QUESTION I (30 minutes)
A. Grandparent established a trust for the benefit of her grandchild, Minor, age 5. The terms of this trust directed the trustee to accumulate all of the income of the trust each year until Minor reached the age of 21 at which time all of the accumulations were to be paid to him. Thereafter all of the income was to be paid to Minor quarterly until he reached the age of 30 when the trustee was directed to pay all remaining trust assets to Minor. During the term of the trust, trustee could pay such amounts of income or principal to Minor as was necessary for his "support, comfort and maintenance." If Minor dies before the age of 30, the trustee is to distribute the trust assets to Minor's issue or if none to the Red Cross. What are the transfer tax consequences of this transfer, assuming that First National Bank is trustee of the trust?
B. Earlier this year the Clinton Administration announced its intention to back legislation to eliminate the annual exclusion for transfers subject to a "Crummey power." This legislation would disallow the annual exclusion where the only present interest created in a donee is a noncumulative right to withdraw amounts contributed to a trust. Based on the principles of estate and gift taxation we have discussed this semester, would you favor or oppose this legislation. Explain your position fully.
QUESTION II (30 minutes)
[This question has six parts. For each, answer the specific questions asked. In each case D is the decedent and W is his surviving wife. In each case assume that D is a person separate from the Ds in the other parts.]
1. D died in 1997 leaving a will which created a trust that provided all income was to be paid to W at least quarterly for her lifetime. At her death the remaining trust assets were to be distributed to D's issue who survived W, per stirpes. W was given an inter vivos power to appoint the property to any of the issue of D that she designated in a writing delivered to the trustee at any time. W survived D. Does the trust qualify for the marital deduction?
2. D was the named insured on a life insurance policy payable to his estate. When D died the proceeds were paid to his estate. D's will provided that these proceeds were to be paid to his wife, W, but this devise was made contingent upon W's not remarrying or dying within 5 months of D's death. W survived D and 5 months after his death was single and alive. Does the value of the policy qualify for the marital deduction?
3. D died in 1997 leaving a will which provided a gift in trust with all income payable to W during her lifetime at least quarterly. At her death the remainder was to pass as she might appoint by will to anyone including her estate or the creditors of her estate. In default of appointment, the assets go to D's issue who survive W, per stirpes. The trustee of the trust had the power to distribute principal to any of D's issue as necessary for "emergency needs." W survived D. Does the trust qualify for the marital deduction?
4. D died in 1998 survived by W. At his death his will created a trust with all income payable to W for her lifetime, remainder to D's issue. The trustee was First National Bank. The trust contained a clause prohibiting any beneficiary of the trust from transferring her interest in the trust and also prohibiting creditors of any beneficiary from reaching assets of the trust. Does the trust qualify for the marital deduction?
5. D and W owned Blackacre in joint tenancy when D died in 1997. They had purchased the property in 1986 for $80,000, and at D's death it was worth $200,000. What is W's basis in Blackacre now?
6. D died in 1994 survived by W. His will created a QTIP trust for W, and the proper election was made by D's personal representative. W had an income interest for her life, and at her death the property is to go to D's issue. Last month W endorsed the check for the last quarter's income in the amount of $24,000 to her son, S, and also assigned one half of her remaining income interest to her daughter, X, who was not D's issue. What are the transfer tax consequences of these acts to W?
QUESTION III (60 minutes)
Sherri Marx died on January 10, 1998, survived by her husband, Craig, and their three children, Annie, Bart and Charles who are all adults. Another child, David, died in 1995 without issue. Annie and Bart are married and each has one child. During her life and at her death Sherri made several transfers.
1. Sherri was the sole trustee of a testamentary trust created by her father in 1978. As trustee she had the power to make distributions of income and principal to herself and any one or more of her issue as necessary for their "care, comfort and support." At her death the trust assets were distributable to her issue who survived her, per stirpes.
In 1993 Sherri created an inter vivos trust in which she retained the power to amend or revoke the trust. All income of the trust was payable to her during her lifetime and she could withdraw principal at any time. As originally drafted the trust provided that at her death the trust assets were to be distributed to her children in equal shares. First Bank was the trustee of this trust. After David died, Sherri consulted a lawyer who suggested she change the remainder interest to make sure that her grandchildren shared the trust if their parents predeceased her. On October 5, 1995, Sherri amended the trust to make it payable at her death to "my issue who survive me, per stirpes." The same amendment renounced her power to revoke or further amend the trust. The trust was still in existence at her death.
Sherri's grandmother had created a trust for her in 1975. Under this trust she was entitled to all of the income from the trust for life, and at her death the trust assets were to be distributed to the persons she might appoint by will. There was no restriction on her power to appoint to anyone, but in default of appointment the assets were to be distributed to her issue. In 1994 Sherri renounced her power to appoint to herself, her estate, her creditors or the creditors of her estate, retaining only the power to appoint to her issue in such shares as she wished. At her death her will appointed this trust to her issue, per stirpes.
In 1984 Sherri's mother had created an irrevocable trust with income to be paid to Sherri or accumulated in the trustee's discretion. At Sherri's death this trust was to go to her mother's sister. The initial transfer to this trust was $10,000, and Sherri's mother had transferred the same amount to the trust each year thereafter. Under this trust Sherri had a noncumulative power to withdraw up to $10,000 of any amounts contributed to the trust in any year. She could do this by a writing delivered to the trustee within 30 days of notification by the trustee of any contribution to the trust. Sherri never exercised this power instead letting the power lapse each time it arose.
Sherri retired from Whitehall University in 1996 after teaching there for 32 years. Upon retirement she began receiving a payment of $5,000 per month from her qualified pension plan at the college. This payment was to continue to her until her death, and after her death the same amount was to continue to Craig for as long as he lived. At his death no further payments would be made to anyone else. Sherri had made the election for this form of payment before her death.
In 1968 shortly after Annie was born, Craig had used funds he received from a magazine article he had written about the experience of becoming a father to buy stock in a newly formed company. The stock was taken in the names, "Craig Marx, Sherri Marx and Annie Marx, as joint tenants with right of survivorship." Since that time the company has been successful and the shares, still held in the form as originally taken, were valued at $200,000. At Sherri's death Craig and Annie became the owners as joint tenants.
For each item describe the estate and gift tax consequences to Sherri or her estate.
[Do not discuss the tax consequences to the other persons involved in the transactions.]