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 Rev. Rul. 78-74

1978-1 C.B. 287

Section 2036 -- Retained Life Estates

IRS Headnote

Trust; valuation of retained interest. The retained interest to be included in the estate of a life income beneficiary of a testamentary trust, to which the beneficiary had made lifetime contributions of stock that remained in the trust at death, at which time the value of the stock could be easily ascertained, is the value of the stock at the time of death.

Full Text

Rev. Rul. 78-74

Advice has been requested as to the proper amount includible in a decedent's gross estate under section 2036 of the Internal Revenue Code of 1954, with respect to a transfer in trust under the circumstances described below.

The decedent was the life income beneficiary of a trust created in 1973 by the will of the decedent's father. Under the terms of the trust, the trustee had the power to receive and invest additions to corpus. The trust terminated upon the death of the decedent and all assets became payable to the decedent's issue.

The value of the corpus on the creation of the trust was $10,000. By December 26, 1975, the trust assets were worth $15,000. On that day, the decedent transferred to the trust 400 shares of X corporation common stock that had a value of $45,000. After this transfer, the total value of the trust was $60,000.

At the date of the decedent's death, May 1, 1976, the trust assets were worth $400,000. The 400 shares of X corporation stock retained by the trustee had increased in value to $350,000.

Section 2036 of the Internal Revenue Code of 1954 provides that the value of the gross estate includes any property that was transferred by the decedent (except in a case of a bona fide sale for an adequate and full consideration in money or money's worth) with respect to which the decedent retained the right to income for life.

In Estate of Kinney v. Commissioner, 39 T.C. 728 (1963), acq., 1964-2 C.B. 6, the decedent transferred shares of stock to a trust of which the decedent was the trustee and income beneficiary. At the time of the decedent's death these shares were still part of the trust corpus. The Tax Court held that the portion of the trust includible in the decedent's estate under section 2036 of the Code was the value of the stock contributed by the decedent and still retained in the trust. Accord, Estate of Bell v. Commissioner, 66 T.C. 729 (1976), acq., 1977-2 C.B. 1.

The court in Kinney distinguished that case from Estate of Karagheusian v. Commissioner, 23 T.C. 806 (1955), reversed on other grounds, 233 F. 2d 197 (2d Cir. 1956), where a proportion of a trust, based upon the ratio of the decedent's contribution to the total value of the trust at the time of the transfer, was included in the decedent's gross estate. In Karagheusian the assets transferred to the trust were commingled, sold and replaced. The court could not determine at the time of the decedent's death what trust assets were attributable to the decedent's transfers. For this reason, the court resorted to a proportion formula to determine the portion of the trust in which the decedent had retained an interest until death. In Kinney, however, it was possible to trace the decedent's transfers in the trust. Thus, the court could readily determine the portion of the trust in which the decedent had retained an interest without resort to a mathematical formula.

In the present case, the decedent was the life income beneficiary of a preexisting trust to which the decedent had transferred 400 shares of X corporation stock. Since these shares were in the trust at the time of the decedent's death, and their value could be readily ascertained, the portion of the trust includible in the decedent's gross estate as a retained interest equals the value of the stock at the time of the decedent's death.

Accordingly, $350,000 of the trust corpus is includible in the decedent's gross estate under section 2036 of the Code.