OVERVIEW OF THE PRESENT FEDERAL

ESTATE AND GIFT TAX1

THE FEDERAL ESTATE TAX

NATURE OF THE ESTATE TAX

The Federal estate tax is imposed upon the transfer of a decedent's estate to his beneficiaries. Unlike an inheritance tax that is imposed upon each beneficiary of the estate and is based on the size of the inheritance and the relationship of the beneficiary to the decedent, the Federal estate tax is imposed on the entire estate, which is primarily liable for its payment. In general, the amount of any distributive share and the relationship of the beneficiaries to the decedent are not considered. However, the beneficiaries of the estate may be required to pay the tax if the estate does not pay it when due, but only to the extent of the value, at the time of the decedent's death, of the property acquired by them.

ESTATES SUBJECT TO TAX

A. Citizens or Residents of the United States

The estate tax is applied to the entire estate of decedents who, at the time of death, were citizens or residents of the United States. The term "United States" includes only the 50 States and the District of Columbia, and does not include U.S. possessions or territories. If the decedent was a U.S. citizen, his residence at death is immaterial. A decedent was a resident of the United States if, at the time of his death, he was domiciled in the United States. A person acquires a domicile by living in a place, even for a brief period of time, with no definite present intention of leaving.

B. Nonresident, Not Citizen

The estate tax is applied only on the value of property situated within the United States if, at the time of death, the decedent was neither a citizen nor a resident of the United States. Similar treatment is accorded a U.S. citizen residing in a U.S. possession at the time of his death, if he acquired his U.S. citizenship solely by reason of being a citizen of a U.S. possession, or by birth or residence in a possession. C. Expatriates

If at the time of death, the decedent was a nonresident not a citizen of the United States, but had lost his previous U.S. citizenship after March 9, 1965, and within 10 years of his death, the estate tax is applied only on property situated within the United States plus certain foreign corporation stock.

1 Abstracted from publication 448, "A Guide to Federal Estate and Gift Taxation," published by the Department of the Treasury, January 1975.

THE GROSS ESTATE

The gross estate includes the value of all property in which a dece dent has an interest at his death. It also includes the value of certain properties not owned by the decedent at the time of his death, if certain circumstances are met. In general, these include transfers in which the decedent retained rights or powers, use or possession or which the decedent transferred in contemplation of death, as a substitute for a testamentary disposition within 3 years of death.

A. Property Owned by the Decedent

Property that was beneficially owned by the decedent at the time of his death, and was transferred at his death by his will or by intestacy laws, is included in the value of his gross estate. This includes property such as real estate, stocks and bonds, bank accounts, promissory notes or other evidences of indebtedness held by the decedent, interests in partnership or unincorporated businesses and miscellaneous property including furniture, jewelry, and personal effects. Property that the decedent owned at his death, but that could not be transferred by his will or by the intestacy laws, such as a life estate created by another, is not included in his gross estate.

B. Transfers With Retained Life Estate

The value of the gross estate includes property transferred by the decedent during his life, after March 3, 1931, if the decedent reserved certain rights or interests in the property for his life (or for a period that does not in fact end before his death, or is not ascertainable without reference to his death), except to the extent that the transfer was made for an adequate and full consideration in money or money's worth. The rights or interests that may be reserved for life include the use, possession, income, or other enjoyment of the transferred property, or the right to designate persons who may possess, enjoy or receive income from the transferred property. The right to designate may be exercisable alone, or if created after June 6, 1932, in conjunction with others. It is immaterial that the others have adverse interests, or that they or the decedent act in special capacities, such as trustees or agents.

If the decedent retained or reserved one or more of the rights or interests described above, the amount includible in the gross estate is the value of the property transferred, less the value of any outstanding income interest, not subject to the decedent's interest or right. actually being enjoyed by another person at the time of his death. If the decedent retained or reserved an interest or right to only a part of the property transferred, the amount includible in his gross estate is only a corresponding proportion of the entire value of the property. The use, possession, right to the income, or other enjoyment of the property is considered as having been retained by or reserved to the decedent to the extent that such use, etc., is to be applied toward the discharge of a legal obligation of the decedent or otherwise for his pecuniary benefit. The term "legal obligation" includes a legal obligation of the decedent to support a dependent during the decedent's lifetime. The retained life estate need not be legally enforceable, so long as a substantial economic benefit is in fact reserved.

C. Transfers Taking Effect at Death

The gross estate includes the value of property interests transferred by the decedent after September 7, 1916, except to the extent that the transfer was made for an adequate and full consideration in money or money's worth, if all of the following conditions exist:

(1) Possession or enjoyment of the property transferred could have been obtained by the beneficiaries, through ownership of the property, only by surviving the decedent;

(2) The decedent retained a reversionary interest in the property; and

(3) The value of the reversionary interest immediately before the decedent's death exceeded 5 percent of the value of the entire property.

The first condition is not met if it is possible for any beneficiary to obtain possession or enjoyment of the property through ownership of it without having to survive the decedent.

The second condition is met if the decedent retained a reversionary interest in the property transferred. For purposes of this section, the term "reversionary interest" includes a possibility that the property transferred by the decedent may return to him or to his estate and a possibility that the property may become subject to a power of disposition by him. In general, the term refers to any right under which the transferred property shall or may be returned to the grantor.

The third condition for includibility is met if the value of the reversionary interest, as of the moment preceding death, exceeds 5 percent of the value of the property transferred.

