Word seems to be getting around that alongside his consulting practice, helping other lawyers sort through various tax and nontax issues arising in connection with private wealth transfers,
particularly those involving split-interest trusts funded with appreciated property, interests in closely held business entities, etc.,
your correspondent also performs the calculations required to substantiate a claimed income and/or transfer tax charitable deduction for funding one of these, or for accelerating the remainder.
An eight- or ten-page narrative, showing the math step by step, and his signature on an 8283.
Often in these engagements, your correspondent is brought in after the transaction has already been completed. And some of the details on which he might have advised had he been involved earlier as a consultant have already been locked in. Sometimes some t's did not get crossed or some i's dotted. And sometimes this can require delicate handling.
Specifically. For example.
Where you have a remainder trust created by one spouse for her own life, with a successive "income" interest in her surviving spouse, subject to revocation, and they both renounce in favor of the remainder org, or they surrender or assign their respective interests, however you want to phrase it,[fn. 1]
but the settlor does not take the preliminary step of releasing her power to revoke the spouse's successive interest, do you say anything about this in the appraisal report?
Obviously you would rather not, but if you do not, have you misstated the value of the deductible gift, exposing yourself to a penalty under section 6695A? and to possibly being barred from doing similar appraisal work going forward? The stakes are not negligible.
difficulty level two
The result everyone is looking for here is a deductible gift in the amount of the present value of the consecutive life interests combined.
But there is a question whether the successive interest in the spouse had any value on the date of the assignment. Not only was it contingent on the spouse surviving the settlor, but it was also subject to defeasance by the settlor exercising her reserved power to revoke.
You can calculate the actuarial likelihood the spouse will survive the settlor, and by how many years, but you cannot calculate the likelihood the settlor will or will not arbitrarily exercise her power.
Yes, the settlor had to take the successive interest into account in calculating her deduction at the inception of the trust for the then present value of the remainder, and if we cannot claim a deduction now for the present value of the successive interest, we would have some rather substantial slippage.
But that is a problem that could have been addressed by going through the formality of releasing the power to revoke before making the assignments. This would have completed a gift to the spouse, which would be eligible for a gift tax marital deduction per section 2523(g).
We might then have to calculate separately the present values of the settlor's life interest and the spouse's deferred, contingent life interest, but in the end these would add to the present value of the two lives combined.
is this trip necessary
You raise the issue with the taxpayer's advisors, and after some hesitation they respond quite sensibly that it is obvious what the parties intended. Fair enough. However.
In a letter ruling issued back in the late 80s, IRS did determine this question adversely to the taxpayer. So we have to pay attention.
The ruling was PLR 8805024.[fn 2] The settlor had created a five pct. straight unitrust payable to himself for his life, then to his spouse if she survived, but he reserved a testamentary power to revoke her successive interest. They each proposed to transfer a portion of their respective unitrust interests to the remainder org. Our facts on almost all fours.
IRS ruled the spouse could not claim a deduction for the acceleration of her contingent, defeasible interest, because there was no "ascertainable assurance" her interest "will ever pass to charity."
It is not entirely clear what that means. Obviously the spouse did hold a transferable interest, albeit contingent and defeasible and therefore of negligible to zero value. Absent her assigning this interest to the remainder org, there would be no merger. The trust would continue to pay out over the settlor's life, but directly to the remainder org. And then if the spouse survived the settlor and he had not exercised his power to revoke, she would step into the income stream.
So it is necessary for her to participate in the transaction to effect a merger of the income and remainder interests, and her assignment does "assure" that her interest will pass to the remainder org, not at some future date, but immediately.
In any event. Twenty years later, IRS issued another letter ruling approving the workaround described above -- the settlor first releases her power to revoke, completing the gift to the spouse, and only then do they each assign their separate interests to the remainderman.
PLR 200802024 does not get into the weeds on valuing the spouses' respective interests separately, but in any event they should add to the value of the combined life interests.[fn. 3] And that might be all we need.
push comes to shove
Your correspondent struggled with the question whether to include any of this in the appraisal report for maybe five minutes before concluding it was not technically his problem.
The decision to characterize the transferred property as the consecutive life interests combined, rather than as two separate interests, one of which might have negligible or zero value, is to be made by the taxpayers' tax advisors. The appraiser simply attributes a value to the property as thus characterized by others.
In other words, the appraiser, in that role at least, is not a "practitioner" subject to section 10.34 and/or section 10.37 of Circular 230. The appraisal report indicates a value, but does not in itself express a view with respect to deductibility. That is a matter for the lawyers, the accountants, and the return preparers.
It is sufficient that the appraiser communicate her concerns to the "practitioners," so that they can exercise the necessary diligence to determine whether the reporting position is supported by "substantial authority," and to instruct the appraiser to place a value on x rather than y.
In any event, the unexpired life interest passes to the remainderman, in whose hands the interests merge.
The online resource at irs.gov does not go back this far. Your correspondent gratefully acknowledges the Planned Giving Design Center for making the text available online without having to go behind a paywall.
Incidentally, as some readers may have heard, pgdc.com is doing some kind of relaunch on September 01. Your correspondent has done some writing for them in the past, and is looking forward to seeing what this "PGDC2 eCampus" is all about.
In other words, while the present value of the deferred single life interest for the spouse might be calculated with reference to the probability of her surviving the settlor by x years, the result should be the same as simply subtracting the present value of the settlor's life interest from the combined two-life interest.