PORTFOLIO

Incomplete Lifetime Transfers: Retained Powers Under Sections 2036(a)(2) and 2038 (Portfolio 50)

Tax Management Portfolio No. 50-6th, Incomplete Lifetime Transfers: Retained Powers Under Sections 2036(a)(2) and 2038, is concerned with lifetime transfers with respect to which the transferor retains or possesses at death one or more rights or powers over possession or enjoyment.

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DESCRIPTION

Tax Management Portfolio No. 50-6th, Incomplete Lifetime Transfers: Retained Powers Under Sections 2036(a)(2) and 2038, is concerned with lifetime transfers with respect to which the transferor retains or possesses at death one or more rights or powers over possession or enjoyment. If such a right or power exists at the death of the transferor, one or both of §2036(a)(2) or §2038 may cause all or a portion of the transferred property to be included in the gross estate of the decedent.
The Portfolio first discusses §2036(a)(2), and relevant historical explanation is included in the analysis. The Portfolio identifies and discusses each of the requirements to invoke §2036(a)(2), and the exceptions also are discussed.
The Portfolio second discusses §2038, again including historical explanation as appropriate. The Portfolio identifies and discusses each of the requirements to invoke §2038, and the exceptions also are discussed.
The third major component of this Portfolio is contained in Section V, which is concerned with a variety of subjects that are common to §§2036, 2037, and 2038. Because §§2036, 2037, and 2038 are covered in part in this Portfolio and in part in the companion Portfolio, 52 T.M., Incomplete Lifetime Transfers: Retained Beneficial Interests Under Sections 2036(a)(1) and 2037, Section V is relevant to both this Portfolio and 52 T.M.
This Portfolio may be cited as Lischer, 50-6th T.M., Incomplete Lifetime Transfers: Retained Powers Under Sections 2036(a)(2) and 2038.


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AUTHORS

HENRY J. LISCHER, JR.
Henry J. Lischer, Jr., University of Iowa (B.B.A., 1967; J.D., 1970); New York University (LL.M. in Taxation, 1974); Judge Advocate, U.S. Marine Corps, 1970–73; Associate, Lillick, McHose & Charles, Los Angeles, California, 1974–75; Professor of Law, University of Alabama, 1975–78; Professor of Law, Southern Methodist University, 1978–present; Counsel, Malouf Lynch Jackson & Swinson, Dallas, Texas, 1982–84, 1985–present; Professor-in-Residence, Office of Chief Counsel, Internal Revenue Service, Washington, D.C., 1984–85; Fellow, American College of Tax Counsel; Academic Fellow, American College of Trust and Estate Counsel.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Scope of Portfolio

B. Sunset of Estate Tax

C. Citation to IRS Private Letter Rulings and Technical Advice Memos

II. Section 2036(a)(2)

A. Overview

B. Historical Background

1. Revenue Act of 1916

2. Joint Resolution of March 3, 1931

3. Revenue Act of 1932

4. Revenue Act of 1987

5. Omnibus Budget Reconciliation Act of 1990 Enacts Chapter 14

6. Taxpayer Relief Act of 1997 Revises § 2035

C. Text of Present-Law § 2036(a)(2)

D. The Four Requirements of § 2036(a)(2)

1. Lifetime Transfer of Property by Decedent

2. Transfer Made After March 3, 1931

3. Transferor Retained the Right to Designate the Persons to Possess or Enjoy the Property or the Income Therefrom

a. General Rules

b. Transferor Serves as Custodian Under Uniform Gifts or Transfers to Minors Act

c. Power to Accumulate Income

d. Power to Distribute Corpus

e. Contingent Power

f. Competency of Transferor

g. Jointly Held Powers

h. Attribution to Transferor of Powers Held by Trustee

i. Powers Excluded from § § 2036(a)(2) and 2038

4. Period of Retention Relates to Death of Transferor

a. Retention for Life

b. Retention for Period Not Ascertainable Without Reference to Death

c. Retention for Period Not Ending Before Death

E. Exceptions to § 2036(a)(2)

1. Transfer That Is a Bona Fide Sale for an Adequate and Full Consideration in Money or Money's Worth

2. Power That Does Not Affect Enjoyment of Income During Transferor's Life

3. Power Subject to Ascertainable Standard

4. Pre-Death Termination of Retained Power over the Transferred Property

F. Amount of Inclusion Under § 2036(a)(2)

1. General Rules for Amount of Inclusion

2. Property Interest to Be Included

3. Adjustment for Preceding Life Estate (or Term Certain)

4. Accumulated Income

5. Partial Consideration Received Under § 2043

III. Section 2038

A. Overview

B. Historical Background

1. Revenue Act of 1916

2. Revenue Act of 1924

3. Early Caselaw

4. Revenue Act of 1936

a. "In Whatever Capacity Exercisable"

b. Power Need Not Be "Retained"

c. Power to "Terminate"

5. Tax Reform Act of 1976

C. Text of Present-Law § 2038

D. The Three Requirements of § 2038(a)(1)

1. Lifetime Transfer of Property by Decedent

2. Transfer Made After June 22, 1936

3. Transferor Possessed at Death a Power to Alter, Amend, Revoke, or Terminate the Enjoyment of the Transferred Property

a. Scope of Powers

(1) General Rules

(2) Power Need Not Be Possessed Solely by Decedent

(3) Transferor Serves as Custodian Under Uniform Gifts or Transfers to Minors Act

