Code 2036(b)Voting Stock: A Technical Summary for Practitioners

This article was originally posted to Steve Leimberg’s Estate Planning Email Newsletter – Archive Message #321.

Historically, much of estate planning has involved avoiding assets transferred prior to death, typically by lifetime gift, being included in a decedent’s gross estate as that inclusion could result in estate tax being imposed on them. Several provisions of the Internal Revenue Code are designed to thwart attempts to avoid estate tax inclusion of assets transferred prior to death.

One of the primary sections which tries to cause estate tax inclusion of assets transferred before death is Section 2036. It causes inclusion if the transferor retained for life (or any period not ascertainable without referring to the transferor’s death or which in fact does not end before his or her death):

“(1) the possession of enjoyment of, or the right to the income of the transferred property, or (2) the right, either alone or in conjunction with any other person, to designate the person who shall possess or enjoy the property or the income therefrom.”

Over time, disputes arose as to whether and how the Section applies. It is difficult to draw complete conclusions. For example, although the Supreme Court in Byrum, held that the closely held stock the decedent had placed in trust before death was not included in his gross estate despite his de facto control over the dividend policy of the corporation, some facts, such as the absence of a third-party minority shareholder, may make inclusion occur. This is especially difficult because Congress passed legislation[iv] to overrule at least part of Byrum. Indeed, the original Congressional attempt at such overruling was substantially revised. Hence, it is difficult to draw “hard and fast” conclusions as to how Section 2036(b) does or does not apply. In fact, although the section was enacted nearly 50 years ago, no regulations under it have been issued. Nonetheless, the goal of this article is to provide some practical guidelines for practitioners to consider in determining if Section 2036(b) applies to a client’s planning, and steps the client may consider taking to endeavor to reduce the risk of it applying.

To read the full article, click here.