1. At the time of the death, the life tenant (of a reserved life estate) only owns the life estate part of the property. If the life tenant tries to sell the property, the table S (or Table R-2 for joint life estate) life estate charts are used to determine what share of the property the life tenant owns and what part is owned by the remainder persons. Those procedures and tables have been in place for several decades.

2. Only the part of the ownership that is owned by the life tenant can pass at death to the remainder persons. The remainder persons already owned the rest of the property. If the remainder persons already owned part of the property, how can they argue that that part also transferred to them at the life tenant’s death?

It is my position that because the life tenant only owns part of the property, that is the only part of property that is eligible for the basis adjustment. So, I believe that carry-over basis exists for the remainder portion and a basis adjustment is allowed for the life estate portion.

I would like to trust Brian’s argument that when Congress did not expressly exclude life estates from 1022, that they implicitly included them. But, it is my position that the basis adjustment is only allowed if Congress specifically allows it. I only wish that Congressional negligence in failing to make the rule clear was a valid justification for me taking an aggressive position on my clients’ returns.

I assume that if there were anything helpful in the legislative history of this provision, it would have been found by now. However, it might be interesting to research the Code provisions in effect prior to the 1970s, when the step-up rule was first adopted.

I agree with your conclusion, and I agree with your logic that if life estates were intended to be excluded, Congress would have specifically mentioned them. I made a similar argument in my detailed analysis of this issue that I wrote earlier this year entitled “Special Report on Tax Changes for 2010″ — available at http://www.livingtrustplus.com/resources. Although my paper deals specifically with the topic of Income Only Trusts (the Living Trust Plus being a specialized type of Income Only Trust that I license to attorneys across the country), the logic is the same. As I stated in my paper:

“The only mention of a trust [under IRC § 1022] in connection with property being ‘owned by a decedent’ is that property will be deemed to have been owned by a decedent if it was “property that the decedent transferred to a qualified revocable trust as defined in Code § 645(b)(1).11 Although there is no mention made of irrevocable grantor trusts, there is no reason to believe that Congress intended to eliminate the effect of IRC §§ 671-679. Specifically, under IRC §§ 671-679 and Rev. Rul. 85-13, if the decedent created a grantor trust, then for income tax purposes (and the § 1022 carryover basis rules are, of course, income tax provisions), it is ‘owned by the decedent.’”

Very interesting analysis. If any clients, for whom I have drafted reserved life estates in years past, die in 2010, I will certainly borrow these arguments.

Gene