28 Aug Making Tax Wise Gifts Before the End of 2012
Many affluent clients are considering making sizeable gifts to family members prior to the end of 2012 in order to take advantage of the current federal gift tax exemption of as much as $5,120,000 ($10,240,000 for couples) less any amount previously used. The exemption is scheduled to go back down to $1 million beginning on January 1, 2013 unless the law is changed. The strategy is to capture a benefit that may disappear.
If gifts of California real property are part of the plan, there are some important factors to take into account when developing your strategy.
- Line up your appraiser now! Appraisers are already getting very busy, if you wait too long, you may not be able to get an appraisal done in time.
- Take advantage of Proposition 58. Certain transfers of California real estate qualify for Parent-Child Exclusion or Grandparent-Grandchild Exclusion (in limited cases) from property tax reassessment. For a principal residence, an unlimited amount qualifies for the exclusion. This means that the children (or grandchildren) will carry over the property tax base of the parents (or grandparents). This can be quite valuable for property that has been held a long time. For California real property other than a principal residence, the first $1 million of assessed value of property qualifies for the exclusion. That is assessed value (value on the tax rolls) not the fair market value. Because of Proposition 13, the assessed value may be significantly less than fair market value. For transfers to grandchildren, the exclusion only applies if the parent of the grandchild (i.e., the child of the grandparent making the gift) has already passed away. If the grandchild’s parent who is the child of your client, is still alive, then the exclusion for gifts of real property from grandparent to grandchild does not apply.
- Do not transfer more than 50% of the ownership in an entity. The rules for reassessment of California real estate owned in an entity (e.g. Limited Partnership, LLC, Corporation, etc.) are different. First, the exclusion for gifts from parents to children (or grandchildren) discussed above does not apply. Real estate owned by an entity is reassessed when a single person or entity acquires more than 50% ownership, or, in some circumstances, when cumulative transfers of interests in the entity aggregate more than 50%. Consequently, it is very important to keep transfers of interests in entities which own real estate below 50%, if possible.
- Take Advantage of Discounts. If you make a gift of a partial interest in real estate or an entity (meaning the donee receives 50% or less ownership interest), the interest that you give may qualify for a valuation discount from as little as 15% to over 50%. For federal gift tax purposes gifts are valued at fair market value (not property tax assessed value that was discussed above). However, a fractional interest in a parcel of real estate or ownership in an LLC, for example a 25% interest, is not worth 25% of the value of the property. This is because a 25% interest is not a controlling interest and is hard to sell. Therefore, when you make a gift of a partial interest in a real property or an entity, it is extremely important to ask your appraiser to do a discount analysis. A properly structured gift of a partial interest can be a very significant gift and estate tax saver.
Naturally, there are many complicated tax considerations which are extremely important to consider in the gift making process. The above summary is just a simplified version of some very complex planning strategies.
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Clark & Trevithick, PLC is a full service law firm representing clients throughout California and western states for more than three decades. Our practice includes specialization in federal and state taxation law and tax reporting compliance, as well as estate planning for owners of closely-held businesses and other high net worth individuals. We also counsel on the sale of closely-held businesses. We develop methods for transferring wealth to surviving spouses and descendants by the most efficient and tax-advantaged methods available. Our practice profile also includes corporate, real estate, litigation, creditors’ rights and remedies and employment law matters.
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