Making Cents: Estate and Gifting Taxations
By: John P. Napolitano, CFP®, CPA, PFS, MST
There is a concept, at least for the next few months, in the world of taxation that allows for discounts to the values of assets where the recipient owns a minority interest or has a limited ability to gift or sell their ownership interest in that asset. This ability to use discounted valuations, however, has be under attack by congress for years and is about to go away due to a new bill signed into law by the president. This is significant when the value of an asset is above the taxable threshold for estate taxation. For federal purposes, that gift and estate tax limit is $5.45 million and in my home state of Massachusetts, the limit is only $1.0 million. What this means is that gifts or estates in excess of these limits will be subject to a death tax that tops out at 40% federally, plus any applicable state death taxes.
For an estate comprised primarily of a business and real estate, this may cause a tax problem. Families may have to borrow or sell assets simply to pay the death taxes. To mitigate this, these families may make gifts to anyone they want to be a future owner.
The thesis behind allowing for these discounts fall under the categories of your lack of control and the lack of marketability of a minority share in any asset. For example, if some stranger offered you a minority interest in their business where you had no say in management or a limited ability to sell your asset, would you pay full value for that asset? Not likely.
But in this case, congress has decided that families shouldn't get to use this concept any longer. It has saved millions of dollars in taxes and allowed families to retain wealth, businesses and assets for future generations. Politics aside, this change will cost families looking to pass a business or other assets along to the next generation.
Families that own a valuable business or parcels of real estate need to act now if reducing the value of their taxable estate is an objective. This is not an act that families should take lightly. Taxpayers need to consider several important moving parts. First is the form of ownership of the asset. For example, while you may want to gift a small stake in your business to a child to mitigate future death taxes, you may not want that child to own that asset directly and be subject to a future divorce or other issues that your child may encounter.
This concept of gifting discounted assets should be a part of an overall estate plan. To do this, a thorough analysis of your entire balance sheet as well as a forecast of future death taxes is advisable. This will require working with professionals with expertise in estate planning, income taxes and financial planning. The clock is ticking on this strategy so start your actions soon.
John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.