(1) In contemplation of death, or

(2) With a retained life interest in the property appointed, or (3) With a retained reversionary interest in the property appointed, or

(4) With a retained power to alter, amend, revoke, or terminate the appointment.

A power of appointment is a power to determine who shall own or enjoy, presently or in the future, the property subject to the power. It must be created by another and does not include a power created by the decedent or retained by him when he transferred his own property. The term "power of appointment" includes all powers that are, in substance and effect, powers of appointment regardless of the terminology used in a particular instrument and regardless of local property law. A general power of appointment is one in which the decedent could have appointed himself, his creditors, his estate, or his estate's creditors. It includes the unlimited power to consume, invade, or appropriate either income or corpus or both for the benefit of the decedent.

The decedent is not considered to have had a general power of appointment if the power was exercisable only with the consent or joinder of the creator of the power or a person having a substantial adverse interest in the property subject to the power. For this purpose, a trustee administering a trust in his fiduciary capacity does not, by that fact alone, have an adverse interest in the trust.

Property interests subject to a general power of appointment will be included in the gross estate if the decedent possessed such a power at the time of his death, or had previously exercised or released such. a power in a way that, if it had been a transfer of his own property, it would have been included in his gross estate as a transfer in contemplation of death, a transfer with a retained life estate, a transfer taking effect at death, or a revocable transfer.

Property subject to such a power is not included in the decedent's gross estate if he released the power completely (and not in contemplation of death) and if he retained no interest or control over the property released, as discussed in the preceding paragraph. If the failure to exercise a general power of appointment results in a lapse of the power, the lapse is treated as a release only to the extent that the value of the property that could have been appointed by the exercise of the lapsed power exceeds the greater of either $5,000, or 5 percent of the aggregate value of the property out of which the appointment could have been satisfied.

In contrast to a release, if a decedent had disclaimed or renounced a general power of appointment, the property is not included in the gross estate. A disclaimer is a complete and unqualified refusal to accept the power of appointment. There can be no disclaimer of a power after it has once been accepted, and the disclaimer must be effective under local law. In the absence of evidence to the contrary, the failure to renounce or disclaim the power within a reasonable time after learning of its existence will be presumed an acceptance. A power of appointment created by will is, in general, considered created on the date of the creator's death. A power of appointment. created by an inter vivos instrument is considered as created on the date the instrument takes effect. Such a power is not considered as

created at some future date merely because it is not exercisable immediately, is revocable, or the identity of its holders is not ascertainable until after the date the instrument takes effect.

H. Proceeds of Life Insurance

The gross estate includes the proceeds of life insurance on the decedent's life if:

(1) They are receivable by the estate; or

(2) They are receivable by another for the benefit of the estate; or

(3) The decedent possessed an incident of ownership in the policy.

Life insurance on the life of another, owned by the decedent at the time of his death, is included in the gross estate as "property owned at death." The amount includible is the replacement value of the policy.

The term "life insurance" refers to life insurance of every description including:

(1) Whole life policies;

(2) Term insurance;

(3) Group life insurance;

(4) Double indemnity, travel, and accident insurance;

(5) Endowment contracts (before being paid up);

(6) Death benefits paid by fraternal societies operating under the lodge system.

However, the following are not considered life insurance:

(1) Refunds of premiums in case of suicide;

(2) No-risk, single-premium policies combining annuities and life insurance.

Proceeds of insurance on the life of the decedent receivable by the executor or administrator, or payable to the decedent's estate, are included in the gross estate. It is not necessary that the estate be specifically named as the beneficiary.

Proceeds of insurance on the life of the decedent not receivable by or for the benefit of the estate are includible if the decedent possessed, at his death, any of the incidents of ownership in the policy, exercisable either alone or in conjunction with any other person, even if he was acting as a trustee. In this connection, the term "incidents of ownership" does not mean only the ownership of the policy in a technical legal sense. Generally, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, it includes the power to change beneficiaries, to revoke an assignment, to pledge the policy for a loan, or to surrender or cancel the policy. Rights that are not considered to be incidents of ownership include the right to receive dividends and the right to veto the sale by a trustee of an irrevocable funded insurance trust.

A group life insurance policy taken out by the decedent's employer on the decedent's life is included in the decedent's gross estate if the decedent owned either the right to change the beneficiaries or the right to terminate the policy; however, the power to terminate the policy solely by terminating employment is not an incident of ownership and the value of the proceeds is not includible in the insured's gross estate. Further, if the employee had the right to convert his group policy

ment (and such a right was transferable), the proceeds of the policy are not included in his gross estate if he irrevocably assigned both the policy and the conversion privilege to another. In such a case, the assignee's right to the proceeds could not have been defeated by any action of the decedent and, therefore, the decedent had no control or "incident of ownership" over the policy.

If a policy is included in the estate because the decedent possessed an incident of ownership over it, it is immaterial that the decedent did not initially take out the policy, or that he was physically unable to exercise his control over the policy at the time of his death.

The term "incidents of ownership" also includes a reversionary interest in the policy or its proceeds, whether arising by the express terms of the policy or other instrument or by operation of law, but only if the value of the reversionary interest immediately before the death of the decedent exceeded 5 percent of the value of the policy. As used in this connection, the term "reversionary interest" includes a possibility that the policy or its proceeds may return to the decedent or his estate and a possibility that the policy or its proceeds may become subject to a power of disposition by him. The terms "reversionary interest" and "incidents of ownership" do not include the possibility that the decedent might receive a policy or its proceeds by inheritance through the estate of another person, or as a surviving spouse under a statutory right of election or similar right.

