United States taxpayers seeking to share wealth must contend with the federal taxation of gratuitous transfers, whether made in life or triggered by death. This is effectuated by the imposition of the gift and estate taxes, which are codified in Internal Revenue Code sections 2501 and 2001, respectively.
Estate planners make a living paving various ways for their clients to characterize property transfers as “non-gratuitous” for tax purposes so that the property will not be includible in a decedent’s estate at death. One such way is to create a family business. The unbearably unfair effectiveness of this strategy is exposed by looking to the US Tax Court’s analysis in Estate of Powell (2017), wherein its decision against the taxpayer, rather than providing cause for celebration among the normies, provides cause for bitter lamentation and well illustrates that the system is utter bullshit.
The US Tax Court held in Powell that the value of cash and securities a decedent transferred to a partnership (a “family business”) in exchange for a 99% limited partnership interest one week before death was includible in her gross estate under section 2036(a)(2). Section 2036(a)(2) provides that the value of all property over which a decedent retained at and before death the ability to designate who may possess or enjoy it—despite the fact that the decedent purportedly had already transferred away this property—must be included in the taxpayer’s estate. The court reasoned in applying the provision that the decedent’s transfer of property to the limited partnership was subject to her retained right to designate who may possess or enjoy it, since she had the ability, acting with the other partners (her family members), to dissolve the partnership.
Powell is the first case in which the Tax Court relied exclusively on section 2036(a)(2) to pull property transferred to a partnership back into an estate in which the decedent owned a mere limited partnership interest. By relying on section 2036(a)(2) as the only justification for the inclusion of property in a decedent’s estate, the Powell court raised concerns for estate planners who have helped their clients reduce the estate tax bill by nesting their wealth transfer transactions inside of clever business structures that allow clients to relinquish control over property for estate tax purposes but retain control over the same property for business purposes. It signals that the Tax Court is willing to look past the shitty veneer of tax-avoiding boilerplate language adopted near the death bed if it’s missing certain specifics.
Classic shitty veneer is whipped up like this: an estate planner wraps up the taxpayer’s property inside of a passthrough business entity to be divided into a 99% nonvoting equity interest and a 1% voting interest, the taxpayer to retain the latter at a discounted value. The 99% nonvoting equity interest is subsequently transferred to a trust by gift, or in exchange for a private annuity or installment note. Solomonic wisdom is then applied to the property split such that the law honors determinations, reflected in property discounts, that each piece is less valuable than the whole. (If you are rich enough, your wealth is recognized as flesh and blood, so you’re compensated for having to split the baby.)
Post-Powell planners with active brain cells must now mix into the shitty veneer a prophylactic boilerplate sentence relinquishing the taxpayer’s ability to dissolve the business. They can place it right under the sentence that relinquishes the taxpayer’s ability to make distributions (a post-Strangi addition). Translation: Powell merely precipitated the latest peppering of patois indulging dynastically inspired Microsoft Word macros, culminating in the complete and total castration of section 2036, which was already nearly impotent under the Supreme Court’s holding in Byrum.
Oligarchs who’ve already had their estates planned further out than the Powell fam may now fear their own power to dissolve their amassed bounties, but they need not tightly clutch pearls—with a couple of big-law clicks existing structures can be rearranged: founder’s interests may be redeemed as they themselves are redeemed in Christ Jesus; business wrappers may be removed, leaving property naked but secure inside of Byrum-backed trusts; and property can be re-wrapped with better protection for everyone’s pleasure. The grand takeaway is that control for estate tax purposes can always be contracted away with sufficiently complex language, and the estate tax system is ineffective since its code relies on control to impute tax ownership on taxpayers. All it takes is for estate planners to wrap up property into business entities which explicitly remove forbidden powers, such as the power to make distributions, but nonetheless allow the taxpayer to retain de facto control over the property. Powell therefore is not a win for fairness or justice in the American tax system. Its best purpose is to shed light on the fact that the only way the royal class is meaningfully taxed at death is when it suffers from a combination of rushed planning and sheer incompetence.
