The Tax Court recently held that trust amounts should be included in a decedent’s gross estate since he did not receive adequate and full consideration for the remainder interests transferred to his children.

In the 1930s, Cyril Magnin assumed control of his father Joseph’s business. Joseph wanted to ensure that the business would stay in the family, so in 1951, he and Cyril executed an agreement. Joseph agreed to bequeath his stock to Cyril as trustee for the benefit of Cyril’s children. In turn, Cyril agreed that he would bequeath his stock only to his children. According to the agreement, if the business were to be sold or liquidated, Cyril would place the proceeds in a trust for the benefit of his children and would receive an income interest for life.

In 1969 the business was bought out, and Cyril later created three trusts, one for each of his children, to hold the proceeds. He held an income interest for life in each trust. When he filed a gift tax return in 1971, Cyril reported that the transfers to the trusts were not completed gifts. He died in 1988, and his federal estate tax return did not include the value of the transfers in his gross estate. The IRS determined a deficiency, which the estate challenged before the Tax Court.

The Tax Court initially held in favor of the IRS (T.C. Memo. 1996-25), stating that because the value of the life estate Cyril received was less than the value of the property transferred to the trusts, the entire trust property was includible in Cyril’s gross estate. But the Ninth Circuit reversed in 1999 and held that adequate and full consideration should be measured against the actuarial value of the remainder interest rather than the fee-simple value of the property transferred to the trust.

On remand, the parties determined that the consideration received by Cyril was around $44,000, but they disagreed widely on the value of the remainder interest. The IRS determined a value of $123,000, and the estate, $42,000. But the Tax Court found the IRS valuation calculations more persuasive, and decided the estate failed to show Cyril received adequate and full consideration. The Court held that the value of the trust property, reduced by the $43,878 paid in consideration, is includible in the decedent’s gross estate.