Upstairs, Downstairs: Retained Interests and Estate of Stewart

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Tax Notes

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Tax Notes


Section 2036(a) hauls back into a decedent’s gross estate, for federal estate tax purposes, property that she gave away while alive, if the decedent retained at death the income from the property or the right to designate who should enjoy or possess the property. Routinely applied to trusts, this provision has also been held applicable to other types of retained interests, including interests in property transferred to family partnerships and family limited liability companies. Quite often, applying section 2036(a) unravels valuation discounts that the decedent had hoped to use in determining the bases of the gift and estate taxes.

In a recent case, a split panel of the Second Circuit vacated and remanded a Tax Court ruling that section 2036(a) required inclusion of a 49 percent tenant-in-common interest that a decedent had given to her son in the final year of her life. The appeals court majority opinion raises intriguing questions about how the estate tax should apply to undivided real property interests created by a decedent, particularly when the co-tenants occupy a portion of the real estate together both before and after the co-tenancy is created. This report seeks to identify and answer some of the questions that the circuit court decision has presented, especially the apportionment issue that the appeals court has directed the Tax Court to address on remand.

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Lewis & Clark Law School Legal Research Paper Series, Paper No. 2011- 8