Masonry Magazine August 1979 Page. 23
ESTATE PLANNING
continued from page 13
tions of stock to the son. Obviously if the father dies within three years of the transfer, the full value of the stock must come back into the father's estate.
Another aspect of the gifting of property is that the Internal Revenue Code provides that anytime a gift is made which would otherwise be subject to federal gift taxation, there's an exclusion of $3,000 per year per donee. And, if the donor is married, they can double the amount of exclusion to $6.000 per year per donee without federal gift taxation.
Retained Interest Rule
Another example of a situation where an estate owner may feel that he has successfully transferred property out of his estate but the property will still be included in his estate is the "retained interest rule." This applies to any situation in which the owner has transferred property to another individual but as part of that transaction has retained some sort of interest, control or beneficial enjoyment over the property. The best example of this situation is the elderly estate owner who has a house. He's a widower now, so he gives the house to his son and daughter-in-law. He deeds it over to them, they move in and, as a part of the transaction, the father lives in the attic apartment and pays no rent. This represents a "retained interest."
Still another example is the situation where the father transfers securities or a stock portfolio into a trust where it's effectively beyond his control. But he has retained the slight right to tell the trustee which of his children should receive what proportion of the dividend payments. This represents a sufficient retained interest to trigger estate taxation over the transferred property at the time of his death.
Life Insurance Policy Proceeds
The proceeds of a life insurance policy may also be included in an individual's estate under certain circumstances. Basically, there is a two-pronged test that is applied to determine if proceeds should be included in an individual's gross estate. You need not meet both prongs. Either will suffice.
The first prong is the situation where an individual has taken out life insurance but fails to designate a specific beneficiary or designates his estate as the beneficiary of the policy. It's not unusual for some individuals to have as much as $500,000 in group term life insurance. And the full face value of such a policy, if included in the estate, could substantially inflate what might otherwise be a relatively modest estate.
The second prong which is more frequently encountered is what is known as the "incidents of ownership" test. The Internal Revenue Code provides that there are certain incidents of ownership in the life insurance policy. Examples would be the right to the cash surrender value, right to change beneficiaries or right to borrow against the policy. If an estate owner has any of these incidents of ownership, and many policies are in fact set up this way, then the face value of the proceeds are going to be included in the estate.
There is a very simple method to avoiding incidents of ownership problems. If you're married, simply have your spouse own the life insurance policy on your life with her as the beneficiary. The question of who is paying the premiums is irrelevant. The only potential problem with cross-ownership of life insurance would be subsequent marital discord. Should you and your spouse become divorced, the policy will remain the property of the designated owner.
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MASONRY/AUGUST, 1979 23