The IRS attempted to include assets transferred during the decedent’s life to a family LLC in her estate in the case of the Estate of Barbara M. Purdue, TC Memo 2015-249 as well as claim that gifts of interests in the LLC did not qualify as gifts of a present interest. 

For purposes of including the assets in the Purdue Estate the IRS turned to its trusty favorite section for including assets, IRC §2036(a).  

The Tax Court in Steinberg v. Commissioner, 141 TC No.8 (referred to as Steinberg I), reversing the position it had previously taken, held that the value of a gift could be reduced when the recipients of the gift agreed to assume any potential estate tax if the donor died within three years. 

Generally if a donor dies within 3 years of the date of a gift, the value of the gift and the resulting gift tax is added back to the donor’s estate pursuant to IRC §2035(b).  While the estate gets credit for the gift tax paid, the inclusion of the gift tax in the estate results in a transfer tax being imposed on both the gift in question and the gift tax itself.  In the absence of such a provision, a tax could dramatically reduce his/her transfer taxes by making deathbed gifts.