Gale Encyclopedia Of American Law 3Rd Edition Volume 4 P26 pdf

representative takes the property as personal
property.
A life estate is alienable, and therefore, the
life tenant can convey his or her estate. The
grantee of the life tenant would thereby be given
an estate pur autre vie. The life tenant is unable,
however, to convey an estate that is greater than
his or her own.
Nonfreehold Estates
Nonfreehold estates are interests in real proper-
ty without seisin and which are not inheritable.
The four main types of nonfreehold estates are
an estate for years, an estate from year to year, a
tenancy at will, and a tenancy at sufferance.
Estate for Years The most significant feature
of an estate for years is that it must be of
definite duration, that is, it is required to have a
definite beginning and a definite ending. The
most common example of an estate for years is
the arrangem ent existing between a landlord
and tenant whereby property is leased or rented
for a specific amount of time. In this type of
estate the transferor leases the property to the
transferee for a certain designated period, for
example: “Transferor leases
BLACKACRE to trans-
feree for the period of January 1, 1998, to
January 1, 2003, a period of five years.”
During the five-year period, the transferee
has the right to possess Blackacre and use and
enjoy the fruits that stem from it. He or she is

required to pay rent according to the terms of
the rental agreement and is not permitted to
commit waste on the premises. If the transferee
dies during the term of the lease, the remainder
of such term will pass to the transferee’s
personal representative for distribution pursuant
to a will or the laws of
DESCENT AND DISTRIBUTION,
since a leasehold interest is regarded as personal
property or a chattel real.
Estate from Year to Year The essential distin-
guishing characteristic of an estate from year to
year is that it is of indefinite duration. For
example, a landlord might lease Blackacre to a
tenant for a two-year period, from January 1,
2003, to January 1, 2005, at a rental of $600 per
month, payable in advance on or before the
ninth day of each month. The tenant might
hold possession beyond January 1, 2005, and on
or before January 9, 2005, give the landlord $600.
If the landlord accepts the rent, the tenant has
thereby been made a tenant from year to year.
An estate of this nature continues indefinitely
until one of the parties gives notice of termina-
tion. The terms of the original lease are implied
to carry over to the year-to-year lease, except for
the term that set forth the period of the lease.
Notice of termination is an important
component of this type of periodic tenancy. In
the preceding example, either party would be

able to terminate the tenancy by providing
notice at least six months preceding the end of
the yearly period. Statutory provisions often
abridge the length of notice required to end
periodic tenancies. Such tenancies may come
within requirements set forth by the
STATUTE OF
FRAUDS
.
Tenancy at Will A tenancy at will is a rental
relationship between two parties that is of
indefinite duration, since either may end the
relationship at any time. It can be created either
by agreement, or by failure to effectively create a
tenancy for years.
A tenancy at will is terminated by either
individual without notice and ends automati-
cally by the death of either party or by the
commission of voluntary waste by the lessee. It
is not assignable and is categorized as the lowest
type of chattel interest in land.
Tenancy at Sufferance A t enancy at sufferance
is an estate that ordinarily arises when a tenant
for years or a tenant from period to period
retains possession of the premises without the
landlord’s consent. This type of interest is
regarded as naked and wrongful possession.
In this type of estate, the tenant is essentially
a trespasser except that his or her original entry
onto the property was not wrongful. If the

landlord consents, a tenant at sufferance may be
transformed into a tenant from period to
period, upon acceptance of rent.
Concurrent Estates
Concurrent estates are those that are either
owned or possessed by two or more individuals
simultaneously. The three most common types
of concurrent estates are
JOINT TENANCY, TENANCY
BY THE ENTIRETY
, and TENANCY IN COMMON.
Joint Tenancy A joint tenancy is a type of
concurrent ownership whereby property is
acquired by two or more persons at the same
time and by the same instrument. A typical
conveyance of such a tenancy would be
“Grantor conveys Blackacre to A, B, and C
and their heirs in fee simple absolute.” The
GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION
ESTATE 239
main feature of a joint tenancy is the RIGHT OF
SURVIVORSHIP
. If any one of the joint tenants dies,
the remainder goes to the survivors, and the
entire estate goes to the last survivor.
In a joint tenancy, there are four unities,
those of interest, time, title, and possession.
Unity of interest means that each joint tenant
owns an undivided interest in the property as a
whole. No one joint tenant can have a larger

share than any of the others.
Unity of time signifies that the estates of each
of the joint tenan ts is vested for exactly the same
period.
Unity of title indicates that the joint tenants
hold their property under the same title.
Unity of possession requires that each of
the joint tenants must take the same un-
divided possession of the property as a whole
and enjoy the same rights until one of the joint
tenants dies.
Tenancy by the Entirety A tenancy by the
entirety is a form of joint tenancy arising
between a husband and wife, whereby each
spouse owns the undivided whole of the
property, with the right of survivorship.
A tenancy by the entirety can be created by
will or deed but not by descent and distribution.
It is distinguishable from a joint tenancy in that
neither party can voluntarily dispose of his or
her interest in the property. There is unity of
title, possession, interest, time, and person.
Tenancy in Common A tenancy in co mmon
is a form of concurrent ownership that can be
created by deed or will, or by operation of law,
in which two or more individuals possess
property simultaneously. A typical conveyance
of this type of tenancy would be “Grantor,
owner of Blackacre in fee simple absolute,
grants to A, B, and C, and their heirs—each

