Tax advantages in fractionalizing ownership.

• Author: Lusby, Roger W., III
• Position: Family interests in decedents' estates

In Estate of Louis F. Bonner, Sr., 84 F3d 196 (1996), the Fifth Circuit rejected the IRS's argument that certain family interests should be aggregated for valuation purposes. Instead, the court allowed fractional shares in real property, which was owned in part by a qualified terminable interest property (QTIP) trust, to be separately valued. This allowed the estate to reflect a discount for the fractional shares when no discount would have been allowed if the family interests had been aggregated.

In reaching this decision, the court concluded an estate was entitled to apply a fractional interest discount in valuing a decedent's undivided interests in real estate and a boat that were held partly by him outright and partly in a QTIP. Although the QTIP property passed from Bonner for estate tax purposes under Sec. 2044, his QTIP interests did not merge with the interests he held outright for valuation purposes. Because he possessed only a life interest in the QTIP, neither Bonner nor his estate had any control over the ultimate disposition of the QTIP assets.

Several recent decisions confirm the holding in Bonner. In Estate of Harriet R. Mellinger, 112 TC 26 (1999), Estate of Ambrosina B. Lopes, TC Memo 1999-225, and Estate of Ethel S. Nowell, TC Memo 1999-15, the courts separately valued business interests and real property held in a QTIP trust for the purpose of calculating the gross estate. As a result, the court also allowed discounts for lack of marketability and lack of control in each case.

In Mellinger, the court clearly stated that neither Sec. 2044 nor the legislative history indicated that a decedent should...