D. Revocable Transfers

The gross estate includes the value of property interests transferred by the decedent (except to the extent that the transfer was made for adequate and full consideration in money or money's worth), if the enjoyment of the property transferred was subject, at the date of his death, to any power of the decedent to alter, amend, revoke, or terminate the transfer. This includes the power to change the beneficiaries or the power to accelerate or increase any beneficiary's enjoyment of the property. Such a power must have been possessed by the decedent at the time of his death, either alone or in conjunction with others. However, if the exercise of such a power was subject to a contingency beyond the decedent's control, and such a contingency did not occur before his death, the property is not included in his gross estate as a revocable transfer. The property included in the gross estate is only the portion of the property transferred that is subject, at the decedent's death, to his power to alter, amend, revoke, or terminate.

The capacity in which the decedent could exercise the power is immaterial. If the decedent gave property in trust, making himself the trustee with the power to revoke the trust, the property would be included in his gross estate. If the decedent named another person trustee but reserved the power to later appoint himself trustee with power to revoke, the property would also be included in his gross estate. If, however, the power to alter, amend, revoke, or terminate was held at all times solely by a person other than the decedent and the decedent reserved no right to assume these powers, the property is not

Property interests are generally included in the decedent's gross estate even though the power to alter, amend, revoke, or terminate is exercisable by the decedent only in conjunction with others, regardless of their capacity or interests. There are two exceptions. First, transfers made before 1924 are not includible if the power is exercisable only in conjunction with a holder of a substantial adverse interest. Second, property is not included in the decedent's estate regardless of when it was transferred, if the decedent's power is exercisable only with the unanimous consent of all parties having an interest in the property, and if the power adds nothing to the rights of the parties under local laws.

The power may arise from the express provisions of the transfer, by operation of law, or by an unrelated action at a later date. It is not necessary that the decedent retained the power at the date of the transfer (except for transfers occurring before 1937) as long as he possessed the power at the date of his death.

E. Annuities

The gross estate includes the value of an annuity or other payment receivable by any beneficiary, by reason of surviving the decedent, under certain plans, contracts, or agreements entered into after March 3, 1931, to the extent that the value of the annuity or other payment is attributable to contributions made by the decedent or his employer.

A pure annuity contract that provides periodic payments to a person as long as he lives, and ceases to make payments at his death, is not included in his gross estate. Only certain annuities that provide payments to beneficiaries after the decedent dies are included in the gross estate. Either of two conditions is required for the inclusion of the annuity or other payment receivable by the beneficiary. They are:

(1) The annuity or other payment must be payable to the decedent, either alone or in conjunction with another person or persons, for the decedent's life, or for any period not ascertainable without reference to his death, or for any period that does not in fact end before his death; or

(2) The decedent must possess, for any period described in (1) above, the right to receive such an annuity or other payment, either alone or in conjunction with another person or persons. The term "annuity or other payment" as applied to both the decedent and the beneficiary has reference to one or more payments extending over any period of time. The fact that the payments are not to be made in equal amounts or at regular intervals is immaterial. The contracts or agreements referred to in this subsection include any arrangement, understanding, or plan arising from the decedent's employment.

An annuity or other payment was payable to the decedent if, at the time of his death, he was in fact receiving an annuity or other payment if, immediately before his death, he had an enforceable right to receive payments at some time in the future, whether or not, at the time of his death, he had a present right to receive payments.

The annuity provisions apply to survivorship annuities, whether decedent's annuity was joint or otherwise. It does not matter whether

the annuity is for a term of years or for life, or whether the payments to survivors or beneficiaries are based upon life expectancy, a term of years, or the original cost of the contract.

Special rules apply for annuities or other payments receivable under "qualified plans." This term refers to certain stock-bonus, pension, or profit-sharing plans of employers, which meet a number of conditions specified by law. Under these rules, the gross estate excludes the portion of the value of the annuity or other payment, otherwise includible, which is attributable to the contributions made by the employer to the purchase of that annuity or other payment. Contributions to a qualified plan by or on behalf of a decedent while he was a self-employed person are not considered contributions made by the employer. The rules of exclusion do not apply if the annuity or other payment is receivable by or for the benefit of the decedent's estate.

For servicemen and former servicemen, the gross estate does not include the value of annuities for a surviving spouse or certain child beneficiaries paid under the "Retired Serviceman's Family Protection Plan." However, this exclusion does not apply to the extent any of the value of the annuity for the survivor is attributable to amounts deposited by the deceased serviceman into the retirement plan during any period after he had been retired, or had become entitled to retired or retainer pay.

F. Joint Interests

The gross estate includes the value of property held jointly at the time of the decedent's death by the decedent and another person or persons with the right of survivorship, except that portion of the property that was acquired by the other joint owner, or owners, for adequate and full consideration in money or money's worth, or by bequest or gift from a third party. The decedent's estate has the burden of proving that the other joint owner, or owners, acquired their interests for consideration, or by bequest or gift. Consideration furnished by the surviving joint owner, or owners, does not include money or property shown to have been acquired from the decedent for less than a full and adequate consideration in money or money's worth.

The provisions discussed in this subsection apply to property held by husband and wife as tenants by the entirety. They do not apply to property held by husband and wife under the community property laws of a particular State or country. Neither do they apply to property held by two or more persons as tenants in common. The includibility of a decedent's interest in community property or in a tenancy in common is to be determined on the basis of the rules otherwise applicable to the type of property or property interests involved.

G. Powers of Appointment

The gross estate includes the value of property interests over which the decedent possessed a general power of appointment at the time of his death. Also included is the value of property interests over which the decedent exercised or released such a power during his lifetime if