taking one-third interest in the property.”
In the preceding illustration, A, B, and C are
tenants in common. There is no right of
survivorship in such a tenancy, and each grantee
has the right to dispose of his or her share by
deed or by will.
In a tenancy in common, one of the tenants
may have a larger share of the property than the
others. In addition, the tenants in common may
take the same property by several titles. The
only unity present in a tenancy in common is
unity of possession.
Future Interests
Future interests are interests in real or personal
property, a gift or trust, or other things in which
the privilege of possession or of enjoyment is in
the future and not the present. They are
interests that will come into being at a future
point in time. There are five classes of future
interests: reversions; possibilities of reverter;
powers of termination, also known as rights of
re-entry for condition broken; remainders, and
executory interests.
Incorporeal Interests
Incorporeal interests in real property are those
that cannot be possessed physically, since they
consist of rights of a particular user, or the right
to enforce an agreement concerning use. The
five major types of incorporeal interests are
easements; profits; covenants

RUNNING WITH THE
LAND
; equitable servitudes; and licenses.
FURTHER READINGS
Abts, Henry W. 2002. The Living Trust: The Failproof Way to
Pass Along Your Estate to Your Heirs. 3d ed. New York:
McGraw-Hill.
Applegate, E. Timothy. 2003. “Estate Planning: Who Owns
the Family Plot?” California Lawyer 23 (October).
“Estate Planning FAQs.” ABA Section of Real Property/
Trust & Estate Law. American Bar Association. Available
online at />html; website home page:
(accessed September 2, 2009).
Trusts & Estates Web site. Available online at http://
trustsandestates.com/ (accessed September 2, 2009).
CROSS REFERENCES
Equity; Servitude.
ESTATE AND GIFT TAXES
Estate and gift taxes are the combined federal tax
on transfers by gift or death.
When property interests are given away
during life or at death, taxes are imposed on the
transfer. These taxes, known as estate and gift
taxes, apply to the total transfers that an
individual may make over a lifetime.
Estate and gift tax law is prim arily statutory.
Although the
TREASURY DEPARTMENT issues reg-
ulations governing t he interpretation of the
revenue laws and although state and federal

courts contribute their interpretations of statu-
tory la w, the foundation of the transfer taxes
rests in chapters 11 and 12 of the
INTERNAL
REVENUE CODE
. To understand the complex
statutory framework requires a basic
GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION
240 ESTATE AND GIFT TAXES
understanding of the concepts underlying the
estate and gift tax system. The
TRANSFER TAX laws
apply to al l gratuitous shifts in property
interests. But although administered similarly,
the estate tax and gift tax have somewhat
different goals. The gift tax reaches the gratu-
itous
ABANDONMENT of ownership or control in
favor of another person during life, whereas the
estate tax extends to transfers that take place at
death, or before death, as substitutes for
dispositions at death. Both taxes are intended
to limit the concentration of familial or dynastic
wealth.
Estate and gift taxes became a source of
political debate in the late 1990s, as many
members of Congress pressed for an end to
these taxes. They argued that such death taxes
were unfair and fo rced small businesses and
family farmers to sell off their assets to pay the

estate taxes. Opponents of repeal noted that
even though the potential tax rate was quite
high, at 55 percent, most individuals never paid
any estate or gift tax. Under the tax system that
had been in place since 1986, every person
could transfer a combined $600,000 worth of
property during life and at death without paying
tax. This tax-free allowance corresponded to
$192,800 worth of federal tax savings and is
known as the unified credit against estate tax.
This unified credit was sufficient to satisfy taxes
on transfers by all but the richest 5 percent of
U.S. citizens. Defenders of estate and gift taxes
maintained that these taxes were guided by an
important government and social policy: the
prevention of large concentrations of dynastic
wealth. Moreover, they pointed out that estate
tax collections typically constitute less than
2 percent of total
INTERNAL REVENUE SERVICE
collections.
The debate on this issue culminated in the
Economic Growth and Tax Relief Reconcilia-
tion Act of 2001. The top estate tax rate was
reduced from 55 percent to 50 percent in 2002
(together with the repeal of the 5 percent surtax
on estates over $10 million), 49 percent in 2003,
48 percent in 2004, 47 percent in 2005, 46
percent in 2006, and to 45 percent in years 2007
through 2009. The credit-level exemption was

