Discussion:100% step-up or 50% step-up?
From TaxAlmanac
Discussion Forum Index --> Advanced Tax Questions --> 100% step-up or 50% step-up?
Discussion Forum Index --> Tax Questions --> 100% step-up or 50% step-up?
Wjalverson (talk|edits) said: | 23 January 2009 |
| I researched this question before posting, but I can not find an answer. John Doe inherits 500+ acres of land from his mother in 1970. All parties and the land resides in Missouri. His basis in the land is determined via appraisal at $1,000 per acre. He is married at the time. In 1987 John Doe creates a Trust and becomes Trustee of the Trust Agreement of John Doe. At the same time, his wife Jane Doe becomes Trustee of the Trust Agreement of Jane Doe. In 1998 John Doe, Trustee of the Trust Agreement of John Doe, conveys via Warranty Deed an undivided one-half interest of the land to Jane Doe, Trustee of the Trust Agreement of Jane Doe. The two Trustees hold the land as Tenants In Common. In 2008 John Doe dies. Does 100% or 50% of the property get a step-up in basis to FMV at the DOD? I know the answer is 50% if the property was held as Joint Tenants. Additionally, does anyone have experience with "farm real property valuation method” IRC § 2032A? | |
| 23 January 2009 | |
| Did John have the right to the income from or the use of the land in Jane's trust? | |
Wjalverson (talk|edits) said: | 24 January 2009 |
| Yes. The only land in Jane's trust was the undivided one-half interest conveyed via Warranty Deed in 1998. | |
| 24 January 2009 | |
| Asking about §2032A and trying to find wiggle room for 100% inclusion seem mutually exclusive...♫
If you don't know why the trusts were set up you are starting out in a deep hole. | |
| 25 January 2009 | |
| Sounds like Sec. 2036(a) would apply, and Jane's land held in trust would need to be included in John's gross estate. | |
| 25 January 2009 | |
| Then what would have been the purpose in establishing a joint tenancy and putting the property in separate trusts? | |
| 25 January 2009 | |
| I think the OP said the property was held in TIC. The JT reference was just a comment about Sec. 2040. | |
| 25 January 2009 | |
| TIC was created specifically to transfer into two trusts. Why? Theoretically you can do this and guarantee full inclusion and consequent step up whichever spouse dies first, but that would require a slight alteration in the fact pattern. | |
Wjalverson (talk|edits) said: | 26 January 2009 |
| to Dennis: as for Sec 2032A and 100% inclusion my interest is either and not both. If the "farm real property valuation method" results in a significantly higher value than the appraisal of the land just after the DOD, then at least the gain will be less if I can not find a way for 100% inclusion of the land for a step-up in basis. I've telephoned the attorney to specifically ask why the property was set-up as TIC and not JT.
What do you mean by "that would require a slight alteration in the fact pattern."? Any and all assistance in this matter is greatly appreciated. | |
| 27 January 2009 | |
| I guess I don't follow how there could be a 100% step up. The OP doesn't indicate that there was any retained interest when H gifted the TIC interest to W in 1998. Sounds to me like 50% of the property gets the step up.
Typically the special use valuation produces a markedly LOWER value than appraised value, so I doubt you will get any help from that. Also, there are several qualifications which must be met before special use value can apply. Here's a good summary from U of Nebraska: https://www.msu.edu/~betz/estateplanning/2004%20EstatePlnning/Neb%20Special-Use%20and%20Alternate%20Valuation,%20NF93-145.htm | |
Wjalverson (talk|edits) said: | 27 January 2009 |
| Thank you Taxtamer. I did find that the special use valuation can only be to reduce FMV. The property was not gifted to his wife. The Warranty Deed states that each Trust now holds an undivided 1/2 interest. From my limited legal knowledge if property is held as TIC then each tenant has the same full rights as the other. Each tenant has essentially retained 100% of the rights to the property. Since that is the case then why can there not be 100% of the land subject to a step-up in basis. Language in the code is pretty clear on Joint Tenants, but silent on TIC. | |
| 27 January 2009 | |
| A belief that the code is "silent on TIC" interests indicates a belief that TIC interests can have only one specific nature. Neither, of course, is true...♫ | |
Wjalverson (talk|edits) said: | 28 January 2009 |
| To Dennis:
I have no idea what you mean. How does my comment on "silent on TIC" equate to a belief that TIC interests can only have one specific nature? I am however, very interested in an answer to: From my limited legal knowledge if property is held as TIC then each tenant has the same full rights as the other. Each tenant has essentially retained 100% of the rights to the property. Since that is the case then why can there not be 100% of the land subject to a step-up in basis? | |
| 28 January 2009 | |
| Wj, unless you are in a community property state, only the decedent's interest in TIC property is stepped up. The code is not silent on TIC property. See Sec. 2033.
However, that is not to say that a 50% undivided interest is valued at precisely 50% of the total value of the property. In other words, don't overlook the discount for fractional interests. | |
| 28 January 2009 | |
| Wj, also remember that if the husband was entitled to the use of or the income from 100% of the property, Sec. 2036(a) would force you to include 100% of the property in the gross estate, thereby forcing a step-up on 100% of the property. | |
Wjalverson (talk|edits) said: | 29 January 2009 |
| To Riley2: Thank you very much for answering my questions and giving me some guidance. The surviving spouse has suffered a stroke and is in an expensive extended care facility. The family is selling the land to help pay for her medical bills, and I certainly am pushing for a way to get a step-up for 100% of the land. Even if I can't get 100% step-up, I'm going to structure the sale as an installment sale. Her medical will offset most of the gain, but I'd rather save the legal fees and the buyer would prefer not to do an installment purchase. It is great when someone takes the time to answer a question. I think sometimes people on here respond to show how much they know as opposed to actually helping the inquirer. Again, thank you. | |
