This time
of year, many of our clients begin considering making gifts to family members.
Some of our clients will use the annual gift-tax exclusion ($14,000 in 2013),
to make family gifts tax-free. Others, who desire to make larger gifts to
family members, are willing to use of a portion of their lifetime exclusion
amount (totaling $5,250,000 in 2013).
Many of
our clients attempt to keep things simple by giving cash. "Cash makes no
enemies" as they say, but it still can remove a significant amount of assets from a client's estate in the event of future estate tax liability. For
example, a couple I represent, who will have a taxable estate, give $14,000
each to a total of 33 children, grandchildren, and great-grandchildren, as well
as to spouses of some of those beneficiaries. Each year they give away more
than $900,000, which will save over $360,000 in federal estate tax liability at
their death. I suggested the clients give interests in LLCs holding real estate
rather cash because it would have allowed them to give away more than
$1,100,000 under their current gifting scheme. Unfortunately, many of their
beneficiaries have gotten used to living outside of their means and need these
cash gifts to help balance out their annual expenses.
As I
mentioned above, clients can get even greater advantage against future tax
liability by using the annual exclusion gifts to give highly appreciating
property rather than cash. The current value of the gift and any future
appreciation escapes taxation. Giving children a portion of real estate or
minority interests in closely held companies are two common methods of taking
advantage of this technique. In addition, it is possible to discount gifts or a
minority interest for gift tax purposes because of lack of marketability and
lack of control. For example, using a 20% discount allows clients to treat a
gift of minority interest valued $18,000 as a gift valued at $14,000. Depending
upon the asset the clients choose to transfer, sometime greater discounts are
possible.
Others of
my clients have taken advantage of the possibility of discounts by giving awayclosely held stock or minority interests in LLCs, which may hold real estate or
other invested assets. Can clients not only leverage the annual exclusion
gifts, but also can actually leverage the lifetime estate tax and gift
exclusion. If there is a desire, a client can make gifts above the annual
exclusion amount by using some or all of their lifetime exclusion. If only a 20%
valuation discount is available, the current $5,250,000 lifetime exclusion
could support gifts of over $6,500,000, not including future appreciation. One
client in particular gave away a 99% nonvoting interest in an LLC holding real
estate that is leased by his other businesses. Not only were we able to use
discounts because the interest was nonvoting, but his retained 1% voting
interest allows him to control the entity. This particular client did not need
the income from the leases so we structured the LLC to distribute that income to
the children. Another client used a similar strategy and distributed income to
his grandchildren for their education expenses.
Even if
the clients do not have a taxable estate, making gifts to children may be a
good idea because it allows them to see if their children will use or invest
the money wisely. If the children make mistakes with small amounts, they can
modify their estate planning documents to provide guidance to children after
their deaths so assets are not wasted. In addition, it can allow them to enjoy
seeing their children do things and have things while they are still alive.
Any time
during the year is a good time to make gifts to help facilitate planning, but
as the days grow short and the year nears an end, there is a finite amount of
time for clients to take advantage of gifting opportunities using the annual
exclusion gifts or lifetime exclusion gifts. It is important for us as planners
to help clients understand the opportunities and facilitate good planning. We
need to remind them that if an annual exclusion gift is not made in any
particular year, it lapses and cannot be carried over to a following year.
This time
of year is also an excellent time for clients to consider charitable gifts, and
next week we will discuss some of the planning opportunities for charitable
donations.
No comments:
Post a Comment
We welcome and appreciate your comments but remind you that while not all viewpoints are equally respectable, all people should be treated with respect. The authors do not actively moderate comments but reserve the right to remove comments that are offensive, derogatory, or contain spam.