Feb 1, 2005 12:00 PM, By David A. Handler, partner, Kirkland & Ellis LLP, Chicago

By: By David A. Handler, partner, Kirkland & Ellis LLP, Chicago

Under several Internal Revenue Code sections, the property a person transfers will remain in his gross estate if he retains certain rights or powers over it. There is is an exception for transfers made for a “bona fide sale for an adequate and full consideration in money or money's worth,” in IRC Sections 2035, 2036, 2037 and 2038, among others. But what, exactly, is a bona fide sale? Recent rulings have shed some light. Unfortunately, the federal appeals courts do not agree. It's therefore vital for estate planners to keep up with the latest decisions.

In Technical Advice Memorandum 200432015 (March 10, 2004), H (let's call him Tom) and his wife (let's call her Anna) formed a limited liability company (LLC) to which Tom contributed insurance on his life and other assets. A few months later, Tom transferred his entire interest in the LLC to his children, then died. The Internal Revenue Service characterized Tom's transfer of the policy to the LLC as an indirect transfer of one-half of the policy to Anna, as it had occurred within three years of his death; thus, the policy was included in his estate under IRC Section 2035. As for the other half of the policy (which had been credited to Tom's capital account), because he'd transferred the policy within three years of his death, the proceeds also would be includible in his estate, this time under IRC Section 2035(a) — unless the exception under IRC Section 2035(d) applied.

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