Using your gift tax credits.

2010
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

For those of you who have substantial assets, the idea of gifting some of those assets to your children or grandchildren may be something to seriously consider. We recommend that you talk with your financial advisor about the best management ideas for your current assets and the future growth of your family’s net worth.

For those of you who have substantial assets, the idea of gifting some of those assets to your children or grandchildren may be something to seriously consider. We recommend that you talk with your financial advisor about the best management ideas for your current assets and the future growth of your family’s net worth.

  • Will my retirement income be secure if I give assets to my children?
  • Can I gift the ownership of some assets to my children, but still maintain control?
  • How are the values determined for making gifts to my family members?
  • If I gift assets to my children, what happens if one of them dies, divorces, becomes disabled, or has a personal bankruptcy?

These questions and more should be discussed before you begin a gifting program with the next generation(s).

Under current internal revenue code rules there is a federal estate tax exemption, which in 2009 is $3.5 million for each person. There is also a federal lifetime gift tax exemption, which is $1 million for each person.

When working with your advisors to planning the transition of your assets, be sure to use all of the estate and gift tax credits to transition the largest amount of assets to your family members while paying the least amount of total taxes.

The estate tax exemption will obviously be used upon your death, but the gift tax exemption can be used whenever it is appropriate for your long-term asset transition goals.

Say, for instance, that the combined net worth for you and your spouse is $10 million. When both of you pass away, if you do very little planning in advance, you will pay about $3 million in federal estate tax. Transitioning some of those assets to the next generation now is obviously a good economic decision.

If you gift $1 million of value to one or more of your children, then you have effectively prevented all future appreciation of those assets from being taxable upon your death. Both you and your spouse could gift $1 million each, which would remove all future appreciation on $2 million total from your taxable estate.

How Do You Maintain Control?

Most of our clients who have a high net worth like the idea of moving some of their net worth to the next generation, but they do not want the next generation to have total control over making business decisions for those assets.

The children may receive a certificate that says they own 10% or 20% of a limited liability company or a family limited partnership, but they would not have voting control over making business decisions because of the nature of the limited partnership. They would also have no control over payment of distributions.

There are many ways for the parents to keep control of the entities where they have gifted away a minority percentage of the ownership in order to remove all future appreciation from their personal net worth.

What Assets Do You Give Away?

Many times financial advisors recommend that a family limited partnership or a limited liability company be created as a place for parents to put assets. Once the new company is funded ,the shares of that company can be valued by an appraiser and the gifts can be made.

Parents usually gift minority percentages in a S-Corporation, C-Corporation, Limited Liability Company, or Family Limited Partnership. These types of entities are easy to work with. The most popular of these are the limited liability company and the family limited partnership.

In addition to gifting some minority percentage to family members, your tax attorneys can also “freeze” the units of ownership that the parents would retain. This also helps transition future growth to the next generation.

When Do You Use The Gift Tax Credit?

If your current personal net worth is enough so that you and your spouse have plenty of retirement income and financial security, then gifting assets now should be considered by you and your advisors. You can gift assets so that the children receive some annual income, or you can design the gift so that the parents receive most of the income.

Gifting assets to remove all future appreciation from your net worth is also a good idea and your financial advisor and tax attorneys can show you several ways to accomplish your goals and still protect your future.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .