Transfer Tax

Property transfers are taxed based on the fair market value of the property at the time the transfer occurs. With a few exceptions and exemptions, the lifetime transfers are combined with transfers occurring at death and are subject to graduated rates ranging up to 45%. Here are the key exceptions you should be aware of:

  • The annual gift tax exclusion allows every individual to transfer, as a tax-free gift, up to $13,000 per year per donee. There is no limit on the number of donees. To qualify, the gift must be considered at "present interest." The $13,000 figure (and $26,000 for split gifts by a married couple) is indexed for inflation in future years.

  • We no longer have a unified transfer tax system. Effective with the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, the gift tax exemption is frozen at $1 million for lifetime transfers. However, at death the exemption is $3.5 million for 2009. In 2010, there is no estate tax and in 2011 the exemption equivalent goes back to $1 million. In addition, the maximum tax rate will reduce through 2009.

  • The marital deduction allows transfers between spouses, during lifetime or at death, that do not incur transfer taxes as long as the spouse is a U.S. citizen. Using a marital deduction, however, does not eliminate transfer taxation, it simply defers it. Careful planning can help you avoid the shifting of assets into a higher transfer tax bracket.

  • The charitable deduction lets you make transfers to qualified charities, providing a deduction from the estate and gift transfer tax system. Techniques are available that combine the tax advantages of charitable giving with the natural desire to provide for family members.

  • Life insurance is subject to a special rule for property transfers. If a person gives away a life insurance policy, he or she must live three years after the transfer has been made. Otherwise the entire death benefit of the policy is included in the gross estate of the donor/insured.

Generation-skipping transfer tax
This tax is in addition to estate and gift taxes, and hits transactions that skip generations (e.g., when grandparents gift assets directly to grandchildren). Each grandparent is entitled to a $2 million exemption in 2007 from this tax, with scheduled increases in future years, however tax rules for such transactions are complex and poor planning may result in the amount of tax exceeding the value of the transferred asset.

Business valuation
A company's value is often a tax challenge between the IRS and business owners. The IRS obviously wants to set your company's value as high as possible to generate the highest tax revenue.

You can anticipate this situation by estimating now, within your succession plan, a bona fide value of your company. "Fair market value" is defined as "the amount a willing buyer would pay to a willing seller with neither being under any compulsion to conclude the transaction." You can determine your company's fair market value by doing market value research through an independent appraiser.