If you were to give significant gifts to family members while you are still alive they could be subject to the federal gift tax. Right now the rate of the gift tax is 35%. We say you “could be” exposed because whether or not the gift is taxable will depend on its value. As of this writing the lifetime gift tax exclusion is $5 million, so you can give gifts up to this amount without incurring any gift tax liability.
However, the gift tax and the estate tax are unified. So using this exemption to give gifts is not going to provide you with estate tax efficiency because your available estate tax exemption will be reduced by the amount of the gifts that you give utilizing the lifetime unified estate/gift tax exclusion. So for example if you had $10 million in total assets and gave $5 million in gifts using this exemption all of the remaining $5 million estate would be taxable.
As a response, you may want to consider the creation of an FLP or family limited partnership.
With family limited partnerships you can reduce the taxable value of a gift. Let’s say that you want to give your daughter $2 million dollars. You can fund a family limited partnership with $4 million and give her a 50% share as a limited partner. You as the general partner have complete control and marketability rights. The limited partner has no control.
Because of this lack of control the taxable value of the 50% share is less than $2 million because no one would pay this amount for such a share on the the fair market due to the lack of control. So your limited partner is in possession of a $2 million dollar asset but the gift tax is applied to a lesser amount based on a fair market appraisal of the value of the share.
Family limited partnerships also provide asset protection, and transfers between partners can be made at a reduced rate of taxation.
The FLP is a useful estate planning tool under certain circumstances. The best way to explore the value of these partnerships in detail is to arrange for a consultation with an experienced legacy planning attorney.
- Effective Planning for Single Seniors - October 1, 2023
- Your Guide to Navigating the Labyrinth of Trusts - September 28, 2023
- Paving the Way For the Future: An Estate Planning Guide for Millennials - September 24, 2023