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Article
Sales of Remainder Interests: Reconciling Gradow v. United States and Section 2702
Virginia Tax Review (1995)
  • Martha W. Jordan, Duquesne University School of Law
Abstract

This article seeks to answer the question of whether the sale of a remainder interest for its actuarial value is exempt from transfer tax. Generally, when a taxpayer sells property for its fair market value, the taxpayer has been adequately compensated and, therefore, should not be subject to transfer tax. The sale of a remainder interest, however, raises various questions that are not present when property is sold outright. The sale of a remainder interest divides the underlying property into two split-interests: the remainder interest and the retained or present interest. The fair market value of split-interests is commonly determined using actuarial methods. Because the actuarial value of a remainder interest is substantially less than the fair market value of the underlying property, the sale of a remainder interest for its actuarial value is viewed by many as allowing the taxpayer to transfer property to the remainderman for less consideration than is required in an outright sale. Consequently, the sale of a remainder interest for its actuarial value, although such value represents the fair market value of the remainder interest, raises the question of whether the seller has been adequately compensated for the transfer of the underlying property to the remainderman. If the actuarial value of the remainder interest does not represent adequate compensation for the transfer of the underlying property to the remainderman, the taxpayer may be subject to both the gift tax and the estate tax. If the taxpayer does not receive adequate and full consideration, the gift tax applies at the time the remainder interest is sold. If the taxpayer holds the retained interest until death, section 2036(a) of the Internal Revenue Code of 1986 (the "Code") pulls the underlying property back into the taxpayer's gross estate, unless the transfer is a bona fide sale for adequate and full consideration.

Keywords
  • remainder interest,
  • retained interest,
  • transfer tax,
  • fair market value,
  • split-interests,
  • present interest,
  • actuarial value,
  • gift tax,
  • estate tax,
  • term interest,
  • post-gift appreciation,
  • bona fide sales
Publication Date
Spring 1995
Publisher Statement
Originally published in Virginia Tax Review, Vol. 14, Issue 4 (Spring 1995)
Citation Information
Martha W. Jordan. "Sales of Remainder Interests: Reconciling Gradow v. United States and Section 2702" Virginia Tax Review Vol. 14 Iss. 4 (1995)
Available at: http://works.bepress.com/martha_jordan/3/