On December 18, 1987, President Reagan signed into law the Revenue Act of 1987, and in so doing dramatically changed traditional estate planning. In the Act was a new Section 2036 (c).


To understand 2036 (c), basic estate taxation must also be understood. If a married person dies and transfers property to a spouse, there is no estate tax. When the surviving spouse dies, however, estate tax rates could severely diminish the value of the estate.


Before 2036 (c), freezing techniques worked to limit the estate tax burden. Parents could freeze the value of the property (at today's value) and retain that portion while transferring the potential future growth in the value to their children. Only the portion retained was included in the parent's estate, thus limiting estate taxes. Section 2036 (c) says that freezing techniques no longer work.


Section 2036 (c) applies if all three of the following tests are met:

  1. A parent owns 10% or more of the voting power or income rights of an enterprise.
  2. The parent transfers his or her children a disproportionately large share of the future appreciation.
  3. The parent maintains some ownership or other rights and privileges in the transferred enterprise.