The value of the residence will still be included in Paul’s gross estate.
Property
transferred before the death of the decedent where the decedent retained an interest or a
power is also specifically included in the gross estate.
14-2
Chapter 14 - Transfer Taxes and Wealth Planning
10.
[LO 2]
Explain how a remainder and an income interest are valued for transfer tax
purposes.
A remainder interest is essentially a promise of a future payment (upon the expiration of
the temporary interest).
As such, the value of the future payment can be estimated with a
present value.
For example, suppose that property worth $100 is placed in a trust with the
income to be paid each year for 10 years after which time the principal (corpus) of the
trust will be distributed.
In such an instance, the remainder is estimated by the present
value of a payment of $100 in 10 years as follows:
Remainder interest = future payment / (1 + r)
n
Where r is the market rate of interest and n is the number of years.
The interest rate for
this calculation is referred to as the Section 7520 rate and is published monthly by the
Treasury.
The value of the income interest is merely the difference between the value of
the remainder and the total value of the property
11.[LO 2] Explain why the fair market value of a life estate is more difficult to estimate than an income interest.
12.[LO 2] Describe a reason why transfers of terminable interests should not qualify for the marital deduction.