raised from $675,000 to $1 million in 2002,
$1.5 million in 2004 , $2 millio n in 2006, and
$3.5 million in 2009. Most importantly, the
estate tax was to be repealed in 2010. However,
the law contains a sunset provision. If Congress
does not extend the law beyond 2010, the new
law will end on December 31, 2010, and the
previous estate law will be in effect again.
The gift tax was not repealed, but it was
modified. The new law increased the total gift
tax exemption from $675,000 in 2001 to
$1,000,000 in 2002 and thereafter . After 2009,
the gift tax is retained at the top income tax rate
for the applicable year, which is currently 35
percent. The retention of the gift tax is meant to
discourage transfers to lower income benefici-
aries to minimize capital gains taxes.
With few exceptions, the individual making
the transfer is responsible for any transfer tax
owed (whereas the individu al receiving income
is responsible for any income tax owed). Thus,
the executor of an estate, as the estate’s
representative, is responsible for paying any
estate tax due, and the donor of a gift is
responsible for paying any gift tax due.
Gifts
The Internal Revenue Code defines a gift as a
“transfer … in trust or otherwise, whether the
gift is direct or indirect, and whether the
property is real or personal, tangible or

intangible.” Generally, a gift is any completed
transfer of an interest in property to the extent
that the donor has not received something of
Federal Estate and Gift Tax Receipts, 1970 to
2007
3.6
6.4
11.5
1
4
.
8
29.7
25.6
27
.
0
0
5
10
15
20
25
30
35
1970
1980
1990
1995
2000

2005
2007
Year
Estate and gift taxes, in
billions of dollars
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Percentage of total IRS collections
SOURCE: U.S. Office of Management and Budget,
Historical Tables, annual, and the Internal Revenue
Service, Statistics of Income (SOI) Tax Stats.
Estate and gift tax amounts
Amounts as percentage
of total IRS collections
ILLUSTRATION BY GGS
CREATIVE RESOURCES.
REPRODUCED BY PER-
MISSION OF GALE, A
PART OF CENGAGE
LEARNING.
GALE ENCYCLOPEDIA OF AMERICAN LAW, 3

RD E DITION
ESTATE AND GIFT TAXES 241
value in return, with the exception of a transfer
that results from an ordinary business transac-
tion or the discharge of legal obligations, such as
the obligation to support minor children. This
definition of gifts does not require the intent to
make a gift. An individual may make gifts of
both present interests (such as life estates) and
future interests (such as remainders) in pro-
perty (26 U.S.C.A. § 2503[b]).
From a tax standpoint, gifts have two
principal advantages over transfers at death.
First, gifts allow a donor to transfer property
while its value is low, allowing future apprecia-
tion in property value to pass to others free of
additional gift or estate tax. Second, provided
that the gift is of a present interest in property, a
donor may transfer up to $11,000 exempt from
tax to each donee every calendar year, which
allows the donor to reduce the size of the estate
remaining at death without any transfer tax
consequences.
To constitute a gift, a transfer must satisfy
two basic requirements: It must lack consider-
ation, in whole or in part (that is, the recipient
must give up nothing in return); and the donor
must relinquish all control over the transferred
interest. To constitute a tax-exempt gift, a
transfer also must constitute a present interest

in property. (A present interest is something that
a person owns at the present time, whereas a
future interest is something that a person will
come to own in the future, such as the procee ds
of a trust.)
Lack of Consideration A transfer is not a gift
if the transferor receives consideration, or
something of value, in return for it. For
example, if A sells B a used car worth $5,000
and receives $5,000 in exchange, the transfer is
not a gift because it is supported by “adequate
and full consideration” (26 U.S.C.A. § 2512[b]).
But if A sells B the same car for only $2,000, the
transfer constitutes a gift of $3,000 because A
exchanges $3,000 worth of car for nothing.
Finally, if A gives B the car without receiving
anything in return, the transfer constitutes a gift
of $5,000. Although consideration may be
whole or partial, not all transfers for partial or
insufficient consid eration result in gifts. An
arm’s-length sale (a sale free of any special
relationship between buyer and seller) will not
be considered a gift where no intent to make a
gift exists, even if the consideration is not
adequate. This limit on the definition of gifts
excludes bad business deals and forced sales
from gift tax treatment.
The Completeness Requirement A transfer
constitutes a gift for tax purposes only if the
donor has parted with the ability to exercise

“dominion and control” over the property
transferred. Many transfers of property satisfy
this condition. For example, if A takes B out for a
birthday dinner, the act of purchasing the dinner
is a gift because A cannot regain control over the
food that B consumes or revoke the acts of
purchasing and consuming the meal. When the
donor has not relinquished absolutely the ability
to control or manage the property or its use,
however, the “gift” may not be complete for tax
purposes. The most common example of an
incomplete transfer is a transfer of property to a
revocable trust, in which the donor retains the
right, as trustee, to alter, amend, or rescind the
trust. The gift is not completed because the donor
could restore ownership in the trust property to
himself or herself or change his or her mind about
who will enjoy or later receive the property.
This distinction between complete and
incomplete transfers determines whether prop-
erty will be included in an estate at death, as
well as the value of that property. The value of
property that was incompletely transferred
during life will be included in the gross estate
at death (26 U.S.C.A. §§ 2035-2038). Therefore,
any appreciation in the value of incompletely
transferred property will be included and taxed
in the estate, whereas none of the value of
completely transferred property will be included
in the estate. Accordingly, if A transfers 1,000

