Parents planning to gift real estate to their children should move to do so now, as the lifetime gift-tax exemption will fall to $1 million for individuals and $2 million for couples in the new year from $5.12 million and $10.24 million, respectively.
Even if Congress intervenes before the exemption sunsets, experts still anticipate some kind of reduction of the tax break. Moreover, the maximum tax rate on gifts exceeding the limits will rise to 55 percent on Jan. 1 from 35 percent.
Some parents are passing properties to their children through limited liability companies, which offer a 15 to 20 percent discount on valuations due to a “lack of marketability.” This means outside buyers will balk at buying shares in a family-owned LLC because they would have to negotiate with a group of related members.
Another strategy for gifting a primary residence and avoiding estate taxes is a qualified personal residential trust, which also affords a discount under the “present value factor” since the child will not receive the property for a specified time period; if the parents die before the period is up, estate taxes will be incurred, and if they outlive the period, they will need to relocate or pay rent to the trust.
Parents also can beat the deadline by transferring publicly traded stocks into trusts and swapping them with real estate of the same value next year, providing cash gifts that their children can put toward a home purchase, or creating an irrevocable trust that will enable them to continue living in the property while paying rent to the trust.
Source: “Feathering the Kids’ Nests,” Wall Street Journal (11/16/12)