A gift tax is a tax levied on your property when you transfer your property as a gift while you are alive.
Not all gifts are taxed, but are treated similar to the distribution of your estate at death (unified treatment
under the Internal Revenue Code). Gift taxes have an exclusion amount, meaning that you are not required to pay taxes on a gift that is valued below a certain threshold amount. Gift taxes also are subject to an annual exclusion, which is applied on a yearly basis instead of on a per gift basis.
An annual exclusion is one tax advantage that allows you to reduce the amount of taxes you pay on a transfer of property. Basically, it permits you to transfer a large gift in small amounts over a long period of time. So long as the gifts are valued below the exclusion threshold, you will not have to pay the gift tax on any of the transfers.
Lifetime gifts can be easy to do when your property is liquid. However, when the property you wish to transfer is land, different issues arise. It is usually not possible to give an acre here and an acre there, not only would it require you subdivide your property, it might also violate local land use rules. Instead, you can transfer a share of the interest in the property, creating a joint tenancy. The interest must be a present interest in the property for the exemption to apply, unlike a bequest in a will.
Joint tenancies can become complicated because multiple people share an undivided interest in the property. So while you might still live on the land and perform many of the business operations, other joint tenants share responsibilities and ownership of the land. It is important to consider issues like management roles and family dynamics when determining if lifetime gifts are a good decision for you and your property. One option may be to set up a FLP or LLC as a way to manage the business and transfer issues.
Transferring only a portion of your property or interest may also make certain valuation discounts available to you and further reduce the amount of taxes you pay. In this way, if the transfer of your property is subject to certain limitations (like partnership interests), it is less marketable, less valuable and thus you pay less taxes.
When used in conjunction with a well thought out estate plan, lifetime gifts can be a great tool for transferring your land and business, while preserving rural communities and preventing sprawl development.
For more information on valuing and documenting gifts, click here