shares of XYZ stock outright to B when it is
worth $10 per share, the value of the transfer
subject to tax equals zero because A can take
advantage of the annual exclusion described in
the following section. If A transfers the same
stock to a revocable trust for B’sbenefit,
however, and that stock is worth $100 per share
onthedateofA’s death, the entire $100,000 is
included and taxable in A’s estate. Moreover, any
income distributions from the trust after the
transfer of property to the revocable trust are
taxable gifts to B for which A must pay tax.
Sometimes people make incomplete trans-
fers, rather than completed gifts, in order to
retain control over the property, even though
appreciation in property value is taxed as a
consequence of an incomplete transfer. For
various reasons, a person might not want to give
GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION
242 ESTATE AND GIFT TAXES
up that control. An individual might wish to
control the distribution of income from a gift to
a trust or even to receive the income distribu-
tions from a trust. Or an individual may create a
trust for non-gift reasons, such as to ensure
property or investment management. Parents
might not trust their children to manage gifts of
stock or cash effectively and thus might retain
control to ensure that transfers are not
squandered. Occasionally, donors mistakenly

believe that revocable trusts are effective devices
to avoid paying estate taxes and simply do not
realize that transfers to revocable trusts are
incomplete for gift purposes.
Present versus Future Interests: The Annual
Exclusion Each individual may make tax-
exempt gifts of up to $11,000 to each donee
every year. To qualify for this so-called annual
exclusion, a gift must be of a present interest in
property (26 U.S.C.A. § 2503[b]). Completed
transfers of future interests, such as remainder
interests in real estate or the vested right to the
distribution of trust principal on the donor’s
death, constitute gifts for tax purposes but do
not qualify for the annual exclusion.
Only the unrestricted right to use, enjoy, or
possess property in whole or in part constitutes
a present interest. For example, if A transfers a
life estate in his home to B, with a remainder
to C, only the life estate to B, which is a present
interest in the home, qualifies for the annual
exclusion. The remainder interest to C is a
completed gift but does not qualify for the
annual exclusion because it is a gift of a future
interest. A more subtle and common illustration
of this principle involves trust property. For
example, A creates an irrevocable trust giving B,
the trustee, complete discretion over the distri-
bution of income to C for ten years, at which
time the trust will terminate, and the entire trust

corpus and accumulated income will be paid to
C. In this case, A has made a completed gift of
the entire trust corpus, but the gift does not
qualify for the annual exclusion because C has no
present right to the trust income.
Testamentary Transfers
The gross estate is the measure of the interests an
individual is considered capable of transferring at
the time of death and provides the starting point
for computing the estate tax (26 U.S.C.A. § 2031).
The gross estate is an artificial concept, in part
because it may include interests that the individual
did not actually own at death (§§ 2035-2038).
From the gross estate are deducted expenses of
administering the estate, the decedent’slegal
obligations at death, the value of property passing
to a surviving spouse, and the value of bequests to
charity (§§ 2053-2056). The remainder is known
as the taxable estate and is the value on which the
estate tax is computed.
Conventional interests in property, such as
ownership of real estate, stocks and bonds, cash,
automobiles, art, and personal property, must
be included in the gross estate and valued at
their fair market value on the date of death. In
addition, interests in life insurance, annuities,
and certain death benefits are included to the
extent that the decedent was able to confer an
interest in them on another person. Finally,
three somewhat artificial ownership attributes,

including the power to change beneficial
enjoyment and the power to revoke or change
the type and time of enjoyment, are included in
the gross estate to the full extent of the property
to which the power applies. The value of
property included in the gross estate is equal
to its fair market value on the date of death.
Designation of Beneficiaries Life insurance,
annuities, and certain death benefits are sub-
stitutes for dispositions at death and are
included in the gross estate to the extent that
the decedent owned or could exercise “incidents
of ownership” over them until the time of death.
Thus, the value of a life insurance policy payable
to the decedent’s estate on death is included in
the decedent’s gross estate (26 U.S.C.A. § 2042[a]
[1]). In addition, life insurance is includable in
the gross estate even though neither the decedent
nor the decedent’s estate actually owned it, if the
decedent possessed any incidents of ownership
over the policy. Incidents of ownership encom-
pass the rights to change the distribution of the
economic benefit flowing from the insurance
policy. For example, if A purchases a life
insurance policy that is payable to B on A’s
death, the value of that policy is includable in A’s
gross estate if she retained, at the time of her
death, the ability to change the policy beneficiary
to C. If the decedent had no rights to direct or
affect economic benefits at the time of her death,

