In this case the higher court reversed a lower court’s inclusion of the entire value of a real property in the Decedent’s estate when the decedent had transferred a portion of the property to her son during her life.
Specifically, prior to her death the Decedent transferred a 49% interest in a Manhattan brownstone to her son who lived with her on 2 of the floors. The Decedent and her son continued living on 2 of the floors until the Decedent’s death and leased the other 3 floors to a tenant. All income and most expenses on the rental portion were paid to and borne by the Decedent for the rest of her life.
The son argued there was an agreement to reconcile the income and expenses of the brownstone to a property in East Hampton that was also co-owned by them. In prior years tenants in the East Hampton property would pay either the Decedent or her son, then they would split the money every few months. After the transfer of the 49% in the brownstone, the Decedent received all income from the tenant in the brownstone and paid most of the expenses, but the son received all rent from the East Hampton property and did not split the proceeds with the Decedent.
The tax court found there was an implied agreement of retained enjoyment and included the entire property in the Decedent’s estate under §2036.
The higher court vacated the lower court’s ruling. This court stated that “co-occupancy of residential premises by the donor and donee is highly probative of the absence of an implied agreement.” The Court also explained that two factors are particularly significant in determining whether there is an implied agreement for retained possession or enjoyment of a residential property: (i) continued exclusive possession by the donor and (ii) withholding possession from the donee.
The higher court found that the son enjoyed the benefits of the residential portion of the 49% and at least some of the benefits of the rental portion and remanded for a determination of how much of the rental portion the decedent retained. The benefits to the Decedent’s estate is a potential 42.5% discount for lack of control and marketability and the exclusion of $125,000 of appreciation from the estate.