PORTFOLIO

Incomplete Lifetime Transfers: Retained Beneficial Interests Under Sections 2036(a)(1) and 2037 (Portfolio 52)

Tax Management Portfolio No. 52, Incomplete Lifetime Transfers: Retained Beneficial Interests Under Sections 2036(a)(1) and 2037, is concerned with lifetime transfers with respect to which the transferor retains at death one or more specified beneficial interests in the property transferred during life.

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DESCRIPTION

Tax Management Portfolio No. 52, Incomplete Lifetime Transfers: Retained Beneficial Interests Under Sections 2036(a)(1) and 2037, is concerned with lifetime transfers with respect to which the transferor retains at death one or more specified beneficial interests in the property transferred during life. If such an interest is retained at the death of the transferor, one or both of §2036(a)(1) or §2037 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)(1), and relevant historical explanation is included in the analysis. The Portfolio identifies and discusses each of the requirements to invoke §2036(a)(1), and the exceptions also are discussed.
The Portfolio then discusses §2037, again including historical explanation as appropriate. The Portfolio identifies and discusses each of the requirements to invoke §2037, and the exceptions are also reviewed.
A variety of subjects are common to §§2036, 2037, and 2038. Sections 2036, 2037, and 2038 are covered in part in this Portfolio and in part in the companion Portfolio, 50 T.M., Incomplete Lifetime Transfers: Retained Powers Under Sections 2036(a)(2) and 2038, and the discussion of the common subjects is contained in Section V of the companion Portfolio.
This Portfolio may be cited as Lischer, 52 T.M., Incomplete Lifetime Transfers: Retained Beneficial Interests Under Sections 2036(a)(1) and 2037.


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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)(1)

A. Overview

B. Historical Background

1. Revenue Act of 1916

2. Joint Resolution of March 3, 1931

3. Revenue Act of 1932

4. Subsequent Supreme Court Decisions and Legislation

5. Revenue Act of 1987

6. Omnibus Budget Reconciliation Act of 1990 Enacts Chapter 14

C. Text of Present Law § 2036(a)(1)

D. The Four Requirements of § 2036(a)(1)

1. Lifetime Transfer of Property by Decedent

2. Transfer Made After March 3, 1931

3. Transferor Retained Possession or Enjoyment of, or the Right to the Income from, the Property Transferred

a. Possession or Enjoyment

(1) Must Possession or Enjoyment Be Exclusive?

(a) Interspousal Transfer Followed by Co-Occupancy

(b) Transfer to Family Member Other Than Spouse

(2) Gift and Leaseback

b. Right to Income

(1) General Rules

(2) Income Must Be Distributed to Transferor

(3) Income May Be Distributed to Transferor at Discretion of Trustee

(a) Generally No § 2036(a)(1) Inclusion

(b) Section 2036(a)(1) Inclusion in Limited Circumstances

(i) Agreement or Understanding

(ii) Settlor's Creditors Can Reach Property

(iii) Settlor Is Trustee

(iv) Trustee Authority to Distribute Income Is by Ascertainable Standard

(4) Income Must or May Be Applied to Satisfy Obligations of Transferor

(a) Transfers for Benefit of Transferor

(b) Trusts Connected with Divorce and Separation

(c) Income May Be Applied by Independent Trustee to Obligations of Transferor

(d) Grantor Trust Distribution to Reimburse Grantor for Federal Income Tax Paid

(e) Trust for Support of Spouse or Dependents

(i) Settlor Not Trustee

(A) Instrument Directs That Income Be Used to Discharge Support Obligations

(B) Instrument Directs Distributions of Income Pursuant to Standard

(C) Instrument Permits Distributions of Income Pursuant to Discretion of Trustee

(ii) Settlor Is Trustee

(5) Is the Right to an Annuity a Retained Interest Within § 2036(a)(1)?

c. Enhanced Life Estate Transfers ("Lady Bird" Deeds)

d. Contingent Rights

e. Retention of Interest

4. Period of Retention of Possession or Enjoyment 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 Application of § 2036(a)(1)