then the proceeds of the policy are not includable
in the gross estate.
Powers of Appointment Frequently, an indi-
vidual owns the power to designate who will
GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION
ESTATE AND GIFT TAXES 243
enjoy an item of property. This power may be
considered an attribute of ownership sufficient
to be included in the gross estate. The provision
26 U.S.C.A. § 2038, discussed below under
retained power, addresses these powers of
appointment that individuals reserve to them-
selves when creating property rights for another
individual. Section 2041, in contrast, includes in
the gross estate the value of property subject to a
“general”
POWER OF APP OINTMENT that the dece-
dent acquired from another person. A general
power of appointment is one that indiv iduals
may exercise in their own favor or in favor
of their estate, their creditors, or the creditors of
their estate. If the decedent may only exercise
the power in conjunction with either the creator
of the power or a person having an adverse
interest in the property subject to the exercise of
the power, then the power is not considered a
general power of appointment because the
decedent cannot freely control the transfer of
the property at the decedent’s death, and the
property subject to the power is not included in

the gross estate. For example, if A dies and
leaves B the right to income in a trust, as well as
the right to appo int the trust in whatever
manner he wishes, then the entire value of the
trust is included in B’s estate when B dies. If, by
contrast, A leaves B the right to income from
the trust as well as the right to appoint the trust
only to C or C’s heirs, then no portion of the
trust is includable in B’s estate when B dies.
A power that is limited by an ascertainable
standard is not a general power, even if it
otherwise appears to be a general power. Ascer-
tainable standards include health, education,
support, and maintenance. Accordingly, if A dies
and leaves B the power to appoint trust principal
to herself if it is required for her health,
education, support, or maintenance, B’spower
is limited by an ascertainable standard, and the
value of the trust is not included in the gross
estate. But if B may invade the trust principal for
her “comfort and happiness,” B’s power is not
limited by an ascertainable standard, and the
value of the trust is included in B’sestate.
Artificial Aspects of the Estate Tax System
Before 1976 the gross estate included the value
of all gifts made in
CONTEMPLATION OF DEATH.
Because determining whether a gift was in
contemplation of death turned out to be
subjective, difficult to prove, and somewhat

morbid, a 1976 amendment to the estate tax law
automatically included any gift that a decedent
made within three years of death (26 U.S.C.A.
§2035[a]). Unfortunately, the effect of § 2035(a)
was to include in the gross estate the full value
of the transferred property at the date of death,
including any appreciation in value since the
transfer. Thus, if A transferred $3,000 worth of
stock to B in 1978 and died in 1980, when the
stock was worth $25,000, the stock’sfullvalue
of $25,000 was included in the gross estate,
defeating much of A ’s pre-death tax p lanning.
In 1981 sweeping tax changes eliminated
from the gross estate most transfers made
within three years of death. Even so, three
specific types of transfers (transfers with a
retained life estate, transfers with retained
powers, and transfers effective on death) are
included in the gross estate because the
decedent owned an interest in the property at
the time of death. Moreover, the value of
property once subject to certain retained
interests is included in the gross estate if the
release or lapse of the retained interest takes
place within three years of death, because the
disposition of the retained interest is considered
a substitute for disposition at death.
Transfers with a retained life estate Trans-
fers with a retained life estate are covered in 26
U.S.C.A. § 2036. For purposes of the estate tax

laws, the term life estate includes more than just
an expressly retained life interest in property.
For example, if A creates a trust for the benefit
of B but retains the right to receive the income
from the trust for the rest of her life, her
retained income interest clearly is a retained life
estate in the property. But the retention of the
right to change the economic benefit derived
from the property also constitutes a retained life
estate, as when A reserves the right to change
the trustee and appoint herself the trustee. It
also might include retained life estates by tacit
agreement, such as when A transfers her home
to B, with the understanding that A and not B
will live there for the rest of her life.
The mere possession of a life estate in
property is insufficient to bring it into the gross
estate under § 2036. The life interest must be
retained by the decedent and must apply to an
interest in property that the decedent trans-
ferred. Thus, a life income interest created by
someone other than the decedent is not
includable in the gross estate under § 2036.
GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION
244 ESTATE AND GIFT TAXES
Transfers with retained powers Transfers in
which the decedent owns, at the time of death,
the power to alter, amend, revoke, or terminate
the enjoyment of the property are covered in 26
U.S.C.A. § 2038(a)(1). In contrast to § 2041,

which allows general powers of appointment,
§ 2038 includes only powers associated with a
property interest that the decedent gave away
during his or her lifetime. The most commonly
encountered retained powers are the powers
applicable to a revocable trust. A revocable trust
is a legal instrument through which an individual
relinquishes legal ownership of the property to
the trustee of a trust, either retaining to himself
or herself beneficial enjoyment of the property,
such as the right to income, or granting it to
another individual. As its name indicates, the
revocable trust is set up so that the creator,
known as the grantor,thesettlor,orthetrustor,
may revoke the trust entirely, may change the
terms of the trust, or may change the beneficial
ownership in the trust.
The creation of, or an addition to, a
revocable trust almost never constitutes a gift.
A gift must be completed in order to be taxable;
the creation of or an addition of property to a
revocable trust is, by definition, incomplete
because the creator may change the beneficial
enjoyment at some time, effectively withdraw-
ing the “gift.” Distributions from a revocable
trust may, however, constitute completed gifts.
For example, if A transfers $2 million to a
revocable trust that pays income to B, the
transfer of the $2 million is not a completed gift,
but the annual payment of $100,000 in interest

