1. Link Between Gift and Estate Taxes
Each is necessary to enforce the other
The taxes are assessed at essentially the same rates
Though, the gift tax is measured exclusively while the estate tax is measured inclusively
Using the exemption of the gift tax also counts against the estate tax
In most cases, a completed gift for gift tax purposes removes an asset from a taxable estate while an incomplete gift remains in the taxable estate

2. The Gross Estate
The gross estate for estate tax purposes is very broadly defined
It is much more broad than the “probate” estate
The gross estate includes:
Payable on death accounts
Retirement accounts
Life insurance policies owned by the decedent
Assets over which the decedent held a general power of appointment
Even if it was not exercised
Joint accounts (to the extent that the assets were contributed by the decedent)
The entire joint account between an older decedent and a younger person will be assumed to have been contributed by the decedent unless proven otherwise

3. §2038 – Revocable Transfers
Revocable trusts are included in the taxable estate of the grantor. But §2038 is much broader than just the standard “revocable” trust.
It includes any trust over which the grantor retains power to:
alter, amend, revoke, or terminate the beneficial interest in the trust
This includes:
The power to change how much each beneficiary receives from the trust.
Such as through a power of appointment
(even a limited one)
The power to determine who receives benefit from the trust.
Virtually any control over the disposition of the trust assets.

4. §2036 – Transfer with Retained Life Interest
This statute means that if the grantor retains the right to benefit from the trust assets for life, it is in his or her estate. This includes the right to:
Live in real estate for life
Receive the income generated from an asset
Have (even a discretionary) potential benefit from an asset for life
This rule is so strong that to keep an asset outside of the estate of the grantor, it usually makes sense to make sure the grantor derives no benefit whatsoever from the trust

5. Other Trust Powers
These other powers over trust assets also cause the trust assets to be part of the taxable estate of the grantor:
Any power that was relinquished within 3 years of death that would have caused it to be part of the grantor’s estate (§2035)
This is important in the case of life insurance trusts. If the policy was transferred to a trust within 3 years of death, the proceeds are in the estate of the grantor
A transfer to the trust that does not take effect until the death of the grantor (§2037)
General power of appointment (§2041)
etc.

6. The Effect of a Completed Gift
An “incomplete” gift to a trust will always remain in the taxable estate of the grantor.
However, a “completed” gift can sometimes remain in the taxable estate of the grantor if the grantor retains power or benefit from the trust asset.
E.g., if the grantor gives a house to the trust in a manner that is a completed gift, but keeps living in the house for life, the house may be considered part of the grantor’s estate
He retained de facto benefit from the trust asset
If you pay gift tax on an asset that’s included in the estate, that is deducted from the estate tax due
So, you do not wind up paying twice for the passing of the same asset in the form of gift tax AND estate tax

7. Trust Assets in The Beneficiaries’ Estates
Most of the provisions discussed above only bring trust assets back into the estate of the grantor.
However, trust assets can also be considered part of the beneficiary’s taxable estate if:
The beneficiary is presently entitled to an outright distribution of the asset; or
The beneficiary has a general power of appointment over the trust asset
(whether it’s a lifetime power or testamentary power)
Letting a general power of appointment or right to take trust assets lapse is a gift back to the trust to the extent that is exceeds 5% of the trust assets or $5,000 (whichever is greater).

8. Grantor Retained Annuity Trust (“GRAT”)
This is one way to give the grantor benefit from the assets while removing it from his taxable estate.
The grantor retains a right to a certain payment each year (annuity) for a specified number of years.
The value of the remainder interest at the outset is a taxable gift.
The value of the grantor’s interest is not a gift since the grantor is retaining that amount.
The grantor must survive the term of the GRAT or the entire value of the trust is part of her estate under §2036.
After the term is up, the remainder goes to the grantor’s heirs (or other designated beneficiaries).

