Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
What Is A Split Interest Purchase Of Property
(Split)?
• An arrangement under which two parties agree to
purchase an asset
– One party (usually a parent) purchases a life estate (right to receive
income from the property or right to use, possess, and enjoy the property as
long as the tenant lives)
– Second party (usually child or grandchild of life tenant) purchases a
remainder interest (right to the property when the first party’s interest
terminates)
• Each party pays the actuarial value of the interest
purchased
• IRC Section 2702 has limited the attractiveness of Split’s
between related persons
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Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
When Is Use Of A Split Appropriate?
• When a client would like to improve current income
• When it is important to keep property within a family, but
the client wants to enjoy it or needs to receive income
for life
• A Split is a contract and should pass outside of the
probate estate
• To avoid ancillary probate in other states where Split
property is located, since the remainder will
automatically pass by contract to the remainder person
Copyright 2011, The National Underwriter Company
2
Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
When Is Use Of A Split Appropriate? (cont’d)
• Where federal gift and estate taxes are not a major
consideration
• When the parties are unrelated, since Splits between
unrelated persons are not subject to Section 2702
– For instance, an unmarried couple or domestic partners
Copyright 2011, The National Underwriter Company
3
Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Ownership is divided into two parts:
– A term interest which is a right to receive payments or use
for a term of years or life
– Remainder interest which passes to the other owner when
the term interest expires
• Both the term holder and the remainder holder must pay
their proportionate share of the purchase price based on
government valuation tables
• The term owner and remainder holder are co-owners of
the property
– The property cannot be sold without consent of both parties
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4
Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
How It Is Done – An Example
– Father wants to purchase undeveloped land, but wants to
make sure it goes to his only daughter upon his death
– Father expects the unimproved land to appreciate
considerably each year
– Daughter is financially successful
– Father purchases life estate in the real estate equal to the
PV of what the unimproved real estate could be rented for
over his lifetime
• Failure to obtain comparable rental values could lead to
adverse gift tax consequences
– Daughter pays the balance with her own money and
receives the appreciated property when her father dies
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5
Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
Tax Implications – Section 2702
• For federal gift tax purposes, joint purchases of
property by related parties are treated as transfers to
a trust under Section 2702
• Such purchases are treated as if the term holder
made a gift to the remainder persons, equal to the
FMV of the property less any consideration paid by
the remainder persons for the remainder interests
Copyright 2011, The National Underwriter Company
6
Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
Tax Implications – Section 2702 (cont’d)
• Any term interest in property, such as a life estate or
term of years, is treated as if held in trust
– A leasehold is not a term interest if for full and adequate
consideration based on a good faith attempt to determine fair
rental value
– In the case of a joint purchase, the amount transferred by an
individual to family members for this purpose shall not
exceed the actual consideration furnished by that individual
for the property
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Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
Tax Implications
Retained Annuity or Unitrust Interests
• To avoid adverse gift tax consequences, instead of
retaining the income for the term, the term holder
retains a fixed annuity payment or percentage
payments based on the annual valuation of the
property (like GRATs and GRUTs, which are
exceptions to Section 2702)
• If consideration paid by the term holder is exactly
equal to the actuarial value of the annuity or unitrust
payments, there will be no taxable gift of the
remainder
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8
Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
Tax Implications (cont’d)
Tangible Property Exception
• It is possible to arrange for the Split purchase of a
work of art or unimproved real estate which does not
have a substantial effect on the value of the
remainder interest, and as such is valued at the
amount a third party would pay for the term interest
rather than zero
Copyright 2011, The National Underwriter Company
9
Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
Tax Implications (cont’d)
Tangible Property Exception (cont’d)
• Valuation is based on a willing buyer and willing
seller test, not under actuarial tables
– Burden is on the term holder to prove an unrelated person in
an arm’s length transaction would have paid the same
amount for the term interest
• A conversion of a term interest into some other
property right is treated as a gift transfer of the
retained term interest valued at the date of the
original transfer
Copyright 2011, The National Underwriter Company
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Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
Tax Implications (cont’d)
Planning Implications
• Pros and cons of grantor retained interests generally
apply here
• Section 2702 is a gift tax provision and should not be
applied in determining whether or not a joint
purchase has estate tax consequences
Copyright 2011, The National Underwriter Company
11
Split Interest Purchase of
Property (SPLIT)
Chapter 38
Tools & Techniques of
Estate Planning
Issues In Community Property States
• Similar to the transfer of community property to a
GRAT or GRUT
• If community funds are used, the retained interest
should either be paid jointly or each transferor will
receive ½ of the required payment for the term
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