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I am preparing a 706 of a first to die spouse where the appraisals are showing approximately 30% discounts on the decedent's 50% community share of various rental properties. The appraisals look well done, thorough and sound but I am not an appraiser. Does anyone have any comments on the extent of the discounts on straight forward community property? I know they have been accepted but the cases I have seen seem to have other issues.
Also, do I have to be worried about whether the appraisals would more likely than not be accepted.
Thank you
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Power Member
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| I believe that if you have an appraisal by a professional that you should use it. If you found any discrepancies on the appraisal - such as not showing the correct owner for example, you should contact the appraiser to see if they can fix it. I have always told my clients that if they did not get an appraisal, we may be able to use a 15% discount based on court cases but that a larger discount would be available with an appraisal. With the stricter rules about valuation in the Internal Revenue Code and the new AICPA standards and the more likely than not, I don't think I'll be venturing a opinion about taking a discount without an appraisal any more. I think that you're fine with using the appraisal that you have and I don't think the more likely than not will apply when you're relying on a professional.
Mary Kay Foss
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After tax season, just getting caught up on past reading.
Do you really want a discount on the 706 of the first to die? Do we need to take a discount? There's not usually any tax due on the first to die's 706.
In my experience I've always valued these at 100% of the appraised value, even when subsequent trust funding places 50% of the property in one trust and 50% in the another trust. (This type of funding sets up discounts on the second death, where there very well may be estate tax.)
What about subsequent sales? If you take a discount on the 1st 706 this will increase any capital gain.
What about depreciation? If you take a discount on the 1st 706 you will have less depreciation going forward.
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Power Member
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| Retired Estate Tax Attorney Joe Stemach used to speak about this frequently. He noted that he rarely saw discounts for the first to die for the reasons you cite; avoiding capital gains tax and maximizing depreciation. He thought that having a 50% interest in a trust at the second death was no different than having a 50% CP interest at the first death and was reluctant to allow discounts at the second death. The reason that you may want a discount at the first death is to cram more assets into a Bypass trust.
Mary Kay Foss
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I have two items to add to this topic:
First of all I have had IRS agents tell us at conferences that if you don't take discounts in the first estate (non-taxable estate) then don't plan on taking them in the second estate. I don't know if this is enforced or not, but I've almost always taken the discounts.
Secondly be aware of Question 10b in Part 4 of Page 3 of the 2007 Form 706. If you took a discount or discounts, you must mark the box "yes" and you must prepare a schedule that shows the overall effective discount that was taken.
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This is from Keith Schiller's website. Keith is well know in estate planning and has taught many courses for Cal Society.
Answer: (January, 2004) A fractional interest discount reflects the fact that the owner of a partial interest in real property cannot control the property and would have a more difficult time selling or borrowing against a partial interest. This creates a discount in the value of the partial interest when compared with a pro-rata value of 100% ownership.
Discounts exist based on ownership, not tax desires. Joint tenancies and community property with right of survivorship do not involve fractional interest discounts because the interest automatically passes to the survivor on death. Whether such a plan makes tax or non-tax sense is another matter and depends on the wishes of the owners.
There is no legal doctrine of consistency that would require the Service to approve or deny a discount on the death of the surviving spouse because there was no discount taken on the death of the first spouse. However, the Service may consider the failure to apply discounts to cause a trust to be over funded. For example, if a 50% interest is allocated to the Marital Trust without discount to value for a fractional interest, the Service would be on good grounds to argue that the fractional interest should be applied. Of course, the use of discounts to fund tax-free trusts (such as the Credit Shelter Trust) can bulk up the value of that trust.
On a theory yet untried, but which may be able to substantially reduce if not eliminate the fractional interest discount for community property, the spouses may wish to consider creating an agreement for the aggregate division of community property with the proviso that this agreement continues post-death rights of equal division in the aggregate and including no survivorship requirement in the Will or living trust. The ability of the surviving spouse to acquire a 100% interest in co-owned property and thereby protect the value of his or her one-half community property interest would be a prudent act for a buyer (i.e., drive the price up) in order to protect the value of his or her one-half interest.
http://www.slg4law.com/FAQ.shtml#1
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