to B is a taxable gift when it takes place. Upon
A’s death, the entire value of the property
subject to the power, including both the trust
corpus and undistributed income payable to B,
is included in the gross estate. Moreover,
because the property is valued as of the date
of death, any increases or decreases in the value
of the property since the transfer will appear in
the gross estate.
Transfers effective on death The provision
26 U.S.C.A. § 2037 includes in the gross estate
the value of transfers that take effect on death.
Although at a distance § 2037 seems to apply to
all property transfers that occur as a result of an
individual’s death, the stipulated transfers are
rarely encountered. To meet the requirements
of § 2037, the beneficiary must be able to
acquire an interest in the property only by
surviving the decedent. Furthermore, the dece-
dent must have expressly retained a reversionary
interest in the property that is wort h at least 5
percent of the property’s value at the time of
death. Both conditions are difficult to meet. In
the first place, the req uirement that the
beneficiary obtain an interest in the property
solely by surviving the decedent is exclusive: If
the beneficiary could have obtained an interest
in any other way, such as by surviving another
individual, satisfying a condition, or outlasting a
term of years, the property is not includable

under § 2037. In the second place, the require-
ment that the decedent’s retained reversionary
interest exceed 5 percent of the property’svalue
is difficult to satisfy because most retained
reversions represent remote interests that reach
fruition only if the primary, secondary, and all
contingent beneficiaries die first or fail to satisfy
the conditions of ownership.
Release or lapse of rights The gratuitous
relinquishment or lapse, within three years of
death, of a retained life estate under 26 U.S.C.A.
§ 2036, a retained reversio n under § 2037, a
retained power under § 2038, or an interest in
life insurance under § 2042 will subject the
value of the property, subject to the retaine d
interest, to inclusion in the gross estate. This
result is a remnant of the pre-1981 policy that
transfers “in contemplation of death” should be
included in the gross estate. Under § 2035(d)(2),
the release or relinquishment of a retained
interest within three years of death is conclu-
sively presumed to be “in contemplation of
death.” Thus, if A transfers his home to B in
2000, retaining the right to live there fo r life, but
abandons that right at the end of 2006, a gift of
the remainder interest in the property takes
place in 2000, followed by a gift of the
relinquished life estate in 2006. But if A dies
before the end of 2006, both the 2000 and 2006
gift tax returns will be ignored for estate tax

purposes, and the entire value of the home will
be included in A’s gross estate.
As with the retained life estate, the relin-
quishment or release within three years of death
of a power of appointment retained under
§ 2038 will cause inclusion of the full value of
the property at its date-of-death value. For
example, if A creates a revocable trust in 1990,
then amends it to make it irrevocable at the end
of 2002, a gift will result in 2002 when the trust
becomes irrevocable. If A dies before the end of
GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION
ESTATE AND GIFT TAXES 245
2005, the entire value of the trust, including any
appreciation in value, will be included in A’s
estate, and the 2002 gift will be ignored. Finally,
the release or lapse of ownership or any
incidents of ownership over a life insurance
policy will cause the entire value of that policy
to be included in the gross estate.
Deductions
Once the value of the gross estate has been
computed, the estate is entitled to take deduc-
tions. Expenses associated with administering
the estate, such as funeral expenses, executors ’
commissions, and attorneys’ fees, as well as
debts the decedent owed at death, are deductible
because they necessarily reduce the value of the
property that the decedent actually is capable of
transferring (26 U.S.C.A. § 2053[a], [b]). The

two most important deductions for tax pur-
poses are the marital deduction and the
charitable deduction.
The Marital De duction The marital deduc-
tion applies to certain interests in property
passing from the first spouse to die to the
surviving spouse. It permits an estate to deduct
the value of certain property included in the
estate from the value of the gross estate, thus
eliminating the estate tax with respect to that
property. The rationale behind the marital
deduction is simple: A husband and a wife
should be considered a single unit for purposes
of wealth transfer. Accordingly, as a general
rule, the marital deduction will be allowed with
respect to certain property passing to a surviv-
ing spouse, provided that it will be included
and taxed in the estate of that spouse on his or
her death.
To qualify for the marital deduction,
property must satisfy three basic requirements.
First, the surviving spouse must be a U.S.
citizen. Second, the inte rest in the property
must pass directly from the first spouse to die
to the surviving spouse. Third, the interest
generally must not be terminable (26 U.S.C.A.
§ 2056). The concept of a terminable interest is
complex and technical, but for the most part,
an interest is terminable for tax purposes if
another interest in the same property passes to

