Giving away assets is a good way to reduce the value of an estate, and this may be important if Congress does not act and the estate tax is increased of January 1. Sometimes we reduce the value of transferred assets by dividing them.
For transfer tax (that is, estate tax and gift tax) purposes, the value of an asset is its fair market value. There are various ways to reduce this value, and I will illustrate one.
Assume that I have four children and I want to give them $1,000,000 in marketable securities. If I give a child $250,000 worth of stock listed on the New York Stock exchange, I have made a transfer of $250,000. The price he will get can be determined immediately by calling a broker.
Now suppose that I put my $1,000,000 of listed stock in a limited partnership or a limited liability company. A limited liability company, or LLC, is the vehicle of choice recently. It looks like a corporation but is taxed like a partnership.
Now I give each child one-fourth of the stock in the LLC. One-fourth of$1,000,000 is $250,000, but the gift is not worth $250,000 for transfer tax purposes. A child who has a 25% interest in the LLC does not have control, so he cannot declare dividends or manage the enterprise. The majority owners might decide not to issue any dividends, so he would have no income from the LLC. His 25% interest in the LLC does not give him a right to be employed. All he can do is ride along with whatever the control shares - the remaining 75% - decide to do.
If he were to offer his 25% interest for sale, he would have to scramble to find a buyer, because there is no place to list shares in a privately-held LLC. Perhaps he could place an advertisement in the Chronicle.
Division into shares is one way to reduce the cost of transferring assets. There are others, and if the estate tax is increased in January they will be important. We will be glad to help you in planning your estate, and showing you how to reduce the cost of transferring assets to your family.
