Estate and Gift Tax Effects of Selling a Remainder: Have D'Ambrosio, Wheeler and Magnin Changed the Rules?

Abstract

For over two-thirds of a century, federal estate tax law has expressly provided that property transferred by a decedent during his lifetime will nonetheless be subject to estate tax if he retains the right to the property's income for the remainder of his life. This rule-now embodied in section 2036 of the Internal Revenue Code-reflects Congress's belief that such transfers are inherently testamentary: the transferor continues to enjoy the "transferred" property for the rest of his life, while his beneficiary obtains the property only upon the transferor's death.
During the same period, "bona fide sale[s] for an adequate and full consideration" have been excluded from the operation of this provision. The rationale for this exclusion is that a transfer of property for which the transferor receives full value does not diminish the size of his estate, and thus there is no need to subject the transferred property to estate tax.