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

2. Exceptions Under § 2036(c)

a. Transfers Before March 4, 1931

b. Certain Transfers After March 3, 1931, and Before June 7, 1932

3. Pre-Death Termination of Retained Possession or Enjoyment, or Income from, the Transferred Property

F. Retained Voting Rights Under § 2036(b)

G. Amount of Inclusion Under § 2036(a)(1)

1. General Rules for Amount of Inclusion

2. Life Estate (or Term Certain) Precedes Retained Interest of Transferor

3. Partial Consideration Received Under § 2043

4. Multiple Transferors

5. Annuity Amount

a. Generally Applicable Rules

b. Yield from Property Not Sufficient to Pay Annuity Amount

6. Amount of Inclusion with Respect to Reciprocal Trusts

III. Section 2037

A. Overview

1. Historical Note

2. Text of Present Law § 2037

3. The Four Requirements of § 2037

B. Requirements to Invoke § 2037

1. Transfer After September 7, 1916

2. Possession or Enjoyment Can Be Obtained Only by Surviving the Decedent

a. General Rule

b. Other Contingencies

(1) Death of Transferor Is One of Multiple Contingencies, Any One of Which Must Be Satisfied

(2) Death of Transferor Is One of Multiple Required Contingencies

3. The Decedent Retained a "Reversionary Interest"

a. "Reversionary Interest" Within § 2037

(1) General Meaning of Reversionary Interest

(2) Property May Return to the Decedent or the Decedent's Estate

(a) Required Payment of Corpus to Settlor by Trustee

(b) Discretionary Payment of Corpus to Settlor by Trustee

(c) Other Reversionary Interests

(d) Reversion in the Transferor's Estate

(3) Property May Be Subject to a Power of Disposition by Transferor

(4) Reversionary Interest Must Exist at Death of Transferor

b. Reversionary Interest Must Be "Retained"

c. Reversionary Interest Does Not Include Possibility That Income from the Property May Return to Transferor or Become Subject to Power of Disposition by the Transferor

4. Value of the Reversionary Interest, Immediately Before the Death of the Transferor, Must Exceed 5% of the Value of the Transferred Property

a. "Property" to Which 5% Standard Is Applied

b. Valuation of Reversionary Interest Under 5% Standard

(1) General Rules

(2) Application of 5% Standard to Multiple Reversionary Interests in Property

(3) Application of 5% Standard to Retained Annual Right to Corpus

(4) Application of 5% Standard to Distributions of Corpus to Transferor for Support and Maintenance

(5) Application of 5% Standard to Other Remote or Difficult-to-Value Reversionary Interests

(6) Reversionary Interest Generally Valued According to Mortality Tables

(7) Effect of Transferor's Health Circumstances on Application of Mortality Tables

(8) Application of 5% Standard to Retained Power of Disposition

c. Value of Reversionary Interest if § 2032A Election Is Exercised by Estate

d. Even Though § 2037 May Not Apply Due to the 5% Standard, § 2033 May Apply

C. Exceptions to Application of § 2037

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

2. Transfer on or Before September 7, 1916

3. Certain Transfers After November 11, 1935, and Before January 29, 1940

4. Possession or Enjoyment of the Property Could Have Been Obtained by Any Beneficiary Through the Exercise of a Power of Appointment Exercisable Immediately Before the Decedent's Death

5. "Reversionary Interest" Does Not Include Possibility That Income from the Property May Return to Transferor or Become Subject to Power of Disposition by the Transferor

6. Pre-Death Termination of Reversionary Interest

D. Amount of Inclusion in Gross Estate Under § 2037

1. Relationship to 5% Standard

2. Multiple Interests Transferred by the Decedent

3. Reversion in Only Part of Property

4. Effect of Outstanding Interest Not Subject to § 2037

5. Effect of Transferor's Retained Annuity from Corpus

E. Relationship of § 2037 to § 2033

F. Gift Tax Consequences Associated with § 2037 Transfers

1. Section 2702 Applies

2. Section 2702 Does Not Apply

IV. Elements Common to § § 2036â€"2038


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]

Worksheet 4 H.R. Conf. Rep. No. 1412, 81st Cong., 1st Sess., reprinted in 1949 U.S.C.C.A.N. 2183, 2189â€"90, discussing Hassett v. Welch, 303 U.S. 303 (1938); Comr. v. Church Est., 335 U.S. 632 (1949); and present-law § 2036

Worksheet 5 H.R. Conf. Rep. No. 1412, 81st Cong., 1st Sess., reprinted in 1949 U.S.C.C.A.N. 2183, 2187â€"89, discussing present-law § 2037 survivorship requirement and alternative contingencies

Worksheet 6 H.R. Conf. Rep. No. 1412, 81st Cong., 1st Sess., reprinted in 1949 U.S.C.C.A.N. 2183, 2185â€"86, discussing present-law § 2037 reversionary interest requirement and 5% of value requirement

Bibliography

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Internal Revenue Code:

Regulations:

Committee Reports/Public Laws:

Treasury Rulings:

Cases:

UNOFFICIAL

Treatises:

Tax Management Portfolios:

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