Section 2036(a)(2) was already innocuous thanks to its parenthetical excepting bona fide sales made for adequate and full consideration, combined with the Supreme Court’s 1972 ruling in US v. Byrum, holding that section 2036(a)(2) does not apply to a decedent who had transferred stock in trust while retaining the right to vote the transferred shares, the right to veto the sale or acquisition of trust property, and the right to replace the trustee. A bona fide sale is one made for a nontax purpose for full and adequate consideration. Its easy to establish a bona fide sale because nontax business purposes are achieved when attorneys use templates containing unverifiable claims describing “nontax” goals (which, remarkably and by total coincidence, allow the sale property to escape estate taxation).
Attorneys can [re]use all sorts of other language too, “transforming” businesses so as to “achieve centralized management” (which is a sufficient “businessy” reason for a sale, according to Estate of Stone, 2003) or allowing assets to be managed in a way “consistent with the transferor’s investment strategy” (also “businessy” according to Estate of Miller, 2009). Translation: if you are rich enough, letting your kids take over the piggy bank is a business move and not a wealth transfer. In 2012 the Tax Court in Estate of Kelly even considered the equalizing of distributions among royal children to be a sufficient nontax business reason for a bona fide sale.
Strangi and Powell—these “wins” for the estate tax system—do not even come into play when estate planners with minimum competence have access to modern macros. So long as an attorney can come up with (or find the template for) a “business reason” for transfer, the threats of Strangi, Powell, and section 2036 are bypassed altogether. The rules are implicated only where a court can find no invocation whatsoever of a transferor’s fiduciary duty to other partners (i.e., somehow, there exists no nontax business purpose for the transfer of assets to a business entity, because somehow, someone forgot to come up with one, perhaps because that someone only had one week to throw together the necessary documentation). Indeed, the estate in Powell did not even attempt to refute the Commissioner’s assertion that there was no significant nontax purpose for the creation of the partnership and the transfer of property to it.
The futility of control as justification for inclusion in the gross estate as it operates in section 2036(a)(2) is only one example of the futility of control throughout the estate tax regime. Other examples can be observed not only throughout the tax code, but also throughout the accompanying administrative law in the form of regulations and revenue rulings, and in judicially created law resulting from Tax Court holdings and other court decisions.
The reason why control is used as justification for the imposition of any tax is because it is probably the most important right (or “incident of ownership”) one has over property if the property can really be said to belong to them. If any incident of ownership carried with it the cost of potential taxation upon transfer, then obviously people would be loath to own any rights to any property that might be transferred without their consent and trigger a tax bill. The wisdom here is obvious when we consider how property rights might be shared among unrelated parties. For example, a Disneyland Ticket confers a conditioned and limited set of property rights to the purchaser, which exist alongside the property rights that other people and entities have over the company. One right of the ticket-purchaser is the right to use the property: walking around the Disneyland Park is not a crime if one does so with the blessing bestowed by the ticket. If during your lawful stroll around Disneyland a millennial sells a Disneyland share on Robinhood, would it make sense for a tax authority to find you and personally charge you a tax because a piece of property (the Disneyland Park), to which you had some incident of ownership (use), changed hands?
It bears invoking here the classic “bundle of sticks” property law metaphor: you might have the ability to use property but not sell it, or give it away but only after a certain measurable passage of time, or have partial influence over how it is used, proportional to the amount of votes you have purchased, or any number of an infinite amount of combinations of property rights over property that can be divided into an infinite amount of pieces. The tax code must therefore discriminate between different categories of ownership, and as always, line drawing poses problems. When should ownership be deemed tax-worthy?
William Blackstone once wrote that the essential core of property is the right to exclude. There’s one stick in the bundle of rights constituting property ownership. Modern traditionalists have added to that the right to use and transfer. The estate tax system, in its attempt to tax transferred property whether the transfer occurs in life or at death, has adopted the latter approach: estate tax code sections taxing transfers over which the decedent had the ability to use the property include IRC §§ 2036, 2042, and 2518. Those taxing transfers over which the decedent had the ability to control (that is, exclude and transfer) the property include IRC §§ 2035, 2036, 2038, 2041, and 2514.
