United States: Common Gifts And Factors Influencing Their Value

Last Updated: July 23 2013
Article by Petra Loer

The American Taxpayer Relief Tax Act of 2012 (the "Act"), enacted on January 2, 2013, ended an 11 year period of uncertainty relating to estate tax exemptions and rates by making the agreed upon exemptions and rates "permanent". [1]

For those of you who still have the assets and inclination to make gifts in 2013, we offer the following summary to help you identify potential assets to gift and factors influencing the value of the gift.

Brief Background on Gift Tax

IRS defines a gift as "any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return."[2] A gift may be taxable or nontaxable. Gifts are generally taxable for IRS purposes except in the following cases:

  • Gifts that are not more than the annual exclusion for the calendar year;
  • Gifts to a political organization for its use;
  • Gifts to charities;
  • Gifts to one's (U.S. citizen) spouse; and
  • Tuition or medical expenses one pays directly to a medical or educational institution for someone.

Under current law, an individual can transfer up to $5.25 million (as of 2013, and inflation-adjusted) over his or her lifetime without being subject to the gift or estate tax. This is referred to as the basic exclusion. However, an individual can also transfer up to $14,000 tax-free under the annual exclusion.

Types of Gifts

The types of assets that an individual can gift are numerous and diverse. The table below compares some traditional and non-traditional assets that can be gifted outright.

Traditional Assets Non-Traditional Assets
Cash Life insurance policies and annuity contracts
Publicly-traded stocks and bonds Patents and other intangible assets
Real estate Promissory notes
Jewelry and gems Qualified conservation contribution [3]
Art and other collections  
Vehicles such as cars, boats, and aircraft  
Other personal property  

In addition to gifting assets outright, an individual can gift a fractional interest in an asset or entity. Examples of fractional gifts include the following:

Fractional Gifts
  • Interests in closely held operating businesses
  • Interests in entities such as Family Limited Partnerships and Limited Liability Companies that hold investments and/or real estate
  • "Vertical slices" of private equity/hedge funds
  • Oil and gas interests
  • Undivided interests in real estate
  • Undivided interests in art

Factors that Impact Value for Fractional Gifts

Market prices, cash flow expectations, and risk can obviously affect the value of an asset or business. However, what may not be as obvious are the factors that influence the value of a fractional interest in an asset or business. For example, a fractional interest may be subject to certain discounts for lack of marketability ("DLOMs") and/or control ("DLOCs"). DLOMs may be appropriate to reflect the lack of a ready market for the interest. A DLOC may be appropriate to reflect the fact that a non-controlling fractional interest cannot manage or control the entity or asset, determine distributions, or force liquidation.

As an example, consider a common gift suggested by estate planners – a fractional, non-controlling interest in an FLP. An FLP will typically be guided by a partnership agreement, which specifies rules and restrictions that apply to its partners. The existence of various restrictions within the partnership agreement can influence the value of such a gift.

Key factors influencing an FLP interest include:

Factor Lower Discount / Greater Value Higher Discount / Lower Value
Size of the FLP Larger, more profitable Smaller, less profitable
Nature of the FLP More diversified / lower-risk assets Less diversified / higher-risk assets
Leverage Low debt High debt
Distributions Large, frequent Minimal, infrequent
Time to liquidity Short term Long term
Transfer restrictions No restrictions Existence of restrictions / right-of-first refusal
Size control of interest Controlling interest Non-controlling interest
Redemption rights Existence of rights No rights
Competence of management Competent management Incompetent management
Voting rights Voting interest Non-voting interest

Although similar in concept to the above example, an undivided (i.e., fractional) interest in property is influenced by slightly different factors. Unlike an FLP interest, an undivided interest reflects a direct interest in the property itself. Although the property may be readily marketable, an undivided interest lacks the ability to sell the property, make decisions related to the property such as maintenance or leasing, or obtain normal bank financing without the other owners' consent. Additionally, although no partnership agreement exists, per se, the owners may have signed a tenants-in-common ("TIC") agreement, specifying restrictions on owners of the property.

Regardless of the existence of a TIC agreement, factors that can influence the valuation of an undivided interest include the following:

Factors Lower Discount / Higher Value Higher Discount / Lower Value
Type of property Developed / leased property Vacant land
Cash flows Income producing Non-income producing
Number of owners Fewer owners More owners
Market forecast Strong real estate market Weak real estate market
Restrictions in TIC agreement removing right to legal partition Retained right to partition Removed right to partition
Other factors such as dissention among owners, foreclosure, etc. Existence of negative factors Lack of negative factors

Conclusion

Although the Act made estate tax exemptions and rates "permanent", future tax reform, including eliminating valuation discounts for interests in family-owned entities, are still possible. Under current legislation, however, opportunities exist for gifting assets/interests at discounted values. Understanding your gifting options and the value of your potential gift are critical components of the gift and estate planning process.

[1] Despite the Act, the Obama administration has proposed to amend the tax code to further restrict transfers by gift and other significant changes, outlined in our Tax Release dated April 22, 2013

[2] Frequently Asked Questions on Gift Taxes, Internal Revenue Service

[3] See IRS Publication 561 for a description of this asset and others.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Coblentz Patch Duffy & Bass LLP
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Coblentz Patch Duffy & Bass LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions