Gift-Lease Back Opportunities

Take-Away: If an individual wants to exploit their opportunity to make sizeable gifts while their gift tax exemption is large, they should fight the urge to continue to use the gifted asset. The next best approach is to enter into a formal lease with the donee to use and enjoy the gifted asset.

Background: You have heard plenty from me over the past year about the ‘use-it-or-lose-it’ approach to estate planning, using the large federal gift tax exemption while it is available. Either Congress will reduce the currently large $11.7 million gift tax exemption, or it will sunset on December 31, 2025. Consequently, many wealthy individuals are encouraged by their advisors to gift assets now in order to use their federal gift tax applicable exemption amount to avoid paying gift taxes. The problem for many of these donors is their desire to continue to use the asset that they just gave away. Retaining the use or enjoyment of a gifted asset exposes the donor to one of the string provisions of the Tax Code.

IRC 2036: One of the string provisions of the Tax Code is IRC 2036(a)(1), which provides that the retained beneficial enjoyment of the gifted asset will cause the value of that gifted asset included in the donor’s taxable estate at death. IRC 2036(a)(1) states that the value of a decedent’s gross estate for purposes of calculating estate taxes shall include:

The value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in cases of a bona fide sale for an adequate and full consideration in money or money’s worth) by trusts or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death- (1) the possession or enjoyment of, or the right to the income from, the property…

Enjoyment:  The United States Supreme Court has held that the terms enjoy and enjoyment, as used in IRC 2036(a)(1) [and other provisions in the Tax Code] are not terms of art, but connote substantial present economic benefit. United States v. Byrum, 408 U.S. 125 (1972). The Treasury Regulations that implement IRC 2036(a)(1) provide that: “The use, possession, right to income, or other enjoyment of the transferred property is considered as having been retained by or reserved to the decedent to the extent that the use, possession, right to the income, or other enjoyment is to be applied toward the discharge of a legal obligation of the decedent, or otherwise for his pecuniary benefit. [Regulation 20.2036-1(b)(2).]