(4) Power to Alter or Amend

(5) Power to Terminate

(6) Power to Revoke

(7) Power over Timing of Enjoyment

b. Capacity in Which Power Held Is Irrelevant

c. Competency of Transferor

d. Attribution to Transferor of Powers Held by Trustee

e. Requirement of Precedent Giving of Notice (or Delayed Effectiveness of Power) Is Ignored

f. Powers Excluded from § § 2036(a)(2) and 2038

E. Exceptions to § 2038

1. Transfer Was for an Adequate and Full Consideration in Money or Money's Worth

2. Decedent's Power Could Be Exercised Only with the Consent of All Parties Having an Interest in the Transferred Property and the Power Adds Nothing to the Rights of the Parties Under Local Law

3. Contingent Power Not Effective at Death

4. Power Subject to Ascertainable Standard

5. Pre-Death Termination or Relinquishment of Power over Transferred Property

a. General Rules

b. Effect of § 2035(e) on § 2038

F. Special Rules for Prior Transfers

1. Transfers Made Before June 23, 1936

2. Transfers Made Before June 2, 1924

G. Amount of Inclusion Under § 2038

1. General Rules

2. Property Interest to Be Included

3. Power of Termination

4. Power over Timing of Enjoyment

5. Requirement of Advance Notice

6. Temporary Suspension of Power

IV. Comparison of Scopes of § § 2036(a)(2) and 2038

Introductory Material

A. Interest Subject to Inclusion in Gross Estate

B. Jointly Held Powers

C. Contingent Powers

D. Retention or Possession of Power

V. Elements Common to § § 2036â€"2038

Introductory Material

A. Inter Vivos Transfer by Decedent

1. General Rules

2. Joint Transfers

3. Gift-Splitting Transfer

4. Transfer for Benefit of Injured Person

5. Division of Trust

6. Constructive or "Indirect" Transfers

a. General Rules

b. Will Contests

c. Spouse's Election Will

d. Joint and Mutual Wills

(1) Probate Property

(2) Non-Probate Property

e. Disclaimers

f. Acquiescence in Misallocation of Estate Income

g. Failure to Collect Claim Against an Estate

h. Transfer or Postponement of Remainder Interest

i. Failure to Withdraw Income

j. Failure to Withdraw Corpus

k. Power of Transferor to Accumulate Income

l. Purchase of Life Estate and Remainder in Same Property

m. Indirect Transfers in Connection with Divorce

n. Employee Death Benefits

o. Life Insurance

(1) General Rules

(2) Life Insurance Settlement Options

p. Reciprocal Transfers

(1) Caselaw Preceding Grace

(2) U.S. Supreme Court Decision in Grace

(3) Application of Reciprocal Trust Doctrine Outside of § 2036(a)(1)

(4) Amount of Inclusion for Reciprocal Trusts

B. Exception for Sale for Money's Worth Consideration

1. General Rules for Consideration

a. Consideration Must Be in Money's Worth

(1) Discharge of Debt May Be Consideration

(2) Retained Interest or Power Is Not Consideration

(3) Reciprocal or Indirect Transfers

(4) Interests Qualifying as Consideration (E.g., Spouse's Election Wills)

b. Consideration Must Be Received at Time of Lifetime Transfer

c. Intention Must Be to Pay Consideration

d. Consideration Must Be Received for a Transferred Interest Includible in Gross Estate

e. To Whom the Consideration Must Go

f. Who Must Supply the Consideration

2. Consideration in Context of Divorce or Separation

3. Valuation of Consideration

4. Effect of Receipt of Consideration on Inclusion in Gross Estate

a. Full and Adequate Consideration Received

(1) General Rules

(2) Consideration in § 2036(a)(1) Transfers

(3) Estate Tax Ownership Doctrine

(4) Bona Fide Arm's-Length Ordinary Course of Business Transfer Deemed to Be for Full and Adequate Consideration

b. Partial Consideration Received

C. Retention of Interest, Right, or Power Under § 2036 or § 2037

1. Overview

2. Methods of Retention

a. Express Retention

b. Retention by Other than Express Retention

(1) Domination by Transferor

(2) Power to Remove and/or Replace Independent Trustee Not Within § 2036 or § 2038

(3) Agreement to Provide Interest, Right, or Power May Be Retention

(4) Retention Pursuant to Document of an Other Person

(5) Retention by Operation of Law or Status

3. Retention Is with Respect to the Property Transferred During Life

a. Transfers in Trust

b. Indirect Transfers

c. Bifurcated Transactions

(1) Carve-Out Transfers

(2) Split-Dollar Life Insurance

(3) Private Annuities

(4) Splitting Business Interests

D. Transferor Services as Custodian Under Uniform Gifts or Transfers to Minors Act

E. Powers Excluded from § § 2036â€"2038

1. Administrative Powers

2. Dispositive Power of Fiduciary Limited by Ascertainable Standard

3. Incidental Powers


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Section 202(b), Revenue Act of 1916, H.R. 16763 (P.L. 271), Sixty-Fourth Congress, Sess. I, Ch. 463 (1916)

Worksheet 2 Section 7, Technical Changes Act of 1949, H.R. 5268, 81st Cong., 1st Sess., Amending 1939 I.R.C. § 811(c)

Worksheet 3 1954 Internal Revenue Code (P.L. 591), H.R. Rep. No. 1337, Ways and Means Committee, 83rd Cong., 2d Sess. A-314, S. Rep. No. 1662, Senate Finance Committee, 83rd Cong., 2d Sess. 469 (1954), [To Accompany H.R. 8300]

Bibliography

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Internal Revenue Code:

Regulations:

Committee Reports/Public Laws:

Treasury Rulings:

Cases:

UNOFFICIAL

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Tax Management Portfolios:

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