Brief Fact Summary. The decedent, Lydia G. Maxwell transferred her property to her son and daughter-in-law, the Maxwells. The decedent continued to reside in the property until her death. The Maxwells transferred a mortgage note in the amount of $250,000 to the decedent. The decedent paid rent payments to the Maxwells in the amount of the interest on the property and forgave their mortgage debt in full upon her death.
Synopsis of Rule of Law. Under I.R.C. Section 2036, where property is disposed of by a decedent during her lifetime but the decedent retains “possession or enjoyment” of it until her death, that property is taxable as a part of the decedent’s gross estate, unless the transfer was a bona fide sale for an adequate and full consideration.
However, this presumption may be rebutted by an affirmative showing that there existed at the time of the transaction a real expectation of repayment and intent to enforce the collection of the indebtedness.View Full Point of Law
Whether the decedent retained possession and enjoyment of the property during her lifetime?
Whether the transfer was a bona fide sale for adequate and full consideration in money or money’s worth?
Yes. The decedent retained possession and enjoyment of the property during her lifetime. The decedent did in fact reside in the house from the time that she transferred it to the Maxwells until the time that she died. The rent payments which the decedent made were offset by the mortgage interest and the Maxwells did not demand rent payments after the day that the decedent died and preceding their sale which they were entitled to.
No. The transfer of the house was substantially a gift to the Maxwells. The conduct of the Maxwells and the decedent suggest that neither party intended that the Maxwells pay any part of the principal of the original note or any successor note. The decedent forgave $20,000 of the mortgage principal each year and upon her death, she forgave the entire mortgage debt.
Discussion. The transfer here was not bona fide even though the note was fully secured and legally enforceable on its face. The parties’ conduct suggested that the intent was that the mortgage note never be repaid so the value of the house at the time of the subsequent sale is a part of the decedent’s estate.