You can choose your friends but the Code chooses your family, at least for estate tax purposes. In broad terms, the estate tax provisions of the Code impose a tax on any gratuitous death-time transfer by an individual. For the most part, precise tax liability will depend on the amount of the transfer. Estate tax liability also may depend on the identity and even the business activities of the transferor, the transferee, and each of their respective “family” members. Depending on the particular Code section involved, however, the term “family” has widely divergent meanings for estate tax purposes.

VARIED DEFINITIONS OF “FAMILY” IN ESTATE TAX LAW

Transfers with a Retained Interest

The basic rule of § 2036(a)(1) is that a decedent may not avoid estate taxation if he or she transfers property to another but retains some benefit from the property. A classic example of a retained interest is a life estate. A similar but less well-known example of a retained right that will cause estate tax inclusion is the right to vote shares of stock in a “controlled corporation.”

Section 2036(b)(2) defines a controlled corporation as one in which the decedent “owned (with the application of § 318), or had the right (either alone or in conjunction with any person)” to vote stock carrying at least 20% of the aggregate voting power of all stock classes. Note that § 2036(b)(2)'s definition of a controlled corporation focuses on the ownership of more persons than just the tax payer transferor.