Internal Revenue Service
Revenue Ruling
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smRev. Rul. 79-94
1979-1 C.B. 296
Section 2036 -- Retained Life Estates
IRS Headnote
Transfers; trust; exchange of retained interest. An individual transferred the retained right of income from an irrevocable trust to the individual's children in return for the children's agreement to make annuity payments of not less than the trust income or an amount certain that was less than average trust income. The fair market value of the trust corpus on the date of the individual's death is includible in the gross estate under section 2036(a) of the Code because the likelihood that the children would have to make payments from their own funds was remote and, since the decedent had received no consideration for the transfer, no part is excludible under section 2043.
Full Text
Rev. Rul. 79-94
ISSUES
1. Is the value of property transferred by a decedent to an irrevocable trust includible under section 2036(a) of the Internal Revenue Code of 1954, if the decedent retains the right to receive income from the property and subsequently transfers the retained interest, under the circumstances described below?
2. Is any part of the transferred property excludible from the gross estate under the provisions of section 2043 of the Code?
FACTS
In 1965, D created a funded irrevocable trust and retained for life the right to the income from the trust corpus. Upon D's death, the trust corpus was to pass to D's children. In 1974, D transferred the retained right to income to D's children in exchange for an annuity. The annuity arrangement provided that the children would pay to D during life all the income from the trust. For any year in which the trust income was less than 20x dollars, the children agreed to pay D the difference. When D transferred the income interest, D was 75 years old. D died in 1978. From the inception of the trust in 1965 until D's death, the trust corpus had generated 30x dollars of income each year.
LAW AND ANALYSIS
Section 3036(a) of the Code provides that the gross estate shall include the value of property to the extent of any interest that the decedent has transferred without adequate and full consideration in money or money's worth and has retained for life the possession or enjoyment of, or the right to income from, the property.
Section 2043(a) of the Code provides, in part, that if a transfer described in section 2036 is made or a retained interest is relinquished for consideration in money or money's worth, the amount includible in the gross estate is the excess of the fair market value, at the time of decedent's death, of the property otherwise includible over the value of the consideration received by the decedent.
In Greene v. United States, 237 F. 2d 848 (7th Cir. 1956), the decedent transferred property to the decedent's children. The decedent's children promised to pay to the decedent all the income from the property, but if the income from the property was less than $3,000 in any year, the children agreed to pay the decedent the difference. The court determined that in substance the decedent had retained for life the right to income from the property transferred. Even though the children had possession and control of the transferred property, they had no beneficial enjoyment of the property until the decedent's death. By their agreement, the children were required to pay the decedent during life whatever income the property generated. Further, the court concluded that the children's obligation to pay the decedent the income from the transferred property was not consideration for the transfer. The only possible consideration was the children's contingent obligation to pay the decedent a fixed amount if greater than the income in any year. On remand, the District Court held that, because the estate failed to sustain its burden of providing the value of the children's contingent obligation, the full value of the transferred property was includible in the decedent's gross estate under section 2036 of the Code.
In this case, both before and after the 1974 transfer, D received all the income from the trust corpus. Similarly, both before and after the 1974 transfer, D's children had a remainder interest in the trust corpus and had no right to enjoy any of the income from the trust. Except for the children's obligation to pay a contingent annuity, the arrangement between D and D's children changed the form but not the substance of their property interests. Neither D nor D's children incurred any risks by entering into the annuity arrangement, provided the income from the trust was not less than 20x dollars.
In accordance with the decision in Greene, the children's obligation to pay D the income from the trust during D's life was not consideration for D's transfer of the retained income interest. No distinction should be drawn because of the timing of the agreement to pay the decedent the income for life. It is immaterial whether the agreement was executed at the time of the original transfer as happened in the Greene situation or the agreement was executed at the time a previously retained income interest is released as happened here. See United States v. Allen, 293 F.2d 916 (10th Cir. 1961). In both situations the transferees were merely acting as conduits to pass the income through to the transferors.
Because of the earnings history of the trust property at the time D transferred the retained income interest, the likelihood that the children would have to make any of the annuity payments from their own funds was remote, and the value of their obligation was zero.
HOLDINGS
1. The fair market value of the trust corpus, at the date of D's death, is includible under section 2036 of the Code, even though D transferred the retained income interest in exchange for annuity payments of not less than the trust income.
2. Because D received no consideration for either the 1970 or the 1974 transfer, no part of the trust corpus is excludible under section 2043.