Gifts of a Lifetime

It is the worst of times, yet it is the best of times (with apologies to Charles Dickens) to plan for your family’s future. A key estate planning goal is to transfer wealth to younger generations with minimal (or possibly no) tax cost. Through lifetime gifting, you can reduce the value of your estate and pass future appreciation to your family. The key element to successful wealth transfers is to gift assets with low values that will eventually appreciate, admittedly a feat in today’s economy. However, this feat may not be so formidable if you put marketplace opportunities, particularly those in real estate, to use. Now is the time to act because some current planning opportunities may soon be lost.

Right now, due to depressed real estate values, the uncertain economy and loss of a portion of your wealth, you may feel your own future needs must be addressed before you think about gifting. Yet, while the future is impossible to predict, based on historical trends, markets eventually recover. Moreover, if you realistically examine your financial situation, you would likely see that while you have less wealth, you still have wealth producing assets, opportunities to acquire new assets and the means to make gifts. Additionally, depressed values combined with valuation discounts and current low interest rates allow you to leverage your gifting strategies so it is less costly to transfer wealth to younger generations (potentially the best of times).

What is almost certain is that outright repeal of the estate tax is unlikely, and removing future appreciation from your estate with lifetime gifting is more tax efficient than passing wealth at death. These planning strategies can help you pass your real estate wealth in a tax efficient manner:

• Make loans to your children and grandchildren. They then have the opportunity to invest in real estate at depressed prices. The Internal Revenue Service applicable federal interest rates are so low that loans can be made at virtually no out of pocket costs. When the markets recover, your family benefits from any appreciation.

• Consider restructuring outstanding family loans. You may have made family loans when interest rates were higher. It may be possible to restructure them to reduce interest payments to current rates. But this must be done with caution because the IRS may contend that there is a gift element to the transaction.

• Establish a grantor retained annuity trust. In a GRAT, you transfer assets to a trust for a term of years, retaining the right to be paid an annual annuity. At the end of the term, the remainder interest passes to your children (or to trusts). GRATS can be structured so the annuity payment is high enough to reduce the taxable gift of the remainder interest to zero (the “zeroed-out” GRAT). If the assets in the GRAT out perform the IRS’ applicable federal interest rate, your children retain the appreciation with no gift tax cost.

• Make gifts of family limited partnership interests. For now, the law allows valuation adjustments for minority interests and lack of marketability.

• Sell assets to a trust in exchange for a promissory note. After forming a grantor trust, you sell assets to it in exchange for a promissory note. Gain is not recognized on the sale, and you are not taxed on interest payments received on the note.

Some of these planning opportunities may soon be eliminated. Certain proposals would prevent use of the “zeroed-out” GRAT. Also, a bill has been introduced in the House of Representatives that disallows the use of valuation discounts in certain situations, including elimination of discounts for gifts of non business assets and gifts of family controlled entities.

The potential loss of these strategies means that if you do not act soon you will have lost the opportunity to pass wealth at reduced gift tax costs. Planning strategies that are now available combined with current depressed economic conditions (worst of times) make it an opportune time (best of times) to make gifts. Now is the time to put your real estate wealth to work for future generations.

Sharon Goodman is a managing director in the Schonbraun McCann Group, the real estate and financial advisory practice of FTI Consulting, Inc. To contact the author, click here.

The views expressed in this article are those of the author and not Real Estate New York.