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Jan 1, 2005 12:00 PM
Why Section 2036(a)(2) Shouldn't Apply to FLPs
Internal Revenue Code Section 2036(a)(2) includes in a decedent's gross estate the value of transferred property (except in the case of a bona fide sale for full and adequate consideration) in which a decedent has retained “the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.” Historically, the courts and the Internal Revenue Service have applied this section to trusts over which a deceased grantor retained the right, as trustee or otherwise, to control distributions of trust income or principal.
In the trust context, a grantor's right to make discretionary distributions of trust income or principal subject to a non-ascertainable standard falls squarely within Section 2036(a)(2). For example, it's common for the trustee to have the power to make unequal discretionary distributions of trust income among a class of beneficiaries. This power allows the trustee to make income distributions to some beneficiaries and exclude others. If such a discretionary power is retained by the grantor of the trust and is not subject to an ascertainable standard, the grantor has retained “the right to designate the persons who will possess or enjoy” such income.
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| 2010 Tax Act News | Industry Trends Surveys |
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