Property transfered from trust, less than fmv.

[Ranger]

Farmer died leaving land in an irrevocable trust with 6 grown children as beneficiaries. Oldest son continued to operate farm according to trust document. To help oldest son out, the decision was made to sale part of the land to him at less than FMV.

The question is how to handle this transaction. I have found limited results from my research but it appears the difference between the consideration and FMV is a gift from the beneficiaries. If so, then oldest son’s basis would be made up of the purchase price plus a portion of the stepped up basis to the trust on date of death.

I appreciate any comments you might have.

[kcjenkins]

I could see the IRS taking the position that the difference was 'compensation' to him for working the farm for them. And thus subject to payroll taxes and reporting on a W-2.

[Mr. Pencil]

The question is how to handle this transaction.

I have the same concern as KC--it might look like compensation.

First, who is your client--the trust, the trustee, or one or more of the beneficiaries? If more than one client, what are you doing about the inherent conflict of interest?

You MUST study the actual trust document. Who is the trustee? Does it allow unequal distributions to beneficiaries? Does "continued to operate farm according to trust document" mean an employee relationship? There's a lot of things to get straight before you deal with specific transactions.

[kcjenkins]

Yes, isn't it fun how families, in such situations, just do "what seems fair" without asking for professional advice, then expect us to straighten it all out later? And often the Trust documents don't contain much help either.

[Ranger]

He is not an employee of the farm. The trust gives him exclusive rights to farm the property during his lifetime. He is entitled to all the income from the farm and is responsible for all the expenses (which he reports on schedule F). He and two of his siblings serve as the trustee’s and the trust document gives them a great degree of liberty to keep the farm in the family.

I don’t believe compensation is an issue since he is already entitled to all the income from the farm. The intent and result of the transaction was to transfer a portion of the land to him. The consideration was about 75% of FMV which included the payoff of a mortgage on the parcel of land that was transferred.

[kcjenkins]

OK, that makes thing clearer. I thought he was operating the farm for the trust, not for himself. So the 'compensation' issue is off the table, you just have a gift to him from the other benes.

[Mr. Pencil]

The consideration was about 75% of FMV which included the payoff of a mortgage

Close enough. I'd treat it as an arms-length sale without any bargain or gift element. Minimal sales costs, I presume? No genuine appraisal? Less attractive as a separate parcel, not to mention requiring release of a 3rd party lien and at least tacit agreement of beneficiaries. You can't expect top dollar in a situation like this.

[kcjenkins]

Good point. FMV is always an estimate where there is no arms-length transaction, so unless you have other recent sales of similar properties, I would not consider a small discount to trigger a gift Of course, we don't know the $ amounts here, so if the 25% is a large amount, that could make a difference.

[Ranger]

Thank you for your responses! The difference is significant.