Wills and Trusts

Wyatt, Tarrant & Combs, LLP

MAXIMIZING AND MULTIPLYING THE “STEP-UP” IN BASIS – Part III

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MAXIMIZING AND MULTIPLYING THE “STEP-UP” IN BASIS – Part III

Valuation Discounts: On or Off?

Where assets have been divided among generations to create discounts, consideration should be given to undoing those arrangements if the effect is to depress the value of an estate below the amount of Available Exemption Amount in order to increase the income tax basis of the assets.

Discount entities could be dissolved or restated to allow the parties to the entity to withdraw.

An option could be given to a parent allowing the sale of the parent’s interest to a child or children for undiscounted fair market value at death.  Giving such an option to a parent would be a gift unless accompanied by adequate and full consideration.

If undivided interests in property are owned, agreements could be entered into that require all generations to consent to the sale of the property as one tract if any one owner wanted to sell.  Quite obviously such agreements may be contrary to other estate planning or ownership goals of the family.

The ability of the IRS to ignore provisions of an agreement that increase the value of assets in the hands of a parent, but not in the hands of a child, is uncertain.  By its literal terms section 2703 of the Code applies only to provisions that reduce value and to restrictions on the right to sell or use property.  To illustrate, in Estate of James A. Elkins, Jr., et al. v. Commissioner, 140 T.C. No. 5 (2013), the Tax Court applied section 2703 to ignore a family co-tenancy agreement requiring all owners of fractional interests in art to agree before the art could be sold.  The purpose of that agreement was to limit the marketability of a fractional interest.  But what might the effect on value be of an agreement which provided, instead, that any fractional owner could compel the sale of the entire asset?  Similarly, a provision that allowed a shareholder in business to put stock to the business at death for fair market value would seem to be outside the scope of the section.  In many instances amending old agreements to include such provisions will be more likely to create gift from the younger owners to the older than would terminating an old agreement and creating a new one.

Turney P. Berry

Louisville, Kentucky

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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