If you are using your LLC or LP as a means to transfer wealth from one generation to the next while minimizing taxes, gifting interests will be a part of that plan. But you need to be careful when and how much you gift so you don’t wind up triggering extra tax.
This year the tax-free gift allowance is $12,000 per year, per person (increasing by $1,000 per year in future years). So, if you and your spouse have three children, you could gift your kids $12,000 each this year, or $36,000 in total. Your spouse can do the same thing, for a grand total of $72,000 changing hands, tax-free! You can keep doing this each year, up until you hit your lifetime tax-free gift limit of $1 million. Gifting isn’t just limited to inter-family transfers, either. You can gift money to friends, neighbors, the paper-boy, your hairdresser – whomever you want.
If you are gifting interests in business structures with restricted ownership, like LLCs and LPs, the IRS gives you a bit of added value to offset the fact that the interests you’re gifting can’t easily be sold. The added-value depends on several factors, not the least of which is the overall value of your LLC or LP, but you should be able to add another $2-3,000 per child without incurring IRS scrutiny. However, this is not set in stone, and if you want to gift interests worth more than $12,000 per person, talk to your tax advisor first.
You can gift interests at any time during a calendar year, although traditionally folks wait until the end of the calendar year. But before you gift any interests you will first need to have them valued by an independent business valuation expert. There are rules and regulations around this, including how such valuation may be requested and paid for. As you can imagine, it’s a tricky area, and is definitely something that you want to do in consultation with your tax advisor.
The formalities for gifting interests are pretty simple: a notarized Deed of Gift is prepared, along with Minutes authorizing the transfer from one member or limited partner to another. We included samples of the Minutes and the Deed of Gift itself on the Forms CD in both of Diane’s products, the Operation Guide to Your LLC or LP, as well as the Operation Guide for your Corporation.