9. Intentionally Defective Grantor Trust (IDGT)
Similar to a GRAT.
First, the grantor funds the trust with some “seed” money to give the trust capital to work with.
This is a taxable gift
The grantor sells an asset that likely will appreciate (such as land or business interests) to the trust in exchange for a promissory note.
The trust promises to pay back the money from the “sale” with interest over a specified period of time.
The grantor need not survive the term of the loan for it not to be included in his estate since he’s getting no benefit from the assets in the trust.
(just repayment of his loan/sale price)
Typically established as a “grantor” trust
(though this is not strictly necessary)

10. Step-up in Cost basis
Capital gains tax is generally assessed on the difference between the cost basis (generally purchase price plus improvements, etc.) and the sale price.
What happens if a person transfers an asset after purchasing it?
If it’s a lifetime gift, the recipient takes over the basis of the donor
(“carryover” basis)
If it’s acquired from a decedent, the new basis becomes the date of death value
(“step up” in cost basis)
Keeping the property in the decedent’s taxable estate generally (with some exceptions), allows the property to be eligible for a step up in cost basis.

11. Estate Tax Marital Deduction
All assets given to a surviving spouse who is a U.S. citizen are not subject to estate tax.
If the spouse is not a U.S. Citizen, the QDOT strategy can be used, as with the gift tax.
Problem:
If you simply give everything to the surviving spouse at the first death, there’s no estate tax at the first death, but the second spouse is “enriched” to the point where there will be an estate tax upon the second death!
Solution…

12. Credit Shelter Trust Strategy
Instead of giving everything to the surviving spouse, you split the estate
The amount that can pass free of estate tax goes to the children or a trust for the benefit of the children
The spouse can also be a lifetime beneficiary of the credit shelter trust as long as s/he doesn’t have a general power of appointment
For example, the spouse can have an income interest in the trust
The rest goes to the spouse or a marital trust
Upon the second death, both shares are distributed to the heirs
This can be accomplished by a will or by an existing revocable trust
Or even an irrevocable trust that’s in the grantor’s estate

13. Marital Trust
Clients sometimes don’t want assets to be distributed outright to the spouse for various reasons, including:
Wanting to ensure that the assets are preserved in case the spouse remarries, etc.
Protecting the surviving spouse from creditors or for benefits eligibility
Allowing a trustee to manage the assets if the surviving spouse is disabled
A marital trust is established instead and funded with assets that cannot pass free of estate tax.
So that the marital share is eligible for the marital deduction, all the QTIP requirements must be satisfied
As discussed last chapter with regard to the gift tax marital deduction

14. Qualified Disclaimers
The IRC allows a person to “disclaim” (refuse to accept any gift, bequest or trust interest).
If done, this makes it as though the person were deceased without issue and the assets go instead to the contingent beneficiaries (or intestacy beneficiaries if there are none).
Requirements:
Must be done within nine months of the event that triggered the interest (usually the death of the grantor)
The person disclaiming must not receive any benefit from the gifted property
Must be delivered to the interested parties
A will or trust can establish a “backup” plan in case the recipient of a gift disclaims interest in it.

15. Generation Skipping Transfer Tax
A transfer that skips a generation is subject to a second level of estate taxation. However, the following limitations apply:
The same annual gift tax exclusion rules apply to generation skipping transfers
The same amount as the estate tax unified credit amount applies
Who is a “skip person”?
A grandchild (or more remote); or
A non-lineal descendant 37.5 years younger than the donor
A GST can be
Direct skip (given directly to a recipient)
Indirect skip (given to a trust or other device)
The skip person doesn’t receive his or her interest right away

16. Generation Skipping Trusts
GST exemption must be allocated carefully so as to cover all “taxable terminations” on indirect skips
To avoid problems associated with indirect skips, a will or trust can set up a trust f/b/o of a grandchild that itself is a direct skip. It must, however, be for the sole benefit of the grandchild.
Sometimes, a client may wish to skip a generation with a trust, such as if a child is wealthy and may be subject to estate tax.
In such a case, a trust can be made for the sole benefit of the grandchildren/ skip persons.
GST exemption should be allocated to the entire trust amount since it will all go to skip persons
Make sure the client has enough GST exemption to cover it
The proceeds will be outside of the estate of the “middle” generation person who is the heir of the grantor.