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b.If the designated beneficiary is the estate, the proceeds become part of the probate estate. A payment to the estate may result when the primary beneficiary provision lapses (e.g., when the beneficiary predeceased).158. For estate tax purposes, what is the difference between a surviving spouse’s share of the community property and a dower (or curtesy) interest? A surviving spouse’s portion of the community property is not included in the deceased spouse’s gross estate. The gross estate, however, is not adjusted for any dower interest. But to the extent it qualifies, a dower/curtesy interest will generate a marital deduction.159. Brad holds a life estate in a trust created by his father, while Scott holds a life estate in a trust created by himself. Upon their deaths, Scott must include the trust in his gross estate, while Brad need not include his trust.Why? Under the operation of § 2036, Scott has retained the enjoyment over property he originally owned. Brad, however, never owned the trust property to begin with. Thus, Scott made an incomplete transfer when he created the trust.160. Joint tenancies and tenancies by the entirety avoid probate, while tenancies in common and community property do not. Why? Joint tenancies and tenancies by the entirety possess the right of survivorship. Since the survivor gets allof the property, nothing is left to include in the probate estate.
161. Cole purchases land for $500,000 and transfers it by gift to his two daughters, Madison and Paige, as equaljoint tenants with the right of survivorship. Ten years later, when the land is worth $2,000,000, Madison predeceases Paige. Madison’s executor includes none of the value of the land in her gross estate, as she contributed nothing toward its cost. Do you agree? Madison’s gross estate must include $1,000,000 (50% of $2,000,000) as to the land. Cole’s gift is treated as an equal contribution by each of his daughters.162. When Travis learns he is seriously ill, he transfers an insurance policy on his life (maturity value of $2,000,000) to his wife Alexis. The couple’s adult children are the designated beneficiaries of the policy. Has Travis acted wisely? Even if Travis lives for three years and avoids § 2035, he has placed Alexis in a gift situation. Unless the beneficiaries are changed, she will make a gift to the children of $2,000,000 when Travis dies.163. What is the justification for the terminable interest rule that is applicable to the marital deduction? The marital deduction is based on the premise that husband and wife are a single economic unit. Thus, property can pass between spouses (either by gift or at death) free of any transfer tax. But once property leaves the family unit, any applicable transfer tax should be imposed. The purpose of the terminable interest rule is to preclude the avoidance of this final transfer tax. Example. H dies and leaves his property in trust, life estate to W and remainder to their children. W dies five years later.