So You Want To Make a Gift

When you think about making a gift it seems pretty simple.  You give it and someone else accepts it.  You are done!  Well, it depends.  If it is $15,000 or less of cash, you’re done.  If it is $15,000.00 of a business entity or a coin collection or a piece of Art, or machinery and equipment, it requires a couple more steps.

You must know the IRS will ask what method you used establish the value of the gift?

Estate and gift tax planning strategies can be complicated, and the process entails multiple steps.  A key step is determining an accurate valuation of the company or asset to help guide those planning strategies. Obtaining a fair market value when gifting a closely held business interest, a ranch, a farm, a piece of Art, a coin collection, or any asset is essential.  What you think your company or ranch is worth may not be what you think it is (either too high or too low).  When you are looking to integrate a gifting strategy into your estate planning, a simple guess at value could be costly.   You really need a qualified appraiser who hasthe experience and credentials to value your gifting asset.

Qualified Appraiser

What qualifications should you look for in an appraiser for your estate or business? Here are some characteristics that should be considered and included in the appraisal report:

  • Background, education, and experience
  • Certifications and membership in appraisal associations
  • Regularly performs appraisals
  • How experienced is your appraiser

The appraiser should also be able to demonstrate his or her independence; meaning they are not affiliated with any interest in the business itself that is being appraised.  Therefore, carefully checking the background of any qualified appraiser is crucial prior to engagement.  The appraiser and the subsequent appraisal report must also stand scrutiny by the IRS as it becomes a legal document and is subject to professional review. The absence of sufficient qualifications, experience or independence on the appraiser’s part could jeopardize the validity of the appraisal itself.

The Valuation Report

The IRS Revenue Ruling 59-60 requires specific information that must be included in a valuation for gift or estate tax purposes.  Below is a list of some (but not all) of the information that the IRS mandates to be included in the valuation report:

  • Nature and history of the business;
  • Value of stock and financial condition of the business;
  • Earning capacity;
  • Intangible value or goodwill;
  • Economic forecast and conditions related to the specific industry;
  • Market prices of stock of similar companies or similar asset classes.

Once the gift and estate tax valuation report is compiled, it has to be supported and able to be defended.  This is done by including discussions of several key indicators:

  • The income or market approach that was used in the valuation;
  • What assumptions were used in the analysis;
  • Explanation of any discount that was applied in the estimation of fair market value; this could include a discount for lack of control or marketability;
  • Market comparables and market outlook
  • The date of the gift or the date on which the business was valued.

All of these factors impact the valuation report and must be carefully considered during the valuation process by your appraiser.  Your wishes, as outlined in the estate or gift tax plan, hinges on the accurate valuation of the asset you are gifting.  Once the asset has been properly valued and appraised, and the gift has been made, there must be adequate disclosure of the plan for the IRS’s statute of limitations to begin to run.

IRS Implications

All transfers require adequate disclosure under Treasury Regulations Section 301.6501. The IRS’s statute of limitations for a gift transfer (through an estate plan) is three years, provided the gift tax return is adequately disclosed.  Should the gift transfer tax plan not be properly disclosed, the statute of limitations of three years does not begin.  That is good, right? Not exactly.

The IRS is free to audit the gift transfer plan at any time during those three years, or after, and could result in additional tax and interest on the gift.  Proper and adequate disclosure of the plan will cut off the IRS’s ability to audit after 36 months following the filing.  No one wants a letter from the IRS indicating an audit of your estate or gift tax return.  Especially if you have gone through the trouble and investment of doing the plan itself.

In summary, a proper gift planning requires securing a qualified appraiser, including the mandatory items for the plan to be properly defended under IRS scrutiny, and must be adequately disclosed to ensure the IRS’s statute of limitations clock begins.

Our firm has been focusing on estate planning for more than two decades and have provided families and generational businesses invaluable security and peace of mind by guiding them through the planning and gifting process.  There is no substitute for experience.

Contact our team at Borkuslaw Group today and make a live online appointment!

Please note that information contained in this news alert is not and should not be construed as legal advice or opinion nor does this information alert create an attorney-client relationship.

About the Author: Randall Borkus

We believe that business succession, asset protection and estate planning are less about numbers and much more about helping people preserve, protect, and provide for who and what is most important to them.