Wills and Trusts

Wyatt, Tarrant & Combs, LLP

Values included in Gross Estate: Estate of Trombetta

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The Estate of Helen A. Trombetta et al. v. Commissioner, T.C. Memo 2013-234, involved two unusual transactions. The first was the decedent’s transfer of certain pieces of real property to a trust in exchange for an annuity. The decedent could, with her children, give herself any trust income in excess of the annuity. The decedent could reduce the term of the annuity and did so, effective about six weeks before she died. The Tax Court agreed with the IRS that the properties would be included in the decedent’s estate by sections 2036 and 2035. The court rejected the estate’s argument that the transfer to the annuity trust was a sale for full and adequate consideration, stating:

First, decedent did not receive full and adequate consideration for the transfers of the rental properties. Decedent received an interest reducible to money value, i.e., the present value of the periodic payments. However, decedent and Eigner [her attorney] structured the annuity trust as a grantor trust, and decedent reported the difference between the then present value of the periodic payments and the FMV of the Tierra Plaza and Black Walnut Square properties as a gift on her Form 709 for 1993. Decedent’s structuring of the annuity trust and subsequent tax reporting supports a finding that she did not transfer the properties to the trust in exchange for full and adequate consideration.

Second, no bona fide sale, in the sense of an arm’s-length transaction, occurred in connection with decedent’s transfers of the properties to the annuity trust. Eigner prepared the annuity trust agreement in the absence of any meaningful negotiation or bargaining with the other anticipated cotrustees or future beneficiaries. Eigner and decedent determined how the entire estate plan would be structured and operated and what property would be contributed to which vehicle. Decedent, as the sole beneficiary and the sole transferor, formed the transaction, fully funded the annuity trust, and essentially stood on both sides of the transaction.

Petitioner nonetheless contends that decedent’s transfers of the properties to the annuity trust satisfy the bona fide sale exception because, according to petitioner, decedent had clear nontax purposes for the transfers. In particular petitioner contends that decedent’s purpose in transferring the properties was to relieve herself of the burden of managing the properties and to receive an assured income. Petitioner urges us to adopt the standard set forth in Estate of Bigelow v. Commissioner, 503 F.3d 955, 969 (9th Cir. 2007), aff’g T.C. Memo. 2005-65, for evaluating whether a decedent transferred an asset to a family member as part of a bona fide sale.

* * *

Although a number of other cases have applied the “legitimate and significant nontax reasons” standard to determine whether a bona fide sale exception was satisfied, all of the cases applied the standard in the context of a transfer to a family limited partnership. See, e.g., Estate of Black v. Commissioner, 133 T.C. 340, 362 (2009); Estate of Bongard v. Commissioner, 124 T.C. at 118-119; Estate of Stone v. Commissioner, T.C. Memo. 2012-48; Estate of Turner v. Commissioner, T.C. Memo. 2011-209. Decedent transferred the Tierra Plaza and Black Walnut Square properties to a grantor trust, not a family limited partnership. Decedent’s transfers are not comparable to a transfer [*24] to a family limited partnership, particularly given that no other individual received a present interest in the annuity trust. We are not persuaded and are unable to find that decedent’s transfers to the annuity trust are sufficiently similar to a transfer to a family limited partnership to apply the “legitimate and significant nontax reasons” standard.

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Decedent undisputedly transferred the rental properties to the annuity trust as part of her overall estate plan. Decedent transferred her assets to the annuity trust at age 72, and at the same time she executed her will. See, e.g., Estate of Rosen v. Commissioner, T.C. Memo. 2006-115, slip op. at 44. Decedent had significant stated tax reasons for creating the annuity trust. While decedent’s creation of the annuity trust accomplished some nontax objectives, we are unable to find that, when viewed in totality, those nontax objectives were significant. Accordingly, the transfers do not qualify under the bona fide sale exception.

The decedent retained sufficient rights to implicate section 2036:

In addition, the annuity trust agreement provided that any additional income could be distributed to decedent at the direction of the trustees. Decedent retained 50% of the voting rights, and the remaining voting rights were divided among her children. Because decedent and her children could make distributions of additional income to decedent when and in the amount they pleased, decedent maintained the same enjoyment of the properties and their income stream as she had before she transferred the properties to the annuity trust. See, e.g., Estate of Thompson v. Commissioner, 382 F.3d 367; Estate of Rosen v. Commissioner, slip op. at 50-51; see also sec. 20.2036-1(b)(3), Estate Tax Regs. Decedent also received an additional economic benefit in that the annuity trust, on behalf of decedent, applied the income from the transferred properties to the discharge of her loan obligations with respect to those properties. See Estate of Bigelow v. Commissioner, 503 F.3d at 965; Strangi v. Commissioner, 417 F.3d 468, 477 (5th Cir. 2005), aff’g T.C. Memo. 2003-145; Estate of Malkin v. Commissioner, T.C. Memo. 2009-212.

The decedent also transferred her residence to a trust described as follows:

Decedent was grantor, trustee, and the sole beneficiary of the residence trust. The residence trust agreement provided that decedent had the right to use any trust property as a personal residence and the right to receive the net income from the trust. The only limitation on decedent’s right to use the trust property was the residence trust term. The term of the trust was 180 months, subject to decedent’s power to reduce the term. The residence trust agreement further provided that decedent intended the residence trust to qualify as a qualified personal residence trust under section 2702.

Upon termination of the residence trust term decedent or her estate would receive the trust property and any accrued income. If decedent was living at termination, the trust property would be distributed equally to her children or their children. If decedent was deceased at termination, the trustee would distribute the balance of the trust property as directed by decedent’s will or, if not so directed, equally to decedent’s children or their children.

The Tax Court held that the estate included the full value of the residence.

Turney P. Berry
Louisville, Kentucky


Author: robmalinesq

I am an estate planning and probate attorney in Memphis, Tennessee.

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