As you consider year-end gifts, keep in mind that paying gift taxes is generally more beneficial than keeping the asset in your estate and paying estate taxes at some future date. When you combine these tax benefits with discounts that are generally available for gifts of family limited partnership (“FLP”) interests, without the loss of control over the assets in the FLP, there is a powerful result.
Consider the following illustration: A widow owns a business worth $2,500,000, business real estate worth $1,500,000, cash and securities of $1,000,000, and a residence worth $500,000, for total assets of $5,500,000. She creates a FLP and transfers the business and business real estate to the FLP (a total value of $4,000,000). In scenario A, she gives approximately 42% (having a value of $1,666,667) and in scenario B, she gives 49% of the limited partnership interests to her children (a value of $1,960,000).
Transfer to FLP
| | $4,000,000
| $4,000,000
|
Transfer of FLP units to children
| | (1,666,667)
| (1,960,000)
|
Lack of control discount (25%)
| | (416,667)
| (490,000)
|
Marketability discount (20%)
| | 250,000)
| (294,000)
|
Value of gifts after discounts
| | 1,000,000
| 1,176,000
|
Gift tax exclusion
| | 1,000,000
| 1,000,000
|
Taxable giftA
| | -0-
| $176,000
|
Gift Tax
| | | $47,000
|
Gross estate (at death)
| $5,500,000
| $3,833,333
| $3,493,000
|
Estate tax exclusion
| (1,500,000)
| (500,000)
| (500,000)
|
Taxable estate
| $4,000,000
| $3,333,333
| $2,993,000
|
Estate taxB
| $1,740,000
| $1,420,880
| $1,257,440
|
Gift tax
| | | 47,000
|
Total estateB and gift tax
| $1,740,000
| $1,420,880
| $1,304,440
|
Assets distributed to beneficiaries
| $3,760,000
| $4,079,120
| $4,195,560
|
Savings
| | $319,120
| $435,560
|
Savings by paying gift tax
| | | $116,440
|
A Ignores annual gift exemption
B Ignores State of Illinois estate tax
Thus, by making a taxable gift and paying a relatively nominal gift tax, there is an overall tax savings of approximately $116,000. The point of this story: there is no reason to delay making taxable gifts. Please call us now if you desire to effectuate either a taxable or non-taxable gift before the end of the year.