Ah, family — is there anything in the world better than family? There might come a point where you want to definitely do something nice for your family members, especially if they took care of you in the past. However, if you give your family money, chances are good that your accountant is going to be looking for you to pay gift taxes on the money. There was once a point where you couldn’t really get past this, but now you can.
The decision is actually one that has been handed down by the Ninth Circuit in San Francisco. The decision is called Estate of Petter v. Commissioner. The federal appeals court basically upheld the concept of valuations, which is really what makes gift taxes so complicated.
You see, you do have a gift-tax exemption of $1 million dollars — it’s currently 5 million in 2011, but in 2013 it’s expected to go right back to 1 million dollars. Large gifts can hit this exemption very quickly, and it can seem impossible to actually be able to get things done. This is why you definitely want to make sure that you focus more on the road ahead rather than the challenges ahead.
The current advice — the advice that was questioned in the court case — is basically to push things into a limited liability company and then give units of the LLC to the people that you wish to inherit the assets. Putting stock into an LLC is going to lower its value, because the units aren’t totally owned by one person. Basically, multiple people are essentially diluting the value together, thus enjoying the tax savings together as well.
The IRS questions the dilution value more than anything else, because that’s where they end up missing out on the taxes that they feel they are properly entitled to.
We still suggest that if you’re thinking about giving away large gifts to your family while you’re still alive, that you get a qualified professional to work through the process with you. Also, you’re going to want to be ready for a fight — the IRS loves sending out audits for this type of thing, and that can be a lot more than what you bargained for.