Ninth Circuit affirms transferred residential property must be included in gross estate.

• Author: Ferretti, Scott J.

The Ninth Circuit, affirming the Tax Court, has ruled that the full fair market value of residential property must be included in the decedent's gross estate, finding that the decedent retained income and economic enjoyment from the property and that the inter vivos transfer of the property was not a bona fide sale for adequate and full consideration under Sec. 2036(a) (Estate of Bigelow, 9th Cir., 9/14/2007, aff'g TC Memo 2005-65).

Facts

Virginia A. Bigelow (Bigelow) gave each of her three children a 1/175th undivided interest in her residence (the Sand Point Road property) in 1990 or 1991. In 1991, she executed a trust agreement and deed, transferring her remaining 98.2857% undivided interest in the property to a trust over which she and her son were co-trustees. In 1992 Bigelow had a stroke, and later that year the trust listed the Sand Point Road property for sale.

In January 1993, Bigelow's three children entered into an exchange and leaseback agreement with Peter and Margaret Seaman, who also owned a residence (the Padaro Lane property). Under the exchange agreement, the trust and the children transferred the Sand Point Road property to the Seamans. The property was appraised at $1.325 million. The Seamans paid the children $125,000 for the Sand Point Road property and transferred the Padaro Lane property, valued at $1.2 million, to the trust. The trust then leased the Padaro Lane property back to the Seamans for a monthly rent of $3,500 until the Seamans could build a new house on the Sand Point Road property. The children also transferred their interests in the Sand Point Road property to the Seamans and received $68,630 in return.

The trust and the children formed a family limited partnership (FLP) in December 1994.The FLP's stated purpose was to engage in the business of owning and operating residential real property. The trust was the sole general partner and a limited partner, and the children were limited partners. The trust transferred the Padaro Lane property to the FLP. The FLP agreement provided that the property would be encumbered by a mortgage with Great Western Savings and a line of credit with Union Bank on the property, on which Bigelow was personally liable. Bigelow, however, agreed to hold the FLP harmless for those obligations. Despite the fact that Bigelow was personally obligated to make the loan payments to Great Western, the FLP made the monthly payments on her behalf and the trust paid $750 to Union Bank for...