The goal in Estate Planning is to remove assets from a taxable estate, while not infringing on gift tax rules. I think it may be prudent to review some rules before we get into Family Limited Partnerships.
In 2013, you may give $14,000 to any one person in a taxable year. If you are married and elect to split your gifts, that amount doubles to $28,000. You have a Unified Credit that you can use in your lifetime of $5.25 million. So you can give gifts to anyone up to the Unified Credit before having to pay gift tax. So you can give in excess of $14,000, or $28,000 if married in one year, but you will have to file a gift tax return. You won’t owe any money, you will just be subtracting from your Unified Credit. Once you go over that credit then you will pay gift tax of 50 percent of your gifts. Clear as mud? Good!
Getting back to Estate Planning, the goal is to remove assets through gifts. Once you have made a completed gift, you can’t get it back. For instance, if you give your son or daughter $14,000, you can’t then take it back. It is important to note that you can give more money to your children, if it is used for education or healthcare.
Typically the removal of assets from a taxable estate is done through Irrevocable Trusts. The Trusts are Irrevocable because you can’t change them. This strategy is good for some assets, and works really well, however what about small businesses, and real estate?
What I like to do as an estate planner is form a Family Limited Partnership. I make the person that I am planning the estate for a 1 percent General Partner through a corporation, and I set up Irrevocable Trusts for the heirs of the Estate, and make them Limited Partners. I then sell purchase the asset in the case of businesses from the owner, and have the Family Limited Partnership buy the stock or membership units from the owner. This allows the owner to sell their business and pay capital gains tax.
With real estate, I do something different. I either gift the real estate, or in the case of a true investment, I have the Family Limited Partnership purchase the asset. Remember there is no gift if you purchase an asset for fair market value. I structure the purchase on an installment sale under IRC §424.
Another way to remove assets and defer capital gains is to form an Irrevocable Trust, and make a Qualified Intermediary the beneficiary with a corporate trustee as the Trustee. The Trust buys the asset from the grantor over a period of time. This sale would qualify again under IRC §424 installment sale. The grantor can take up to a 65 percent loan from the trust completely tax free. The grantor would control the trust by the language within the Trust document.
There are so many ways to do Estate Planning. That is why I love it so much.
For more information visit
If you have any questions you can email Craig W. Smalley E.A., C.E.P.®, C.T.R.S.®
Admitted to Practice Before the Internal Revenue Service
Certified Estate Planner®
Certified Tax Resolution Specialist®
Author of the books:
- It Starts With an Idea – Tax Tips for Small Businesses
- The Ultimate Real Estate Investor Tax Guide
- The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012
- Everything You Wanted to Know about the IRS – Audits, Appeals and Collections
- Tax Avoidance is Legal! The Complete Guide to Individual Income Tax
- The Complete Guide to the Affordable Care Act’s Tax Provisions
- The Complete Guide to Retirement Plans for Small Businesses
- The Complete Guide to Estate, Gift and Trust Taxation
- The Complete Guide to Hiring an Accountant
- The Complete Guide to Subchapter S-Corporations,
- Free Money
All available exclusively on Kindle