Property Transferred With Retained Life Estate – I.R.C. §2036

In general terms, Internal Revenue Code Section (“I.R.C. §”) 2036 requires the inclusion in the gross estate of property which the decedent, while living, had transferred as a gift (i.e., without adequate and full consideration in money or money’s worth), but in which he retained for himself a beneficial interest to last for the rest of his life.

Example: D wishes to transfer 10,000 shares of stock in ABC Corporation to his son, S, but D wants to be able to continue to receive the dividends with respect to the stock for the rest of his life. D transfers the stock to a newly created irrevocable trust for the benefit of S. The trust is required to pay over to D all dividends received, until D’s death. When D dies the trust is to terminate, with the stock passing to S outright. Under I.R.C. §2036, D is treated as, in effect, still owning the stock when he died, and thus, it is includable in his gross estate, even though D legally did not have title to the property when he died. This is because, by retaining the right to receive the income from the property for the rest of his life, he retained, and possessed when he died, a significant economic benefit of ownership.

The rule of §2036 applies not only to transfers as to which the decedent retains the

income for life, but to other situations in which he retains, for life, benefits substantially

akin to outright ownership, including the right to physical use and enjoyment of the

property and the right to designate another party who should ultimately receive outright

ownership or receive the income or physical use and enjoyment during the donor’s

lifetime.

The retention of the right to vote (directly or indirectly) shares of stock of a controlled corporation which are transferred as a gift is considered to be the retention of the enjoyment of the transferred property. For example, a transfer of voting stock in a controlled corporation to a family limited partnership in which the transferor is the general partner results in such a transfer with a retained life interest (i.e., all the stock will still be includable in the transferors estate). A corporation is controlled if, at any time after the transfer and within 3 years of death, the decedent owned or could vote 20% of the total combined voting power of all stock, and the attribution rules of I.R.C. §318 apply for purposes of the 20% test.

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In addition to the property owned outright at the date of death the gross estate for federal estate tax purposes includes certain other property with which the decedent was connected, as discussed in the following blog posts:

Property Transferred With Retained Life Estate – I.R.C. §2036

Transfers Taking Effect at Death – I.R.C. §2037

Revocable Transfers – I.R.C. §2038

Annuities – I.R.C. §2039

Jointly Owned Property – I.R.C. §2040

Property Subject to General Power of Appointment – I.R.C. §2041

Proceeds of Life Insurance – I.R.C. §2042

Gifts Made Within Three Years of Death – I.R.C. §2035