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

Internal Revenue Code (I.R.C.) Section 2037 requires the inclusion in the gross estate of property which had been transferred by gift during lifetime if —

(1) possession or enjoyment of the property by the transferee can be obtained only at or after the transferor’s death, or

(2) the decedent retained a possibility (referred to as a “reversionary interest”) that the property, other than the income alone, would return to the decedent or his estate or would be subject to a power of disposition by him, and such reversionary interest had a value, immediately prior to decedent’s death, in excess of 5 percent of the total value of the property.

The value of a reversionary interest is determined in accordance with recognized valuation principles for determining future or conditional interests in property as set forth in Treasury regulations.

The underlying rationale of §2037 is similar to that of §2036: although the decedent may have given the property away during his lifetime, he actually retained for himself the beneficial enjoyment of the property (or, in the case of a reversionary interest, he retained a meaningful prospect of receiving the property back again).

Notwithstanding the foregoing, an interest in transferred property is not includable in a decedent’s gross estate under section 2037 if possession or enjoyment of the property could have been obtained by any beneficiary during the decedent’s life through the exercise of a general power of appointment (as defined in section 2041) which in fact was exercisable immediately before the decedent’s death. The application of section 2037 with respect to a reversionary interest held by the decedent is illustrated by the following example:

Example: The decedent transferred property in trust with the income payable to his wife for life and with the remainder payable to the decedent or, if he is not living at his wife’s death, to his daughter or her estate. The daughter cannot obtain possession or enjoyment of the property without surviving the decedent. Therefore, if the decedent’s reversionary interest immediately before his death exceeded 5 percent of the value of the property, the value of the property, less the value of the wife’s outstanding life estate, is includable in the decedent’s gross estate.

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