Valuation discount for property split between QTIP marital trust and surviving spouse presents planning opportunity.

• Author: Washelesky, Frank L.
• Position: Estate of Bonner

It has become a generally accepted planning technique to make gifts of partial interests in closely held businesses or other property during life to take advantage of fractional interest discounts; see Mehigan and Potter," Lifetime Giving Remains a Powerful Tool for Family Business Owners," TTA, Feb. 1996, page 97. However, many clients are unwilling to give away control of a major asset during their lifetime. This unwillingness limits the effectiveness of the discounts taken on lifetime gifts, since they may be at least partially offset by a control premium on the majority interest remaining in the taxpayer's estate. Even if a taxpayer is willing to give up control during his lifetime, the potential swing vote premium may also offset the discounts taken; see Letter Ruling (TAM) 9436005.

However, the recent decision in Est. of Bonner, 5th Cir., 1996, offers a unique planning opportunity that may allow the taxpayer to retain voting control of the asset while taking full advantage of minority interest discounts. In this case, the Fifth Circuit refused to combine (for valuation purposes) partial interests held by the decedent outright with those held in a qualified terminable interest property (QTIP) marital trust also included in the decedent's gross estate.

Accordingly, a husband and wife could each retain minority interests in an asset which together are sufficient for control. At the first death, the surviving spouse can retain voting control of the decedent's interest as trustee of a QTIP marital trust. In this way, the spouses can ensure that they will retain control, as well as a potentially larger income stream, until the second death, while obtaining minority interest discounts on the property for estate tax purposes.

This result is obviously very advantageous to the taxpayer. However, several caveats must be noted. Most importantly, the Service does not agree with the results of the Bonner case. In fact, two recent letter rulings have held that a QTIP's fractional interest in property must be aggregated with a fractional interest in the same property held by the decedent outright for valuation purposes (see TAMs 9550002 and 9608001). Further, the effect of control premiums and swing vote premiums must be considered when valuing the two separate interests. Finally, a general power of appointment marital trust should not be used in lieu of a QTIP...