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When Is an Asset Considered “Acquired from the Decedent” under Internal Revenue Code Section 1022?

August 11, 2010

It seems that the more I look at Internal Revenue Code Section 1022, the more questions I have.  Let’s look closely at the “acquired from the decedent” requirement in 1022(e), which I’ve posted below:

1022(e) Property acquired from the decedent

    For purposes of this section, the following property shall be

considered to have been acquired from the decedent:

        (1) Property acquired by bequest, devise, or inheritance, or by

    the decedent’s estate from the decedent.

        (2) Property transferred by the decedent during his lifetime–

            (A) to a qualified revocable trust (as defined in section

        645(b)(1)), or

            (B) to any other trust with respect to which the decedent

        reserved the right to make any change in the enjoyment thereof

        through the exercise of a power to alter, amend, or terminate

        the trust.

        (3) Any other property passing from the decedent by reason of

    death to the extent that such property passed without consideration.

At first blush, it may appear that Congress meant for (e)(1) to deal with all estate issues, for (e)(2) to deal with all trust issues, and for (e)(3) to deal with anything else, but why in (e)(1) did Congress specifically reference bequests, devises and inheritances when it would have sufficed to mention the decedent’s estate?  The extra phrases must have been placed in the law for a reason, and the comma after the word inheritance is significant, in that it seems to separate (e)(1) into two sections: “bequest, devise, or inheritance” and “the decedent’s estate.”  Further, the definition of “inheritance” found at law.com is “whatever one receives upon the death of a relative due to the laws of descent and distribution, when there is no will. However, inheritance has come to mean anything received from the estate of a person who has died, whether by the laws of descent or as a beneficiary of a will or trust.”  Black’s Law Dictionary, Fifth Edition goes even further on the definition of inheritance and includes assets which pass “by operation of law.”  Based on this way of reading (e)(1), I conclude that Congress probably intended that the phrase “acquired from the decedent” include inheritances from trusts.

On the other hand, (e)(2) seems to suggest limited step-up opportunities for assets in trusts.  Under (e)(2)(B), the step-up would be limited to trusts established by the decedent with a reserved power to alter, amend or terminate, so many irrevocable trusts would not be eligible for a step-up in basis, but perhaps Congress, already having dealt with bequests, devises and inheritances in (e)(1), wanted to make sure that certain other grantor trusts not be eligible for a step-up in basis, and was expressing its intention to exclude powers that had been given to the decedent to attempt to obtain a step-up in basis. 

If (e)(1) and (e)(2) were meant to cover estate and trust issues, then (e)(3) was meant to cover any other types of transfers, such as jointly-held assets and transfer-on-death, pay-on-death and beneficiary designations.  It also seems that a so-called Ladybird deed, where the owner of real estate deeds it away but reserves the right to retrieve it, fits into the (e)(3) category, although it may be questioned whether the non-exercise of a reserved power could be considered passing “from” the decedent. 

Two other common types of transfers, a reserved power of appointment and a reserved life estate, are more problematic, but may also fit under (e)(3).  A reserved power of appointment in a deed is not a possessory interest but can also fit into the (e)(3) category because the real estate was a vested interest subject to divestment, and the real estate passes without consideration when the original owner dies and the divestment possibility is eliminated; until the power holder’s death, the person or entity to whom the real estate was deeded cannot sell or mortgage it, and is therefore not the owner in any significant economic sense. 

A reserved life estate may fit under (e)(3) because the person or trust to which the real estate was deeded does not have possession during the life tenant’s lifetime, and, at the time of the life tenant’s death, the life tenant has an ownership interest to the exclusion of the holder of the remainder.  Under this type of analysis, even though title passed when the deed was recorded and the remainder interest became vested at that time, the real estate could still be viewed as passing “from” the decedent.

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3 Comments leave one →
  1. October 21, 2010 9:42 am

    I have a client whose grandfather died in 1969, leaving a testamentary trust for the lifetime benefit of his daughter, remainder to his sons. At the time, there was an inheritance tax in Massachusetts. The daughter died in 2010, and an inheritance tax is now due for the remainder interest. The phrase in Section 1022(e)(1), “bequests, devices, and inheritances” is significant in this instance, and would not be covered by “the decedent’s estate.” Since we are paying an inheritance tax on current values, we should be entitled to a stepped-up basis for the stock in the trust. The now-dormant Section 1014 would have accomplished this had death occurred in 2009, and Section 1022 seemingly does this for 2010. “Property acquired from a decedent” includes an inheritance caused by the death of the life tenant, even though the decedent only had a life estate, because of the inheritance tax occasioned by the death of the life tenant. Am I on the right track here?

Trackbacks

  1. 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
  2. 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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