Gifting Real Estate Under The Annual Gift Tax Exclusion

Gifting Real Estate Under The Annual Gift Tax Exclusion

We know that you can give up to $12,000 per person per year and never pay a federal gift tax - thanks to the annual gift tax exclusion. That's fine if you're writing out a check or just giving cash. But, how can you give someone a house or a business or anything else that is not money and still have it come under the annual gift-tax exclusion?

Let's say you're parents have a condo in Florida that they bought several years ago for $100,000, and it's now worth $400,000. Now, they want to give it to you and your two sisters because they're concerned about the new Medicaid laws and their estate taxes.

Qualifying the entire $400,000 condo under the annual gift tax exclusion is not easy. First, it's hard to gift real estate in $12,000 increments. Sure, you can do it by simply dividing the value of the condo ($400,000) by the annual exclusion amount ($12,000 in 2006). In our example, $12,000 is equal to a 1/34th interest in the condo, which means that each of your parents could give you and each of your sisters a 1/34th interest in the condo each year. At that rate, it would take roughly 6 years to complete the transfer. If spouses were included in the annual gifts, then the time needed to transfer the entire condo would be reduced to about three years. [Careful planning could reduce that time to 366 days by making the first transfers on December 31st, the second transfers on the following January 1st, and the final transfers on January 1st of the next year.]

Seems pretty cumbersome though, doesn't it? And, it is. Besides, every year your parents would have to prepare a new deed for each gift and would have to record each deed on the land records. Plus, they'll probably need an attorney to take care of all that for them. The costs for all that work, including the recording fees, can be quite substantial. Then, when all of you decide to sell the condo, you'll have to put 34 different deeds together, with every owner signing off on the sale.

There's still another problem - that is, you have to make sure that your values are all correct. You see, if you give money, there's no queston as to what the value of the gift is. With anything besides money, whether it's real estate, stock, bonds, collectibles, etc., there is often no readily ascertainable value. So, you need to have the property appraised by a qualified appraiser so that the value comes under the annual exclusion. There are rules for doing this and, if you don't comply, then the IRS can always challenge your value. If the value is found to be more than the annual exclusion amount, then you'd have to file a gift tax return each year and possibly pay a gift tax. Appraisals cost money and have to be done every time a gift is made.

Is there a better way to transfer real estate under the annual gift tax exclusion? Sure there is! No one wants to transfer real estate in the manner we just discussed. It's just too cumbersome, time consuming, and expensive. The preferred way to transfer real estate under the annual gift tax exclusion is to use a separate legal entity, such as a corporation, or a limited liability company, or a family limited partnership to facilitate the transfer. My preference is a limited liability company (LLC) because it is easy and inexpensive to set up, and does not create the need for additional on-going expenses.

Here's how it works: First, your parents would create a limited liability company. Let's call it the Smith Family Condo, LLC. The LLC would be created with 34 membership units ($400,000 / $12,000). Your parents would then transfer their condo to the LLC in exchange for all 34 membership units (each parent would receive 17 membership units). Only one deed is necessary when your parents transfer the condo to the LLC, and only one recording is required. Likewise, only one appraisal is necessary to establish the value of the condo at the time of the transfer.

Now, whenever your parents wish to make a gift to each of you under their annual gift tax exclusion, all they have to do is transfer one membership unit in the LLC. No further deeds are required, no recording of deeds is required, and no attorney's fees are required. The transfers have to be reflected on the books of the LLC, but that's it. Not only does the LLC make it very easy to transfer the property in the first place, it also makes it very easy to manage the property and eventually sell it when the time comes.

That's the preferred way to transfer real estate or any other type of property to multiple beneficiaries under the annual gift tax exclusion.

Next time: Is it so terrible if you go over the annual gift tax exclusion amount in any year?

Attorney Michael P. Pancheri is a practicing attorney and the founder and CEO of the Living Trust Network. You may contact him by email at info@livingtrustnetwork.com. You may also contact him at the Living Trust Network's web site. Its URL is http://www.livingtrustnetwork.com.