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Can a “Retained” Life Estate Be Eligible for a Step-up in Basis under Internal Revenue Code Section 1022?

September 19, 2010

Some tax professionals are trying to find an argument that a retained (as opposed to reserved) life estate can obtain a step-up in basis under the modified carryover basis rules in effect for estates of decedents who die during 2010.  I have already covered  whether an explicitly reserved life estate  is eligible for a step-up in basis during 2010 under Internal Revenue Code Section 1022, and concluded that the possibility exists.  (See Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue Code Section 1022?  and  More about Whether Life Estates Are Eligible for a Step-up in Basis in 2010)  The deeper question that is now being posed by some tax professionals is whether a life estate that was not reserved can nevertheless be considered “retained” by the conduct of the parties after the gift, and thereby be eligible for a step-up in basis under the modified carryover basis rules.  Based on the language in Section 1022, I do not believe such a retained life estate has any chance whatsoever of being eligible for a step-up in basis.

Under pre-2010 law, an asset that was includible in the decedent’s gross estate for federal estate tax purposes always received a step-up in basis.  A retained life estate, includible under Internal Revenue Code Section 2036, was one of those assets, and a line of tax cases developed that defined the word “retained” as including not only a life estate that was explicitly reserved, but also life estates that were retained by agreement, understanding, assumption or conduct of the parties. That meant that under Internal Revenue Code Section 2036, the real estate of someone who had completely given it away could be pulled back into the decedent’s gross estate.  For pre-2010 deaths, Section 1014 allowed a step-up in basis for assets pulled back into the gross estate under section 2036, but, unfortunately, neither of those laws are in effect for decedents who die during 2010.

For 2010 deaths, Section 1022 requires that assets be owned by the decedent at the time of death and received from the decedent at that time, and those are much stricter standards than were required under Sections 2036 and 1014 in previous years.  Tax positions formerly available utilizing Section 2036 are irrelevant in 2010, as there is no language in Internal Revenue Code Section 1022 that would allow an argument that the conduct of the parties after the gift would be equivalent to the retention of ownership.  The retained life estate argument is an extreme stretch on the “owned by the decedent” test, but even if that argument were to pass muster, the argument in favor of the step-up would still fail on the “received from the decedent” requirement of the statute.  If full legal title to the real estate was already given away, at the time of death the donees of the lifetime gift cannot possibly receive from the decedent what they have already completely owned.

Claiming that assets that were given away during lifetime were nevertheless owned by the decedent and received from the decedent at the time of death, and receive a step-up in basis under Internal Reveue Code Section 1022, seems to me to be a frivolous tax argument.  We’ll know better how much leeway tax professionals will have to take such a position when we finally see the new tax return that is in the process of being created by the Internal Revenue Service for allocation of increased basis for 2010 deaths.

6 Comments leave one →
  1. October 3, 2010 3:07 pm

    Hey there, thanks for info.I googled this issue and got only this page.Really helped me ! Farewell, Adam

  2. Marianne W permalink
    December 28, 2011 10:57 am

    What happens if the life estate is relinquished before death of grantor? The house has since been sold. Can the proceeds of the sale still be included in the estate when the parent dies or are they subject to capital gains taz?

    • January 10, 2012 4:58 pm

      Sorry, but this is a blog, and is not intended to give advice to anybody. You should obtain specific advice geared to your own particular situation from an estate planning lawyer in your state.

Trackbacks

  1. Enhanced Life Estate Deed/Lady Bird Deed | angeles attorney los tax
  2. New Form 8939 Required to Be Filed with the Internal Revenue Service for Step-up in Basis for Estates of Persons Who Die During 2010 « Massachusetts Estate Planning, Probate & Elder Law
  3. Internal Revenue Service Releases 12/16/2010 Advance Proof Copy of Form 8939 Required for Step-up in Basis for 2010 Deaths « Massachusetts Estate Planning, Probate & Elder Law

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