By: Martin M. Shenkman, CPA, MBA, JD
Code Section 2036 has become one of the IRS' weapons of choice in attacking family limited partnership (FLP) and other transactions. The provision, its many sub-parts, and the case law interpreting it, are all very complex such that a mere definition could prove more dangerous then helpful in guiding your planning. In brief, 2036 includes in your estate property interests that you might have thought should not be. If you transferred (directly or indirectly) property interests but retained a tainted right in the property transferred, 2036 might operate to pull the entire value of that property back into your estate. If you transferred property to a trust or otherwise and retained the right to the possession or enjoyment of the property, or the right to the income from the property, or the right to designate who can enjoy the property, the value of that property will be included in your estate. Here are some examples: o You give your house to your children but reserve the right to live in your house for the rest of your life. The entire value of the house is taxable in your estate. o You give your children interests in a family partnership but you have an implied agreement with them that you'll continue to earn all the income of the partnership. All of the partnership interests given will be included in your estate. For 2036(a) to apply you must be the transferor of the property. This is not always obvious or simple. If you gave a nephew $13,000 in cash with the tacit understanding that the nephew would transfer the property to a trust for which you are a trustee, 2036 might apply. There is a bona fide sale exception. If you receive full and adequate consideration for the property transferred it will not be reached by 2036(a). For example, if you sell an asset to a trust for its fair value, 2036(a) won't apply. To help backstop this position you should have an appropriate independent appraisal of the property sold to corroborate that you are in fact selling it for "adequate and full consideration".
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