Tax Court Includes Value of Home Purchased by Daughter in Mother’s Estate

The Tax Court has held that a home occupied by an individual at her death was includible in the value of her estate even though the home was previously purchased and owned by her daughter and son-in-law at the time of the decedent’s death.

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Estate of Adelina C. Van, TC Memo 2011-22

Transactional Facts.  In 1962, Adelina Cheng Van (“Van”) emigrated from China to the United States with three of her four children and became a real estate agent and property manager.  In 1973, Van’s significant other, Marcel Periat (“Periat”), purchased a residence for Van to use in San Mateo (the “Capistrano house”), incurring all costs and keeping title to the property solely in his name.

In 1988, Van’s adult daughter and her husband, Mr. and Mrs. Hu, asked Periat to sell the Capistrano house to them.  After negotiating the terms of the agreement, Periat instead sold the Capistrano house to Van for $250,000, with $170,000 paid from the personal funds of Mr. and Mrs. Hu as a down-payment and an $80,000 secured promissory note payable by Van.  The Hus also used their personal funds to make payments on the promissory note on behalf of Van.

Van received title to the house in 1989.  On the same day that the deed transferring title to Van was recorded in San Mateo County, Van subsequently recorded a second deed transferring title to herself and two of her grandchildren (daughters of Mr. and Mrs. Hu), as joint tenants.  Five years later in 1994, without telling the Hus, Van had her granddaughters convey sole title of the Capistrano house back to her.  In 1997, Van created a revocable trust and transferred the house into the trust.  Finally, in 1999, Van conveyed the house from her, as trustee of the revocable trust, to her daughter and three grandchildren.

On May 1, 2000, Van passed away.  Her son, Michael, served as personal representative of her estate and filed the estate tax return.  The return disclosed the existence of the Capistrano house, but did not list the house as an asset of the estate since Van did not hold title to the house at the time of her death.  The IRS responded to this return by sending the estate a notice of deficiency that included the Capistrano house as a taxable asset of Van’s estate.

Tax Court’s Analysis.  The Court first looked to state law to determine what interests in the house Van held upon her death.  If California law gave Van a legal or beneficial interest in the Capistrano house at some point during her life, it might be includible in her estate under Internal Revenue Code §2036.  The estate argued that under California law, Van never had an interest in the Capistrano house because Mr. and Mrs. Hu were the real owners and Van had taken title only as their agent.  The Tax Court found that the Hus gave Van the money for the down-payment and payments on the note, but determined that this in itself did not prove Van was merely their agent.

The Hus testified that they put the house in Van’s name because they were worried that creditors of Mr. Hu’s Taiwanese business might someday take the residence.  However, since Mr. and Mrs. Hu owned other California properties titled in their own names, the Court was unconvinced that Van was acting merely as their agent in acquiring the Capistrano house. Van did not only initially hold title in her name, but she also she lived there. Therefore, the Tax Court found that Van acquired a beneficial interest in the house during her lifetime.

The Court did find that Van intended to leave the house to her daughter’s family; however, having found that Van had a beneficial interest in the house, the Court’s next task was to determine whether her divestment of title to the house acted to remove its value from her estate.  In this regard, the Court noted that, even where a decedent has transferred property before death, the value of such transfer can be included in the estate if she kept some sort of continuing interest in the property. (Treas. Reg. §20.2036-1).

The next question was whether Van retained sufficient “possession or enjoyment” of the Capistrano house until her death so as to require that the house be included in her estate.  Van lived in the Capistrano house without paying any rent from 1973 until her death in 2000.  The Tax Court found that, on numerous occasions, the type of possession or enjoyment Van retained was sufficient to include the full fair market value of the residence in her estate.  Ultimately, the Court concluded that Van had a beneficial interest in the Capistrano house, and while she no longer held legal title to the home at the time of her death, she retained a sufficient degree of “possession or enjoyment” of the home to warrant inclusion of its entire fair market value in her estate under Internal Revenue Code §2036.

Recommendations.  In this case, the determinative factor for the estate was Van’s retention of possession of the Capistrano house. Here, as in the typical case, inclusion of the house could have been avoided if, more than three years before her death, the decedent had both given away title and retained no right to possess or enjoy the property without paying fair market rent to the titleholders of the property.  Also, in this case, inclusion could have been avoided in the first instance had the property originally been deeded to the Hus and never been titled in Van’s name.