Last week, I wrote about a “simple” question a client asked that ended up with me asking 30 “follow-up” questions until we determined what they really wanted to accomplish. That client asked me how much their business was worth without any other information. After a quick question or two, it seemed they were pretty vague about what they wanted to accomplish, leading to a battery of questions, with each question leading to further questions and more facts that the client originally “did not think were important.” My suggestion in such situations is to have a paid consultation with a tax pro to identify what the client really wants to accomplish.
Unrelated to that, a day later, I received a call asking me how much the gift tax exemption was.
Here we go again. Anyone could find the exemption amount on the internet or by using AI. The real issue is why they want to know that amount. That will take a battery of questions following a process not much different from the situation I wrote about last week.
Checklist Questions
The following are a few questions and comments that need to be addressed before any gifts are decided upon, and these should be asked and covered during a paid consultation with a knowledgeable tax professional.
- How much is the gift?
- What will the gift be comprised of? Will it be cash, stocks, a business or an interest in a business, a residence, real estate rental property, jewelry, art, collectibles, intellectual property, a life insurance policy or something else?
- Suppose a gift of a business interest will be made. In that case, a buy-sell agreement should be executed as well as employment contracts with the primary owner and key people, leases of property owned by the majority owner and other contracts based on the company’s and its majority owner’s circumstances and situation.
- When will the gift be made? This year, next year, spread out over a period of years or when the donor or someone else dies?
- What is the tax basis of the gift?
- How is the property that will be gifted titled?
- What is the cash flow from the property?
- Will the donor’s cash flow reduction from the property that will be given away cause a hardship to the donor?
- Who are the beneficiaries and their relationships?
- If the beneficiaries are grandchildren or other generation-skipping people, there are special rules that need to be adhered to.
- Is the gift of a certain amount or property that is intended to be maintained in the recipient’s bloodline?
- Will the gift be given outright, in trust or with restrictions?
- What is the financial situation of the recipient, i.e., is he or she in debt, wealthy or will they need the cash flow from the property they receive?
- What will the done do with the amount provided as a gift? Will they pay down existing debt, add to their annual spending needs or add it to their investment portfolio, buy a house or a second residence, invest in or start a business, have some ownership or bigger ownership in the family business they work in, pay medical costs or tuition for themselves or someone else, or re-gift it to someone else?
- Is the primary reason for the gift to provide cash flow or an asset to the done?
- Is the primary reason for the gift to reduce the donor’s eventual estate taxes?
- Is the primary reason to start transferring some ownership of a family business, or to transfer the entire business ownership to family members who work in the business?
- What is the form of entity the business is in?
- If a business or an interest in a business is being transferred, it will be necessary to review the financial data of the business before a discussion about that could ensue.
- If the gift is anything other than cash or marketable securities, an appraisal might be necessary. Note that there are strict rules that must be followed for what is subject to appraisals, and how and when they are made.
- If the donor is married, will their spouse share in the gift or agree to split it for gift tax purposes?
- If the donor wants to gift it to a trust, who will the trustee be, and what terms of the trust will they want?
- There are many types of trusts, so a review of them would be necessary based on the overall objectives of the gift.
- If the gift is to a recognized charity, then the gift tax rules will not apply, and the charitable contributions rules should be consulted.
- Any taxable gifts must be reported on IRS Form 709 United States Gift (and Generation-Skipping) Tax Return.
- Depending upon the type of trust the gift is made to, there might be a requirement to file IRS Form 1041 U.S. Income Tax Return for Estates and Trusts. There are also varied rules about the income tax liability of income earned in trusts.
Final Thoughts
Making a gift is a serious undertaking and should be done after consultations with a CPA and an attorney familiar with such transactions before any actions are taken. My recommendations to any professional asked anything about a taxable gift is to be engaged by the client to help them clearly articulate and define what they want to accomplish. My advice to a potential donor is to prepare a bullet point listing of what they want to accomplish and what they believe the steps are. If they can end up with over 20 bullet points, I believe they will have a much better understanding of what they want to do. With that list, they will then be ready to meet with a tax pro, and they will also save time at that meeting since they will be better prepared.
The above is a brief checklist, but it should be sufficient to provide you with a heads-up of what would be involved in the decision-making, planning, and execution process.
Contact Me
If you have any tax, business, financial or leadership or management issues you want to discuss please do not hesitate to contact me.
