Tax implications of discount to buyer

[mrdonsmith]

What is the name of your state?MD
Does anyone know for sure that if a living trust provides for someone to have the "right of first refusal" to acquire real estate held by the trust at a discount from its fair market value, does that create an income tax issue for the purchaser? For example, if my trust owns property valued when I die at $500,000, and if I provide someone the opportunity to purchase it from the trust at a 40% discount ($300,000), is that $200,000 discount taxable in any way?

[mtpockets]

I think you would be creating a gift. Since the actual transfer would take place only if and when the recipient purchased the property at a discount, the gift is a future interest and not eligible for the annual exclusion.

I am not a lawyer.

[LdiJ]

Originally Posted by mrdonsmith

What is the name of your state?MD
Does anyone know for sure that if a living trust provides for someone to have the "right of first refusal" to acquire real estate held by the trust at a discount from its fair market value, does that create an income tax issue for the purchaser? For example, if my trust owns property valued when I die at $500,000, and if I provide someone the opportunity to purchase it from the trust at a 40% discount ($300,000), is that $200,000 discount taxable in any way?

What exactly is it that you are trying to accomplish? If you told us that, you might get better advice. It definitely would create a gift, and that could be problematic.

[mrdonsmith]

I am trying to "equalize" shares of my estate to children so that the straight bequeathal of property to one does not create an imbalance in the division of assets. In this instance, the child getting the "discount" would be paying the property's price back into the trust, with those liquid assets then being distributed equally. If, as you both suggest, the "discount" is a "future interest" and therefore a gift not eligible for the annual deduction, why is that amount any different than say the straight bequeathal of $200K to someone else? Does the answer lie in the fact that the $200K property discount is an amount that has to be accounted for? But doesn't an inheritance, of at least that amount, come clear of any tax liability?

[abezon]

If this is a revocable living trust, no future interest has been created, since the trust can sell the property at any time prior to your death. The future interest is created when you die, & is part of your final estate. Federal gift taxes are not at issue.

I suggest you consult an estate lawyer about how to set this up. One wrong move will viscerate all your intentions & mess everything up.

[mrdonsmith]

It was my initial understanding that there would be no gift tax issue, nor any estate tax within the constraints of whatever the limits are at the time of death. I simply want to be sure that the notion of allowing one of the trust's beneficiaries (at my death) to obtain (buy) an asset of the trust for an amount that is less than its market value (at death) does not in some way obligate the beneficiary to deal with that difference. And, yes, I am getting professional assistance, but this is an area I wanted to collect some "second opinions" on. Thank you for your insights.

[tranquility]

You don't need to write it as a discount as, if the right is not exercised, the beneficiaries will all have a portion of the property given them. Just write out the right of first refusal for the portion of ownership the targeted beneficiary would not be otherwise get.

On the grantor's death, the property will be divided equally between B1 and B2. B1 has the right to purchase B2's portion for the fair market value (FMV) if he so desires before distribution. The FMV shall be determined by.... with the terms to be...

That way the tax implications are minor at all as long as the FMV is calculated by the IRS estate rules and the terms don't include any additional interest income to the beneficiary.