Control is an operative consideration in determining whether and to what extent tax will be imposed on the transfer of property throughout the tax code. For example, since being the controlling entity on both sides of a business transaction in the corporate tax regime is a common first step in tax evasion, section 482 allows the IRS to reallocate income between two or more commonly controlled trades or businesses to prevent tax evasion or to clearly reflect the income of the taxpayers. This section is also used in the international tax context as a basis for challenging transfer pricing, a pretend game corporations play to make tax-free property transfers from the right pocket to the left. Such games are effectively sanctioned by the code to the extent that its language allows. When a taxpayer fails to remit tax because the taxpayer’s interpretation of the language of the code (and subsequent actions) betrays reality, the IRS retroactively constructs a more realistic representative structure of the transfer, imposes an appropriate tax on the transfer in light of its newly deemed structure. For example, according to Treas. Reg. § 1.482-1(d)(5), section 482 as applied to a section 351 tax-free reorganization (which is arguably a good analogue to the type of transactions often involved between family trusts) permits the IRS to reallocate income or expenses from the transferee corporation back to a transferor of property.
However, using control as justification for taxation gets confusing once ownership is fractured. If you share a bike with your brother Bob who rents it out as part of his own business for a day to your schoolmate Sammy, should you be taxed on the proceeds? What if you split the cost of the bike with Bob long ago and never had any intention of monetizing it, and never knew nor authorized Bob to rent it out for day? Consequently, intermingled throughout the Tax Code are provisions, including exceptions and other forms of special treatment, which Congress has provided to mitigate the effects of the tension arising from a system that imposes ownership-based taxation while also allowing for fractured ownership. This tension often manifests in liquidity issues.
Concern for taxpayers’ lack of liquidity is evidenced by elements in our tax system such as the realization requirement articulated by the Supreme Court in perennial tax cases like Glenshaw Glass Co. (1955) and Helvering v. Bruun (1940), the imposition of different capital gains rates, the step-up basis of Section 1014, and the preferential treatment in the code for the formation and recapitalization of business entities. Section 351 provides for the non-imposition of tax that would otherwise be imposed on gain from a transaction under section 1001(c) where such gain would be realized from the transfer of property to a corporation by a controlling transferor, allowing the transferee corporation to keep working capital on hand. Similarly, section 721 provides that the transfer of property to a partnership in exchange for partnership interest is not recognized by the partnership, notwithstanding the fact that the transaction is a realization event under section 701.
Apart from accounting for lack of liquidity among wealth transfer beneficiaries, there seems little reason to believe that the forced transaction that death imposes on every taxpayer should be taxed any differently than the taxable transactions that occur in life. Yet, the beneficiaries of these somber transactions almost certainly have the resources to handle liquidity problems: for the estate tax system to even concern a family, the transfer of wealth must exceed $23.16 million for a married couple able to use both spouses’ basic exclusion amounts, which in 2020 were $11.58 million per person. Plus, after utilizing the generation skipping tax exemption and deciding whether to sell their shit to an IDIT or gift it to a GRAT (types of trusts which allow the freeze the value of the property at the time of transfer) and utilizing some combination ETIPs, ILITs, GRUTs, QDOTs, QPRTs, QTIPs, SLATs, or other magical four-letter instruments, as appropriate, then applying various discounts, as appropriate, the limit might be closer to $350 million.
Absent valuation adjustments, the value of property for tax purposes is its fair-market value (FMV). Under Treas. Reg. § 20.2031-1(b), FMV is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” According to Estate of Lauder, determining the FMV of property is a question of fact; however, the determination of value for estate tax purposes is clearly an enterprise steeped in total fantasy.
Here's an example of a valuation game using a QPRT (Qualified Personal Residence Trust):
Suppose taxpayer couple H and W own a home worth $10,000,000. H and W can save a substantial amount of money that would otherwise be paid in taxes on the transfer of the home to future heirs or any other chosen beneficiaries if they do the following:
- H & W obtain an appraisal for the home pricing the home 10% more conservatively than market price—here, $9,000,000.
- An estate planner creates two QPRTs—one QPRT to be held by each of H and W.
- If H and W reside in a state where joint tenants are able to sell their own respective interest in real property, such as California: sign a contract waiving their right to partition the property and unilaterally sell their interest in it.