someone other than the surviving spouse by
reason of the decedent’s death, allowing that
other person to enjoy the property after the
surviving spouse’ s interest terminates. For
example, if A leaves to her husband, B, a life
estate in her property, with a remainder to
their children, her bequest to B does not
qualify for the marital deduction. B’s interest
terminates automatically on his death, and the
children, by reason of the termination, will
then enjoy the property.
If no one else can enjoy the property
following the termination of the surviving
spouse’s interest, the property interest is not
considered terminable for tax purposes, and a
deduction will be allowed. For example, if A
leaves to her husband, B, her interest in a patent
and dies while the patent has ten years of life
left, the patent interest qualifies for the marital
deduction, because no one else will enjoy it after
it expires.
Whether an interest is terminable must be
determined at the time of death. Therefore,
even if an event following the first spouse’s
death makes the termination of the surviving
spouse’s interest impossible, the marital deduc-
tion will not be allowed if it technically was
terminable at the time of death.
Congress in 1981 created an important
exception to the general rule that a terminable

interest does not qualify for the marital
deduction. This exception, called the qualified
terminable interest property (QTIP) exception, is
a sophisticated statutory rule allowin g the estate
to deduct the value of a terminable interest that
passes to the surviving spouse as long as the
transfer meets five requirements:
1. The surviving spouse receives all or a
specific portion of the income for life from
the interest.
2. The income from the QTIP … is paid at
least annually.
3. The surviving spouse has the power to
appoint the interest to himself or his estate.
4. The power must be exercisable in all events.
5. No other person has the power to appoint
the interest to anyone other than the
surviving spouse (26 U.S.C.A. § 2056[b][7
]).
In return for the marital deduction, the
estate must agree that the QTIP will be included
in the estate of the surviving spouse at death, to
the extent that the surviving spouse has not
disposed of the property dur ing his or her life
(§ 2044).
TheCharitableDeductionThe charitable
deduction permits an estate to deduct the entire
GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION
246 ESTATE AND GIFT TAXES
value of bequests to any of a numb er of public

purposes, including the following:
n
any corporation or association organized
for religious, charitable, sc ientific, literary,
or educational purposes
n
the United States
n
a state or its political subdivisions, and the
District of Columbia
n
a foreign government, if the bequest is to
be used for charitable purposes
n
selected amateur sports organizations (26
U.S.C.A. § 2055[a])
The charitable deduc tion is intended to
provide wealthy individuals a tax incentive to
benefit the public interest. Only bequests
passing directly from the decedent’s estate to
the charitable entity qualify for the deduction.
Therefore, if A leaves $100, 000 to her son C,
who gives $50,000 to the Red Cross immediately
after A’s death, A’s estate cannot receive a
charitable deduction for the sum given to the
charity (§ 2518[b][4]).
Computation of Tax
The estate and gift taxes are progressive and
unified taxes, meaning that each taxable transfer
taking place after 1976 is taken into consider-

ation when computing the tax on subse quent
transfers. Progressivity in the estate and gift tax
system ensures that individuals cannot avoid
increased tax rates by making a series of small
transfers. If the taxes were not progressive, then
$1 million parc eled out into ten annual gifts of
$100,000 would be taxed at the marginal rate of
26 percent for each gift, whereas under the
PROGRESSIVE TAX system, the gifts are taxed at the
marginal rate of 39 percent. Similarly, unifica-
tion between the transfer tax systems ensures
that individuals cannot avoid paying higher
estate tax rates at death simply by giving away
most of their property interests during life.
Thus, in the case of A above, the marginal tax
rate on A’s estate is 49 percent, computed on
$2.7 million of total lifetime and death trans fers,
rather than 45 percent, computed only on the
value of the gross estate.
FURTHER READINGS
Barlett, Bruce. 2003. “Taxing Debate: The Estate Tax.”
National Review (January 23).
Economic Growth and Tax Relief Reconciliation Act of
2001, H.R. 1836, May 25, 2001.
“The Revocable Living Trust as an Estate Planning Tool.”
1972. Real Property, Probate, and Trust Journal 11.
Stephens, Richard B., et al., eds. 2002. Federal Estate and Gift
Taxation. 8th ed. Valhalla, N.Y.: Warren Gorham &
Lamont.
ESTIMATED TAX

Federal and state tax laws require a quarterly
payment of estimated taxes due from corporations,
trusts, estates, non-wage employees, and wage
employees with income not subject to withholding.
Individuals must remit at least 100 percent of their
prior year tax liability or 90 percent of their
current year tax liability in order to avoid an
underpayment penalty. Corporations must pay at
least 90 percent of their current year tax liability
in order to avoid an underpayment penalty.
Additional taxes due, if any, are paid on
taxpayer’s annual tax return.
Typically, non-wage earners pay estimated
tax since their incomes are not subject to
WITHHOLDING TAX to the same extent as the
income of a salaried worker. Persons who receive
a certain level of additional income, apart from
their salaries, must also pay estimated tax.
The calculation and payment of estimated
tax are preliminary stages to the filing of a final
income tax return. Under federal and most state
laws, estimated tax is paid in quarterly install-
ments. The tax paid is applied to the tax owed
when the taxpayer files a final return. Any
overpayment of estimated tax will be refunded
after the filing of the final return. If no tax is
owed, a taxpayer is still required under federal
law, and many state laws, to file a final return.
When tax is due upon the filing of the final
return, the taxpayer must pay the outstanding

