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Valuations: An Important Tool For Estate Planning

If you’re like most people, you don’t like to think about planning your estate.  But it’s an important part of ensuring the financial security of your loved ones.  One of the most common tools used in estate planning – and one that everyone should at least give careful consideration to – is a program of giving gifts.  A carefully planned gift-giving program can reduce the amount of your estate that is subject to tax while still passing on wealth.  Valuations are a key component in understanding your current estate worth.

The American Taxpayer Relief Act of 2012 (ATRA), passed by Congress on January 1, 2013 and signed into law by President Obama the next day, brings some much-needed certainty.  ATRA sets the unified gift and estate tax exclusion at $5 million ($10 million for married couples) for 2013 and subsequent years (indexed for inflation).  The maximum estate and gift tax rate is 40 percent for 2013 and subsequent years.

Absent the immediate financial needs of a gift recipient, the main motivation for making large gifts during your lifetime rather than waiting to pass on your wealth at death is to remove the future appreciation from your eventual taxable estate.  There is a certain degree of risk in this strategy since your donee receives a tax basis equal to what you paid for the asset while your heirs will receive a stepped-up tax basis equal to the assets value at death, As a result, the loss of stepped up basis and higher future tax rates on capital gains may diminish the benefits of current gift giving.  Nevertheless, the consensus planning purposes is that getting future appreciation out of a taxable estate still trumps worries about any more remote tax issues for your donees if and when they eventually were to sell the gifted assets.

While large gifts can be subject to rules with a multitude of variable, you can give away up to an “annual exclusion amount” per recipient per year free of gift tax and free of any future offset against any exemption amount used to lower future gift or estate taxes.  For 2013, that annual exclusion amount is $14,000 (up from $13,000 in 2012).  You can give up to $28,000 in 2013 per recipient per year if you are married and your spouse consents to “split” your gifts.  Don’t underestimate how an annual gift-giving plan using the $28,000 split gift exclusion per donee alone can facilitate the tax-efficient transfer of family wealth.

Whether you are looking to gift a large one time gift of $5 million or just the $14,00 annual gift you will need to determine the value of the gift.  The gifting of privately held stock or your personal residence would require a valuation of those assets in order to determine how much should be reported on your gift tax return.  Understanding the proper value can help you pass along your estate without paying any gift taxes by ensuring the assets are under the one time or annual gift exclusions.  Often the valuation value is different than the book/appraised value due to the use of different methods such as Asset, Market, or Income approaches.  Also the use of discounts can help reduce the gift value.

If you have any questions about the best way of using gifts and valuations as part of your overall financial plan, please email us.

by Michael J. Kerwin, CPA, MT, CVA, Partner

January 28, 2014