Form 709 Gift Tax Reporting of Transfers of Fractional Interests to Trusts

Description

A commonly used estate planning practice is the gift transfer of "fractional interests" in certain assets, particularly real estate, investments in art and closely held businesses. Planners use the strategy in several different trust scenarios, often leveraging current charitable deductions and using multiple trusts to obtain valuation discounts and provide asset protection.

Determining the proper tax treatment of fractional interests can challenge tax advisers, particularly in substantiating valuation discounts for purposes of gift tax reporting of initial transfers of these divided interests. Compliance professionals advising both individuals and trusts must have a thorough grasp of fractional interest rules to avoid costly tax consequences.

The particular hurdle in reporting fractional interests is determining the valuation of the transfer for gift purposes. Taxpayers may take discounts on the value of split-interest gifts based on lack of marketability or, in the case of minority interests, lack of managerial control. The Code requires taxpayers to provide a qualified appraisal of the interest transferred, and the IRS intensely scrutinizes fractional interest gifts.

Listen as our experienced panel provides a practical guide to tax compliance when reporting fractional interest ownership and transfers on estate and trust tax returns. The panel will focus on fractional interest transfers in trust documents, allocations and valuation adjustments on tax returns, and conditions in transfer structures that trigger gift tax imposition.