## Facts

- Mollie P. Fabric, a Florida resident, created an irrevocable foreign trust shortly before undergoing open-heart surgery.
- The trust was initially funded with a nominal amount and named as beneficiaries her four sons and their lineal descendants.
- At the same time, Fabric entered into an annuity agreement with the foreign trustee requiring the trustee to pay her a fixed weekly amount for life.
- The annuity payment amount was computed using the actuarial tables in Treas. Reg. § 20.2031-10 and was not tied to the trust’s income.
- Fabric transferred substantial assets to the trust in exchange for the annuity; the trustee was obligated to make the annuity payments to the full extent of its assets even if the trust assets were exhausted.
- Fabric retained no control over the trust and no power to alter, amend, or revoke it.
- Fabric died about 1 year and 5 months after her surgery.
- The IRS issued a notice of deficiency asserting that the transferred property was includible in her gross estate under I.R.C. § 2036 on the theory that she effectively retained a life estate and that the transfer was not for full and adequate consideration.

## Issues

1. Whether the arrangement constituted a valid private annuity or instead a transfer with a retained life estate in the transferred property under I.R.C. § 2036.
2. If a valid annuity existed, whether the annuity provided full and adequate consideration for the property transferred so as to prevent estate inclusion under § 2036.

## Decision

- The Tax Court held that Fabric entered into a valid private annuity agreement with the foreign trust, rather than retaining a life estate in the transferred property.
- The court held that the annuity was properly valued using the Treasury actuarial tables and constituted full and adequate consideration.
- Because the transfer was treated as a bona fide exchange for adequate consideration, the transferred assets were not includible in Fabric’s gross estate under I.R.C. § 2036.

## Legal Principles

- A transfer of property in exchange for a bona fide private annuity with fixed periodic payments for life, payable without regard to income from the transferred property, is not treated as a retained life estate in the transferred property under I.R.C. § 2036.
- An obligor’s enforceable liability to make annuity payments (including liability to the full extent of its assets) supports characterization of the transaction as a true annuity rather than retained enjoyment of the transferred property.
- Actuarial tables prescribed by Treasury regulations may be used to value an annuity for transfer tax purposes unless, at the time of the transaction, substantial evidence shows the annuitant’s life expectancy is materially shorter than reflected in the tables.
- Actual early death after the transaction does not, by itself, invalidate use of the actuarial tables or negate adequate consideration if the tables were appropriate based on information available when the contract was made.

## Conclusion

The Tax Court concluded that the decedent’s transfer of assets to an irrevocable foreign trust in exchange for a properly structured and actuarially valued private annuity was a bona fide exchange for full and adequate consideration, so the transferred property was excluded from her gross estate under I.R.C. § 2036.


Estate of Fabric v. Commissioner, 83 T.C. 932 (1984)