:1 Introduction.................................................................. 14-1§ 14:2 Responsibility for Tax ................................................... 14-3

§ 14:2.1 Common Law......................................................... 14-3§ 14:2.2 Tax Apportionment................................................. 14-4

[A] Broad Tax Clause .................................................. 14-7[B] Marital Deduction Trust....................................... 14-8[C] Generation-Skipping Tax .................................... 14-12[D] Trusts and Tax Payment ..................................... 14-15


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[E] Special Problems/Source ofPayment of Taxes ................................................ 14-18

[F] Confirming Apportionment................................ 14-21§ 14:2.3 Filing the Estate Tax Return; Closing Letters;

Basis Reporting ..................................................... 14-21§ 14:2.4 New IRS Procedures Concerning Requests for

Discharge of Estate Tax Liens ............................... 14-23§ 14:3 Deferral of Estate Tax ................................................. 14-25

Chapter 15 Not to Be Overlooked

§ 15:1 Introduction.................................................................. 15-2§ 15:2 Costs of Dying.............................................................. 15-2§ 15:3 Memento Bequests ....................................................... 15-5§ 15:4 Tangible Property .......................................................... 15-6§ 15:5 Disclaimers................................................................. 15-11§ 15:6 Providing for In-Laws ................................................. 15-23§ 15:7 Income in Respect of a Decedent ............................... 15-25§ 15:8 Estate Liquidity........................................................... 15-28

§ 15:8.1 Life Insurance ....................................................... 15-32§ 15:9 Care for the Elderly and the Failing............................ 15-33§ 15:10 IRS Guidance on the 2-Percent of Adjusted Gross

Income Floor for Trusts and Estates........................... 15-46§ 15:10.1 The Basic Rules .................................................. 15-47§ 15:10.2 The Special Case of Investment

Advisory Fees ...................................................... 15-48§ 15:10.3 Bundled Fees ....................................................... 15-49

§ 15:11 Proposed Regulations Concerning BasisConsistency and Reporting for Property Acquiredfrom a Decedent ......................................................... 15-51

§ 15:11.1 Consistency of Basis with Estate Tax Return..... 15-52§ 15:11.2 Property that Increases Estate Tax Liability ....... 15-52§ 15:11.3 Final Value of Property Acquired from a

Decedent ............................................................ 15-53§ 15:11.4 After-Discovered or Omitted Property ............... 15-53§ 15:11.5 Definition of Executor for Purposes of

Sections 1014(f) and 6035 ................................. 15-54§ 15:11.6 Requirement to Provide Information Return

and Statement(s) Under Section 6035 ................ 15-54§ 15:11.7 Circumstances Under which No Form 8971

or Schedule A Is Required UnderSection 6035 ...................................................... 15-55

§ 15:11.8 Property to Be Reported on the Form 8971and Schedule A .................................................. 15-55

§ 15:11.9 Beneficiaries ....................................................... 15-55


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§ 15:11.10 Due Date for Information Return andStatements ........................................................ 15-57

§ 15:11.11 Supplemental Form 8971 and Schedule A........ 15-57§ 15:11.12 Subsequent Transfers ........................................ 15-58§ 15:11.13 Proposed Effective/Applicability Date................ 15-59

Index ................................................................................................ I-1

xxiv
