New Reasons to Remember the Estate Taxation of Reversions
Published in Real Property, Trust & Estate Law Journal, volume 44, number 1, pages 324-383, Summer 2009.
Multiple law reform efforts are underway to reverse the no-implied-conditions-of-survivorship rule historically applying to future interests. Yet, whenever the NICS rule is reversed, a reversion arises in the transferor of the future interests—which reversion will take effect if the newly-implied conditions of survivorship fail—unless the NICS-rule-reversal reform itself negates that reversion. The most well-known NICS-rule-reversal reform, Uniform Probate Code section 2-707, negates the transferor’s reversion, but other reforms do not. When the reversion is not negated, complicated transfer tax issues arise. First, for gift tax purposes, the reversion must be valued, because the value of the reversion is subtracted in valuing the transferor’s gift. Second, if the transferor dies at a time when any of the future interests she created continue as future interests (i.e., the interests have yet to arise in possession or fail), the at-death value of the transferor’s reversion is included in her federal gross estate under Internal Revenue Code section 2033, unless her reversion fails at her death, in which case Internal Revenue Code section 2037 includes an amount greater than the immediately-before-death value of the transferor’s reversion; section 2037 includes the after-death value of the property interests replacing the reversion.
Application of section 2037 and of section 2033 in this context always requires determining the probability that one person survives another, and nothing presently exists in the legal literature to demonstrate how to do that. This article surveys life contingency actuarial mathematics and provides a method.
Two points become clear. First, whatever the merits of reversing the NICS rule, the transferor’s reversion should be negated in any reform, which argues for the UPC approach. Second, through a series of case examples, this article demonstrates how to value a reversion, both when an inartful NICS-reversal reform creates one, and when a transfer expressly creates one, either by real intention or, as is more likely, by inadvertence.
F. Philip Manns. "New Reasons to Remember the Estate Taxation of Reversions" Real Property, Trust & Estate Law Journal 44.2 (2009): 324-383.
Available at: http://works.bepress.com/f_philip_manns_jr/7