Ryan Conklin

Gifting as a tax management tool

By: Ryan Conklin, Wright & Moore Law Co., LPA

A few months ago we discussed the basics of tax basis and potential tax changes from pending legislation. With various bills and proposals making their way through Congress, it is an opportune time to examine one of the strategies that could mitigate adverse tax impacts.

Gifting is a common tool for estate planners and their clients. It provides a path to divestment of ownership of important assets like land or equipment so that income tax or estate tax concerns may be reduced or eliminated. To be a completed gift, the giving party must completely divest ownership, meaning no retained income or control, and the receiving party must accept through an affirmative act. Also, documenting the gift and its value in writing is strongly recommended. This paperwork might take the form of a gift declaration, transfer of LLC membership units, or the deed to a farm.

Gifts allowed per year

Current tax rules allow for one person to make as many $15,000 gifts to as many people per year. If gifts to a specific person exceed $15,000 for a particular year, the gifting party will need to file a gift tax return. By filing that gift tax return, the amount exceeding $15,000 is deducted from that individual’s estate tax exemption (currently $11.7 million). The favorable estate tax exemption level makes gifting a feasible tactic here, and any changes to that exemption number could make gifting more difficult.

Gifting drawbacks

One major drawback of gifting pertains to tax basis. While inherited assets receive a step-up in tax basis upon the death of the owner, gifted assets receive no such treatment. Instead, the recipient of the gift receives the tax basis of the gifting party. As a result, a future sale of gifted assets could carry a healthy tax bill.

Now, the passage of certain proposals, such as elimination of stepped-up basis, mandatory taxation of appreciated assets, or changes to gifting rules, could render this strategy obsolete. At that point the only effective estate planning tools may involve a complex scheme of trusts that would carry some drawbacks but would guard against a hefty tax bill.

Even as harvest gets into full gear, engaging your legal counsel to devise a “break in case of emergency” plan is advisable, especially with potential time limitations looming.

Wright & Moore Law Co., LPA has a rich heritage in Ohio agriculture. Since 1988, our firm has proudly assisted farmers, rural residents, and landowners from all over the state with their farm succession planning and agricultural legal needs. We would be happy to discuss your family goals and how to meet them. To learn more about Wright & Moore or schedule a meeting, call 740-990-0750 or visit OhioFarmLaw.com.