Taxation of Estates and Gifts

Retained Life Estate

26 U.S.C. § 2036 says that gross estates also include the value of property where the decedent transferred part of his interest but retained part of it for his life, where the portion was not sold for "adequate and full consideration."

  • "For life", for a period not ascertainable without reference to his life, or for a period which does not end before he actually dies

If the right was only to the income from part of the property, only that part will be included in the gross estate.

If the right was only for an annuity, only that part of the property the income from which is necessary to maintain paying that annuity will be included. (Divide the annuity amount by the interest rate to find the corpus.)

If the child buys a remainder interest at the rates in Table S, nothing is included in the gross estate from the annuity under 26 U.S.C. § 2036. (Although the value of the consideration will be under 26 U.S.C. § 2033 if the decedent does not consume it. (And at expected interest rates, it will reach the same value as the gross estate would have included if it was not sold.))

  • To find the value of a life estate or remainder, use Table S. (Although you will need an interest rate.)

If the decedent actually dies before the period ends and transfers a remaining interest, the full amount is still included by § 2036 and nothing is included by § 2033.

Unlike §§ 2033 & 2038, § 2036 does not discount. Include the entire value of the retained property at the date of the death.

Elements of § 2036
  1. Decedent owned property, transferred part, and kept part;
  2. The retained interest is a "life-like interest";
    Life-Like Interest

    A "life-like interest" is one which is kept for:

    1. decedent's life,
    2. a period ascertainable only with reference to decedent's death, or
    3. any period which does not in fact end before decedent's death.
  3. The transferred interest was not sold "bona fide" for "adequate and full consideration;"
  4. The property interest retained by the decedent is either:
    1. possession of non-income producing property or income from income producing property, or
    2. the right, either alone or in conjuction with any person, to designate the persons who shall possess the property or its income; and
  5. The amount included in the decedent's gross estate is the value, as of the decedent's date of death, of the property transferred during life to which the retained interest relates.

The right to designate income does not include a power over the transferred property itself which "does not affect the enjoyment of the income received or earned during the decedent's life."

  • If the income from principal is already being transferred to someone during the decedent's life, the right to transfer the principal to that person is not included.

26 U.S.C. § 2036 is only intended to include the powers over the property that actually affect it while the decedent is alive. It does not include a power over the transferred property itself which does not affect the enjoyment of the income received or earned during the decedent's life. (See, however, [26 U.S.C. § 2038] for the inclusion of property in the gross estate on account of such a power.) 26 CFR § 20.2036-1(b)(3). E.g., remainders. It has to be sure to not affect him during his life.

Property is only included under 26 U.S.C. § 2036 if the decedent still had the "string" at the date of his date. However, 26 U.S.C. § 2035 will capture interests transferred away within 3 years of one's death.