Transfers of stock with retained voting rights.

• Author: Gingerich, Henry F.

Sec. 2036(a) requires that a decedent's gross estate include the value of transferred property to the extent the decedent, at his death or within three years of death, retained an interest in the transferred property. An "interest" is defined as "(1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom."

The classic transaction governed by Sec. 2036(a) involves a transfer in trust of property in which the transferor retains the right to the income for life. Under Sec. 2036(a), a decedent's estate will include the entire value of the trust corpus at the estate tax valuation date. In addition, transfers made with retained interests are also subject to Federal gift tax when made, even though the donee does not take possession of the property until a future date. The value of the gift will depend on whether the transferor has retained a qualified interest. The retained interest will be a qualified interest that may be valued and subtracted from the value of the total property transferred if any of the following apply:

* The transferor retains an annuity payable at least annually or the right to receive a fixed percentage of the corpus payable at least annually;

* The property is a residence transferred to an irrevocable trust and is to be used entirely as a personal residence by the person holding the income interest;

* No interest is transferred to or for the benefit of the donor's family;

* The transfer is wholly incomplete for gift tax purposes; or

* The transfer is to a "pooled income fund" or a qualifying charitable remainder trust when the "lead" interest is held by a member of the donor's family.

If the interest retained by the transferor is not a qualified interest, the entire value of the property transferred in trust will be subject to gift tax when transferred. If there is a qualified interest, the gift is the present value of the remainder. If, under Sec. 2036, the value of the trust property is included in the transferor's gross estate on death, adjustments are made in calculating the estate tax to adjust for the prior taxable gift.

As originally enacted, Sec. 2036 did not consider the retention of the right to vote stock transferred to another to be the retention of an interest for purposes of causing the inclusion of property in the decedent's gross...