Professor F. Philip Manns, Jr.’s article, “New Reasons to Remember the Estate Tax of Reversions,” might have been cheekily (but not inappropriately) titled, “Everything You Really Need to Know about the Estate Tax of Reversions.” A reversion, per Professor Manns, “exists whenever a transferor transfers less than all she owns.” (footnote 12 at P. 327.) In its first main part, the article focuses on how a reversion can arise not only from the transferor’s intent but also from inartful drafting and even by statute or common law decision; in its second main part, the article addresses the gift and estate tax treatment of reversions (however they are created).
Among the many strengths of the article, perhaps its most significant contribution to the existing literature is Professor Manns’ detailed explanation of how to calculate, for purposes of Internal Revenue Code sections 2033 and 2037, the value of a transferor’s reversion. Professor Manns indicates that “no case law, administrative pronouncement, or commentary instructs people how to make such calculations.” (P. 354.) Many sources address the calculations by referring the reader to Revenue Ruling 76-178, 1976-1 CB 273. But that Revenue Ruling merely gives answers without any explanation. In his article, Professor Manns explains the required “probability theory and life contingency actuarial mathematics” (P. 354.) and then impressively provides sample calculations showing all of his work.
But the article is not just a series of calculations. As noted above, the first main part of the article describes how a reversion can arise. Professor Manns first discusses a transfer of title to certain property from O to A for life, remainder to B (or, in a trust context, a transfer of title to certain property from O to the trustee of an irrevocable trust under which the trustee holds a portion (or all) of the trust property with income to A for life, remainder of the portion (or all) of the trust property to B). Because those transfers do not indicate whether B (or B’s successors) must survive A in order to take the remainder, Professor Manns indicates that the common law “developed a rule that B’s survival is not implied” (P. 325), the no-implied-condition-of-survivorship rule or the “NICS rule.”
Under the NICS rule, B has from O an indefeasibly vested remainder, which B can transfer during B’s life or upon B’s death. Under certain circumstances, B’s remainder (because it is indefeasibly vested) is included upon B’s death in B’s gross estate. To preclude this inclusion, there were attempts to reverse the NICS rule. Certain reforms (applying the foregoing facts) made B’s remainder from O contingent upon B surviving A; other reforms added the provision that, if B does not survive A, there is a substitute gift of the remainder to B’s descendants who survive A. In these reforms (or under poor drafting), however, there is no specified alternate taker to B (or to B and B’s descendants), thereby creating a reversion to the transferor O. In this way, a reversion can arise not from the transferor’s intent but rather from inartful drafting or by a statute or common law decision attempting to reverse the NICS rule.
Professor Manns shows how the Uniform Probate Code (which “reverses the NICS rule with respect to trusts, but not legal life estates” (P. 333)) successfully negates a reversion to O. The Uniform Probate Code provides that, if B and none of B’s descendants survive A, there are two additional alternatives: First, “if the trust was created in a nonresiduary devise in the transferor’s will or in a codicil to the transferor’s will, the property passes under the residuary clause in the transferor’s will,” and second, if there still is no taker, then “the property passes to the transferor’s heirs”. (P. 333.) There is no reversion to transferor O because, if applicable, the property is transferred under the residuary clause in the transferor’s will, or, if that is not applicable, to O’s heirs, including the final possible taker as an escheat to the state.
In other words, in instances when the Uniform Probate Code does not apply, a reversion can arise from the transferor’s intent, from inartful drafting, or by a statute or common law decision that attempts to reverse the NICS rule but fails to negate the transferor’s reversion. Any reversion must be analyzed for possible gift tax and estate tax consequences (especially for purposes of IRC sections 2033 and 2037). In sum, Professor Manns’ article analyzes how and when a reversion can arise and then impressively explains the actuarial mathematics required to calculate the gift tax and estate tax consequences of transfers involving reversions–that is, everything you really need to know about the estate tax of reversions.