- H & W each transfer their respective one-half ownership interest in the home to each QPRT, so that each QPRT trust owns what would appear to be a $4,500,000 interest in the home. Note here however that neither of H & W have the unilateral right to sell the property.
- When valuing the property owned by the QPRT, the estate planner factors in discounts for lack of control and marketability, say at a total discount of 20%. The property in each QPRT is now worth $3.6 million a piece
- H & W then subtract from the value of each QPRT the value of rent for occupation in the home, which is now held in the QPRT for the eventual benefit of the beneficiaries. The value of the rent depends on the term length of the QPRT, during which the taxpayers will reside in the home. If the fair market rent for the $10 million home is $20,000 per month, H & W can each justify reducing the value of the property in their own respective QPRTs by $20,000 multiplied however many months are in the term of the QPRT. Thus, if the term of the QPRT is 12 years, each QPRT is lowered in value by $20,000 multiplied 144 months, which is $2,880,000. As an aside, this example is simplified: the retained interest is valued under the applicable § 7520 actuarial methodology, factoring in present value.
- At this point the QPRTs that would each be worth $3,600,000 are for the purposes of estate inclusion worth $720,000. At the end of the QPRT terms, the property in each QPRT can flop into a single irrevocable trust, the value of which, at $1,440,000, can apply against either of the taxpayers’ $11.58 million basic exclusion amount. The total inclusion of the home in the estate is therefore $1,440,000 instead of 10,000,000. (Note also that to the extent passed the taxpayer’s universal credit is already used, the estate tax due to the inclusion of the home would be $576,000 (40% of $1,440,000) instead of $4,000,000 (40% of $10,000,000). That is a tax savings of $3,424,000 for the cost of probably $75,000 in legal fees.
In reality, our rich-ass couple has transferred property worth $10,000,000; but for purposes of inclusion in the estate, the taxpayers are treated as having transferred property worth $1,440,000. Ironically, the $10,000,000 value of the home will only go up over time, as real property tends to do—yet the value remains frozen at $1,440,000. This is called an estate freeze, and the example given is mild, selected only for its simplicity. Many more egregious evaluation games involving instruments having various 4-letter names are played by the royalty every day.
Note also that with QPRTs, improvements on the home can be made to increase the home’s value without affecting the value of the QPRTs, which is what will be used for purposes of determining its inclusion in the estate. The home can also be sold and the proceeds of the sale can be reinvested toward a new and even more expensive home, so long as it’s purchased within two years of the sale of the last one. At the end of the QPRT terms, the property in each QPRT can flop into a single irrevocable trust, the value of which, at $1,440,000, can apply against either of the taxpayers’ $11.58 million basic exclusion amount.
If one insists that the code should account for possible lack of liquidity in estates subject to the tax, one must agree that the costs incurred to facilitate the inheritance of millions should be effectively subsidized by single moms and indentured students alike. Miraculously, such costs are explicitly subsidized under section 2053(a), which holds that the value of the taxable estate is determined in part by deducting from the value of the gross estate amounts for funeral expenses, administration expenses, claims against the estate, and unpaid mortgages or any indebtedness (which, by the way, hilariously includes indebtedness for outstanding taxes) on property included in the value of the gross estate, as allowable by the laws of the applicable jurisdiction. A savvy estate lawyer knows funeral expenses include last doctor’s bills, depending on the circumstance. Administrative expenses include executor’s commissions, attorney’s fees (which estate planners will remind clients about), court costs, and appraiser fees. According to Treas. Reg. 20.2053-(1)(b)(1), these administrative expenses must be “reasonable” under local law. Wise estate planners also look for items that arguably “must” be sold to provide liquidity, and thereby deduct the cost.
Imagine what politically powerful people did once the Fed responded to Covid? Note also the justification for the Fed’s actions—injecting liquidity into our financial system. Liquidity is only necessary when one is overleveraged. Perhaps the powerful should lever down before they are ruling over dust.
An abridged version of a research paper of the same title, written December 2020. Statutory figures and calculations reflect the Internal Revenue Code as of December 2020. First published September 19, 2026.