what is a split interest purchase of property (split)?
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What Is A Split Interest Purchase Of Property (Split)?. An arrangement under which two parties agree to purchase an asset - PowerPoint PPT PresentationTRANSCRIPT
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 1
• An arrangement under which two parties agree to purchase an asset– One party (usually a parent) purchases a life estate (right to receive
income from the property or right to use, possess, and enjoy the property as long as the tenant lives)
– Second party (usually child or grandchild of life tenant) purchases a remainder interest (right to the property when the first party’s interest terminates)
• Each party pays the actuarial value of the interest purchased
• IRC Section 2702 has limited the attractiveness of Split’s between related persons
What Is A Split Interest Purchase Of Property (Split)?
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 2
• When a client would like to improve current income
• When it is important to keep property within a family, but the client wants to enjoy it or needs to receive income for life
• A Split is a contract and should pass outside of the probate estate
• To avoid ancillary probate in other states where Split property is located, since the remainder will automatically pass by contract to the remainder person
When Is Use Of A Split Appropriate?
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 3
• Where federal gift and estate taxes are not a major consideration
• When the parties are unrelated, since Splits between unrelated persons are not subject to Section 2702
– For instance, an unmarried couple or domestic partners
When Is Use Of A Split Appropriate? (cont’d)
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 4
• Ownership is divided into two parts:– A term interest which is a right to receive payments or use
for a term of years or life– Remainder interest which passes to the other owner when
the term interest expires
• Both the term holder and the remainder holder must pay their proportionate share of the purchase price based on government valuation tables
• The term owner and remainder holder are co-owners of the property– The property cannot be sold without consent of both parties
What Are The Requirements?
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 5
– Father wants to purchase undeveloped land, but wants to make sure it goes to his only daughter upon his death
– Father expects the unimproved land to appreciate considerably each year
– Daughter is financially successful– Father purchases life estate in the real estate equal to the
PV of what the unimproved real estate could be rented for over his lifetime
• Failure to obtain comparable rental values could lead to adverse gift tax consequences
– Daughter pays the balance with her own money and receives the appreciated property when her father dies
How It Is Done – An Example
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 6
• For federal gift tax purposes, joint purchases of property by related parties are treated as transfers to a trust under Section 2702
• Such purchases are treated as if the term holder made a gift to the remainder persons, equal to the FMV of the property less any consideration paid by the remainder persons for the remainder interests
Tax Implications – Section 2702
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 7
• Any term interest in property, such as a life estate or term of years, is treated as if held in trust
– A leasehold is not a term interest if for full and adequate consideration based on a good faith attempt to determine fair rental value
– In the case of a joint purchase, the amount transferred by an individual to family members for this purpose shall not exceed the actual consideration furnished by that individual for the property
Tax Implications – Section 2702 (cont’d)
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 8
• To avoid adverse gift tax consequences, instead of retaining the income for the term, the term holder retains a fixed annuity payment or percentage payments based on the annual valuation of the property (like GRATs and GRUTs, which are exceptions to Section 2702)
• If consideration paid by the term holder is exactly equal to the actuarial value of the annuity or unitrust payments, there will be no taxable gift of the remainder
Tax ImplicationsRetained Annuity or Unitrust Interests
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 9
• It is possible to arrange for the Split purchase of a work of art or unimproved real estate which does not have a substantial effect on the value of the remainder interest, and as such is valued at the amount a third party would pay for the term interest rather than zero
Tax Implications (cont’d)Tangible Property Exception
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
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• Valuation is based on a willing buyer and willing seller test, not under actuarial tables
– Burden is on the term holder to prove an unrelated person in an arm’s length transaction would have paid the same amount for the term interest
• A conversion of a term interest into some other property right is treated as a gift transfer of the retained term interest valued at the date of the original transfer
Tax Implications (cont’d)Tangible Property Exception (cont’d)
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
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• Pros and cons of grantor retained interests generally apply here
• Section 2702 is a gift tax provision and should not be applied in determining whether or not a joint purchase has estate tax consequences
Tax Implications (cont’d)Planning Implications
Split Interest Purchase of Property (SPLIT)
Chapter 38Tools & Techniques of
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• Similar to the transfer of community property to a GRAT or GRUT
• If community funds are used, the retained interest should either be paid jointly or each transferor will receive ½ of the required payment for the term
Issues In Community Property States