amount. Depending upon the amount due and
the reasons for the miscalculation, a taxpayer
might be liable under federal and state law for
interest imposed upon the deficiency, as well as
being subject to a penalty.
ESTOPPEL
A legal principle that bars a party from denying or
alleging a certain fact owing to that party’s
previous conduct, allegation, or denial.
The rationale behind estoppel is to prevent
injustice owing to inconsistency or fraud. There
are two general types of estoppel: equitable and
legal.
Equitable Estoppel
Equitable estoppel, sometimes known as estoppel
in pais, protects one party from being harmed by
GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION
ESTOPPEL 247
another party’s voluntary conduct. Voluntary
conduct may be an action, silence, acquiescence,
or concealment of material facts. One example of
equitable estoppel due to a party’sacquiescenceis
found in Lambertini v. Lambertini, 655 So. 2d 142
(Fla. 3d Dist. Ct. App. 1995). In the late 1950s,
Olga, who was married to another man, and
Frank Lambertini met and began living together
in Argentina. Olga and Frank hired an attorney in
Buenos Aires, who purported to divorce Olga
from her first husband and marry her to Frank
pursuant to Mexican law. The Lambertinis began

what they thought was a married life together,
and soon produced two children. In 1968 they
moved to the United States and became Florida
residents.
In 1992 Olga sought a divorce from Frank.
She petitioned the Florida court for sole posses-
sion of the marital home and temporary alimony,
which the court granted. Frank sought a rehear-
ing, arguing that the Mexican marriage was not a
valid legal marriage and was therefore void.
Though Frank won with this argument in the trial
court, the appellate court reversed, holding that
Frank was equitably estopped from arguing that
the Mexican marriage was invalid. According
to the appellate court, Frank and Olga had
held themselves out as a married couple for more
than 30 years, lived together, raised two children,
and owned property jointly. Both Frank and Olga
apparently believed all along that the Mexican
marriage was legal, and it was only when Olga
filed for divorce that Frank discovered and chose
to rely on its invalidity. The appellate court
granted Olga her divorce, the house, and the
temporary alimony. Frank’s acquiescence for
three decades—holding himself out as being
married to Olga—prevented him from denying
the marriage’s existence.
There are several specific types of equitable
estoppel.
PROMISSORY ESTOPPEL is a contract law

doctrine. It occurs when a party reasonably
relies on the promise of another party, and
because of the reliance is injured or damaged.
For example, suppose a restaurant agrees to pay
a bakery to make 50 pies. The bakery has only
two employees. It takes them two days to make
the pies, and they are unable to bake or sell
anything else during that time. Then, the
restaurant decides not to buy the pies, leaving
the bakery with many more pies than it can sell
and a loss of profit from the time spent baking
them. A court will likely apply the promissory
estoppel doctrine and require the restaurant to
fulfill its promise and pay for the pies.
An estoppel certificate is a written declaration
signed by a party who attests, for the benefit of
another party, to the accuracy of certain facts
described in the declaration. The estoppel
certificate prevents the party who signs it from
later challenging the validity of those facts. This
type of docume nt is perhaps most common in
the context of mortgages, or home loans. If one
bank seeks to purchase mortgages owned by
another bank, the purchasing bank may request
the borrowers, or homeowners, to sign an
estoppel certif icate establishing (1) that the
mortgage is valid, (2) the amount of principal
and interest due as of the date of the certificate,
and (3) that no defenses exist that would affect
the value of the mortgage. After signing this

certificate, the borrower cannot dispute those
facts.
Estoppel by laches precludes a party from
bringing an action when the party knowingly
failed to claim or enforce a
LEGAL RIGHT at the
proper time. This doctrine is closely related to
the concept of statutes of limitations, except
that statutes of limitations set specific time
limits for legal actions, whereas under laches,
generally there is no prescribed time that courts
consider “proper.” A
DEFENDANT seeking the
protection of laches must demonstrate that the
plaintiff’s inaction,
MISREPRESENTATION, or silence
prejudiced the defendant or induced the defen-
dant to change positions for the worse.
The court applied the doctrine of laches in
People v. Heirens, 648 N.E.2d 260 (Ill. 1st Dist.
Ct. App. 1995). William Heirens pleaded guilty,
in 1946, to three murders, for which he received
three consecutive life terms in prison. Heirens
sought court relief numerous times in the
ensuing years. In 1989, 43 years after his
conviction, Heirens filed his second postconvic-
tion petition seeking, among other things, relief
from his prison sentence due to ineffective
counsel and the denial of due process at the
time of his arrest. The court found that all the

witnesses and attorneys involved in Heirens’s
case had since died. Laches precluded Heirens
from bringing his action because, according to
the court, it would be “difficult to imagine a
case where the facts are more remote and where
the state might be more prejudiced by the
passage of time.”
GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION
248 ESTOPPEL