At the beginning of June 2012, the Tax Court ruled that gifts of family limited partnership interests qualified for the gift tax annual exclusion, which is currently $13,000 per donee per year.
The Estate of George Wimmer involved a family limited partnership that was funded with marketable securities. Wimmer made gifts of limited partnership interests but the IRS disallowed annual exclusions for the gifts.
As many of you know, when you give a gift to a beneficiary, you are allowed a $13,000 exemption before you have to include that gift as being subject to gift tax. Many people are setting up limited liability companies, family limited partnerships and other vehicles to get discounts of those interests and then gift those interests to a family member. Understandably, when those people make that gift they want to take that $13,000 as a deduction from the value – many times even creating their gift to equal the $13,000.
Seems reasonable, right? The IRS, however, challenges this saying that the gift does not meet the definition of a present interest because there is no immediate benefit that is being given to the beneficiary to the gift. Many times to get the maximum discount on the values the partnership or LLC agreement will severely restrict the aspects of the interest that can be used by the beneficiary – they can’t sell it, they can’t transfer it, or cash may be restricted in terms of distributions.
The IRS successfully argues that as a result, the donor isn’t really giving the beneficiary anything – at least not in a current expectation of value. And because of this, the IRS has made it difficult for a taxpayer to use the $13,000 exemption.
As tax planners, this has been difficult, as many of our clients want that $13,000 exemption. So we’ve worked to find the answer as to what will qualify as a present interest when taxpayers are gifting these limited partnership and LLC interests.
The Wimmer case made it clear that you still have to confer a present value, but where the IRS will argue in this case that they did not qualify, the Court looked at the history and said, wait a second – there are securities in this company and they have been able to distribute interest and dividends every year – which makes this gift a present interest. You either confer a transferable value or you confer an income interest and in this case the beneficiaries were able to demonstrate they were able to have an income interest.
The result turned out favorably for taxpayers as now we can structure a gift that will reasonably expect them to get a $13,000 annual exclusion to every gift they make to their beneficiaries – whoever they are. It gives some certainty to taxpayers who want to make these gifts yet it’s important for people to realize they will still have to give something that is defined by a present interest.
Additionally, this $13,000 exemption is separate from the $5 million gift tax exemption that is expiring this year. And while the $13,000 may pale in comparison, it can be very useful and valuable especially if you are someone who has a lot of beneficiaries.
