Example 1. Decedent (D) creates an irrevocable inter vivos trust. The terms of the trust provide that all of the trust income is to be paid to D and D's child, C, in equal shares during their joint lives and, on the death of the first to die of D and C, all of the trust income is to be paid to the survivor. On the death of the survivor of D and C, the remainder is to be paid to another individual, F. Subsequently, D dies survived by C. Fifty percent of the value of the trust corpus is includible in D's gross estate under section 2036(a)(1) because, under the terms of the trust, D retained the right to receive one-half of the trust income for D's life. In addition, the excess (if any) of the value of the remaining 50 percent of the trust corpus, over the present value of C's outstanding life estate in that 50 percent of trust corpus, also is includible in D's gross estate under section 2036(a)(1), because D retained the right to receive all of the trust income for such time as D survived C. If C had predeceased D, then 100 percent of the trust corpus would have been includible in D's gross estate.
Example 2. D transferred D's personal residence to D's child (C), but retained the right to use the residence for a term of years. D dies during the term. At D's death, the fair market value of the personal residence is includible in D's gross estate under section 2036(a)(1) because D retained the right to use the residence for a period that did not in fact end before D's death.
(1) Annual payment | (2) Prior year payment | (1-2) Periodic addition | |
Year 3 | 144,000 | 120,000 | 24,000 |
Year 4 | 172,800 | 144,000 | 28,800 |
Year 5 | 207,360 | 172,800 | 34,560 |
(2) Step 1: Fair market value of corpus | $120,000 |
(3) Step 2: Corpus required to produce D's date of death annuity ($5,000/0.07) | 71,429 |
(4) Step 3: Corpus required to produce D's annuity if D had survived C ($10,000/0.07) | 142,857 |
(5) Step 4: Present value of C's interest | 40,000 |
(6) Step 5: The amount determined in Step 3, reduced by the amount determined in Step 4, but not to below the amount determined in Step 2 ($142,857-$40,000, but not less than $71,429) | 102,857 |
(7) Step 6: The lesser of the amounts determined in Steps 5 and 1 ($102,857 or $120,000) | 102,857 |
26 C.F.R. §20.2036-1