I. Transactions in Contemplation of Death

The gross estate of the decedent includes the value of property or of an interest in property transferred by him within the 3-year period preceding his death, if such transfer was made in contemplation of death. This applies only to the extent that these transfers were made for less than full and adequate consideration in money or money's worth. Transfers made more than 3 years before death are considered not to have been made in contemplation of death. If made within the 3-year period, a transfer is considered to have been made in contemplation of death, unless it can be shown otherwise.

For the purpose of the estate tax, the phrase "in contemplation of death" does not refer to a general expectation of death. On the other hand, its meaning is not restricted to an apprehension that death is imminent or near. A transfer is considered as prompted by the thought of death if it was made (1) with a purpose of avoiding death taxes, (2) as a substitute for a testamentary disposition of the property, or (3) for any other motive associated with death. The bodily and mental condition of the decedent at the time of the transfer and all the surrounding facts and circumstances at that time are relevant to the question of whether the transfer was made in contemplation of death. If the decedent transferred an interest in property or relinquished a power in contemplation of death, the gross estate includes the property subject to the interest or power to the extent that it would have been includible had the decedent retained it until his death.

Proceeds of life insurance policies transferred by the insured-decedent more than 3 years before death are not includible in the decedent's gross estate, but premium payments made by the decedent within 3 years of death are includible. Proceeds of an accidental death policy

purchased by the decedent and transferred within 3 years of death are includible in the decedent's gross estate.

The value of the property includible under this subsection is its value on the date of death or on whatever valuation date is applicable in the particular case. Such value, however, does not include any increase in the value of the property resulting from improvements made by the transferee, nor does it include income from the property received after the transfer of assets purchased with such income. An increase in value not due to accumulated income is, however, includible in the value of the property in the case of certain transfers in trust.

VALUATION

Once it is established that a particular property interest is included in the decedent's gross estate, the value of the interest must be determined. The value included in the gross estate is the fair market value of the property interest at the date of death (or at the alternate valuation date if elected by the executor or administrator).

The "fair market value" is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of all relevant facts. It may not be determined by a forced sale price, nor is it to be determined by the sale price of the item in a market other than that in which the item is most commonly sold to the public, taking into account the location of the item wherever appropriate.

The value of stocks and bonds is their fair market value per unit on the applicable valuation date. If there is a market for stocks and bonds, on a stock exchange, in an over-the-counter market, or otherwise, the mean between the highest and lowest quoted selling prices on the valuation date is the fair market value per unit. If there were no sales on the valuation date, but there were sales on dates within a reasonable period before and after the valuation date, the fair market value is determined by taking a weighted average of the means between the highest and lowest sales prices on the nearest date before, and the nearest date after, the valuation date. The average is to be weighted inversely by the respective numbers of trading days between the selling dates and the valuation date.

The value of a share in an open-end investment company that is, a "mutual fund" is the redemption price (known as the "bid price") on the date of death, or alternate valuation date. If there is no public redemption price quoted by the company for the applicable valuation date, the fair market value of the mutual fund share is the last public redemption price quoted by the company for the first day preceding the applicable valuation date for which there is a quotation.

The fair market value of any interest of a decedent in a business, whether a sole proprietorship or a partnership, is the net amount that a willing purchaser would pay for the interest of a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. The relevant factors to be considered in valuing the business are: (1) a fair appraisal of the assets of the business; (2) the demonstrated earning capacity of the business; and (3) certain other factors used in considering the valuation of corporate stock, to the extent they apply to the particular situation.

The value of an annuity, or of a life insurance policy on the life of a person other than the decedent, issued by a company regularly engaged in the selling of such contracts, is the amount that the issuing company would charge for a comparable contract on the date of the decedent's death. An annuity payable under a combination annuity and life insurance policy on the decedent's life, which had no insurance element at the time of the decedent's death, is treated simply as a contract for the payment of an annuity.

The value of all annuities, life estates, terms for years, remainders, or reversions other than those described above is the present value on the applicable valuation date, computed with reference to annuity factor tables.

ALTERNATE VALUATION

The executor of an estate may elect to use the alternate valuation method. This provides for the valuation of the property included in the decedent's gross estate as of a date other than that of his death. Such an election does not change the rule that the gross estate includes property that the decedent owned, or in which he had an interest, on the date of his death. The election must be made on the estate tax return, filed within 9 months (15 months if decedent died before January 1, 1971) of the date of death or within the period of any extension of time granted for filing such return.

The purpose of this method is to permit a reduction of the tax liability if there is a shrinkage in the aggregate value of the estate's property. However, the method may be used whether or not a shrinkage has occurred. The election, however, is not effective for any purpose unless, on the date of death, the value of the gross estate was in excess of $60,000 (or in the case of nonresidents, not citizens, the value of the gross estate situated in the United States was in excess of $30,000) so that a return is required to be filed. In any event, the election applies to all of the property in the estate. It cannot be used for only a portion of such property.

The alternate valuation method is used according to the following rules:

(1) Any property distributed, sold, exchanged, or otherwise disposed of within 6 months (1 year, if the decedent died before January 1, 1971) after the decedent's death is valued as of the date on which it is first distributed, sold, exchanged, or otherwise disposed of;

(2) Any property not distributed, sold, exchanged, or otherwise disposed of within 6 months (1 year, if decedent died before January 1, 1971) after the decedent's death is valued as of 6 months (1 year, if decedent died before January 1, 1971) after the date of the decedent's death;

(3) Any property, interest, or estate that is affected by mere lapse of time is valued as of the date of the decedent's death, but adjusted for any difference in its value due to mere lapse of time as of 6 months (1 year, if decedent died before January 1, 1971) after the decedent's death, or as of the date of its distribution, sale, exchange, or other disposition, whichever date occurs first. Properties, interests, or estates that are "affected by mere lapse of time" include patents, estates for the lives of persons other than the decedent, remainders, and reversions.