In the poem "Jabberwocky" Lewis Carroll warned of the frumious bandersnatch. I have never seen one, but I suspect that it is a frumious bandersnatch that hides my car keys when I am in a hurry in the morning.
We have the equivalent in the federal estate tax law, and that is Section 2036. It snatches back what you thought you had given away, and subjects it to transfer tax. The federal estate tax is no longer a consideration for many people, since the floor is now $3,500,000, but Massachusetts estate taxes start at $1,000,000, so we must be careful not to keep a string on what we give away.
Section 2036 of the Internal Revenue Code provides that if you give something away and retain certain rights in it, it will be includible in your estate for federal estate tax purposes. The Massachusetts estate tax law tracks the federal statute, so this governs for Massachusetts purposes also.
I do not have room here to discuss Section 2036 in detail - I have posted a discussion in our website - but I will mention two situations in which I have seen the Section 2036 trap sprung. Those are the family home that has been given to the children, and assets that have been added to a family limited partnership or a limited liability company.
Before the federal estate tax floor was raised, many taxpayers transferred their valuable houses to their children to reduce their estates for transfer tax purposes. If a taxpayer continues to stay in the house, and does not pay rent to the children, the IRS or the Massachusetts Department of Revenue can take the position that the taxpayer transferred it with the retained right to occupy it, and therefore it is includible in his or her estate.
Other problems occur when taxpayers contribute assets to a family limited partnership or limited liability company. The Internal Revenue Service dislikes both of those vehicles, viewing them as frustrating the federal fisc, and applies the tests of Section 2036. Sometimes, when the taxpayer retains forbidden rights over the transferred assets, the courts hold that the frumious bandersnatch has struck again, and the assets are back in the estate for tax purposes.
We will be happy to help you with any federal or Massachusetts estate tax problem.
