Gifting as business succession

Last week, the Kansas City Federal Reserve released its Fourth Quarter Agricultural Conditions Report.  The Report noted what we all intuitively knew — farmland prices keep rising and as a result, young and beginning farmers are having a difficult time acquiring land.

But there may be some ways to transfer land to young and beginning farmers who do not have the equity a more established farmer has.  One of those methods is the use of gifting.  How would that work?

First, recognize that the annual gift tax exclusion amount (for 2013) is $14,000, or if gift-splitting, $28,000 for spouses.  Thus, you may gift property with an fair market value of up to $14,000/$28,000.  You can think of gifting cash but also more broadly than that.  Property can be personal property, such as a piece of machinery or breeding livestock.  You could consider gifting crops, seed, or other inputs needed to get started.

Property could also be real property, such as a parcel of land or a residence.  You could gift various types of interest in the property, such as a leasehold.  Again, there is no reason not to think somewhat outside the box if you would like.

But property could also be intangible, such as shares of a limited liability company or S-corporation.  You may consider gift such shares but you will also want to consider the type of shares, such as voting or non-voting.

I realize that this may seem a paltry amount of property, especially in large operations.  But it is nonetheless a method to begin the transfer of the operation to the next generation.  It is also a method to slowly bring the next generation into the business, while mentoring and providing insight into the operation.

Also keep in mind that the monetary amount of the annual gift tax exclusion is indexed to inflation.  Thus, for 2012, the monetary limit was $13,000.  For 2013, it is $14,000.  The exclusion amount will continue upward.  There is no guarantee that inflation will keep apace with valuation increases in the operation but, should you run the numbers on your operation, you may be able to gift more than a nominal portion of your operation throughout the years.

As you consider business succession and transition, you are welcome to contact Legal Aid of Nebraska.  We’re happy to discuss the myriad of methods available for business succession and transition.

A brief summary of gift tax

As I am fond of saying, there are gifts and then there are gifts.  What in the world I am talking about?

I’m talking about federal gift tax laws.  There are two gift tax provisions to be aware of: the annual gift tax exclusion and the gift tax.  Today’s edition is to give you a bit of background on gift taxes; the next post will discuss how to use the gift tax to help in the business succession of your farm or ranch.

Annual Gift Tax Exclusion:

The annual gift tax exclusion permits a person to gift, in 2013, up to $14,000 to an individual.  There is no limitation on the number of individuals who may receive up to $14,000.

If you are married, you and your spouse may contribute up to $28,000 per individual.  This is known as gift-splitting.  Keep in mind that each spouse must agree to the gift and gift splitting must be specified when filing taxes.  This requires each spouse to file a Form 709.

Because this is an annual exclusion, you can make this gift every year to individuals and pay no gift tax.

Gift Tax:

If you gift more than the annual exclusion limit to an individual, you are subject to federal gift tax.  The federal gift tax is part of the unified credit with the federal estate tax.  This means you can gift, in 2013, up to $5.25 million without being subject to the gift tax.

But how does the federal estate tax come into play?  The gift tax applies to lifetime gifts and the estate tax applies to assets left at death.  Whether you gift your assets or leave them at death, the assets are taxed in the same way at the same rate.  Thus, the gift tax and the estate tax are “unified”.  This means that when you combine the value of lifetime gifts and the value of your taxable estate at death, a total of $5.25 million is excluded from tax.

Keep in mind that the above information is general and is for your information only.  It is well worth your time to discuss your specific questions with your attorney and/or tax professional.  If you have specific questions, please feel free to contact us.