Strategic Gifting: A Key Tool for Estate Tax Minimization

Want to Leave More to Loved Ones and Less to the IRS? Here's How.

Give with Intention. Grow a Legacy.

When it comes to estate planning, gifting isn’t just generous—it’s strategic. With federal and Washington State estate tax rates reaching as high as 40%, smart gifting can be the key to preserving your legacy. From annual exclusion gifts and irrevocable life insurance trusts to charitable remainder trusts and family limited partnerships, there’s a wide array of tools available to reduce your taxable estate. This article breaks down the most effective gifting strategies to help you pass on your wealth with purpose—and with minimal tax bite.

The Federal Government and the State of Washington have both established an excise tax that is imposed upon your “privilege” of transferring your assets during your life or after your death.

There are three important rules associated with estate taxes:

1. If you are married (and your spouse is a U.S. citizen), you may give your spouse an unlimited amount of assets both during your life and after you pass away. This is known as the “unlimited marital deduction.”

   
   

2. Everyone is currently given federal and state exemptions from estate taxes. Protecting these exemptions is an important piece of any estate plan. For 2025, the federal exemption amount is $13,990,000. The Washington State exemption amount for 2025 depends on when in 2025, the death occurs. For deaths occurring from January 1, 2025, to June 30, 2025, the exemption amount remains at $2,193,000. However, for deaths occurring on July 1, 2025, to the end of 2025, the exemption amount increases to $3,000,000.

   
   

3. Estate tax rates are extremely high. Currently, the effective rate for the Federal estate tax is 40% for all assets above the Federal exemption amount. The estate rates for Washington State, again, depends on when the death occurred. For death occurring from January 1, 2025, to June 30, 2025, it ranges from 10% to 20%. However, for deaths occurring on or after July 1, 2025, the estate tax rate ranges from 10% to 35%.

The value of your estate is based upon the “fair market value” of the assets as of your date of death, and includes everything you own, including your personal property and the death benefit of your life insurance.

The comments that follow are for thought and discussion. They are certainly not a set of recommendations. That would be premature.

Background

Let us make the following assumptions. First, you have a taxable estate, which means that the value of your estate is greater than the estate tax exemption amount. Second, assume that no changes to the present law as it exists concerning gift and estate taxation will be made in the foreseeable future.

If you are married, let us make some further assumptions. Your initial estate planning documents contains provisions which will take advantage, at the first spouse’s death, of whatever amount can pass free of estate taxes to shelter the maximum under that technique. Following the first spouse’s death, your estate planning documents will include, both a Family Trust and a Marital Trust. Remember, that under this plan, there would be no federal estate tax obligations until after the second spouse’s passing, at which time the estate tax obligations would be calculated.

With this as background, what tools might be used to offset or eliminate all or a portion of that potential tax?

Possible Approaches

How can you reduce the impact of the estate tax? There are many tools available, each with its particular benefits and drawbacks. Proper combinations of these tools can save hundreds of thousands, or even millions, of dollars.

Outright Gifting

Just as a federal estate tax applies to transfers of property at death, a federal gift tax applies to transfers of property during life. In 2025, a $13,990,000 Federal lifetime exemption is applicable to the gift tax. To the extent all or a portion of this exemption is used during life, it is not available at death. Currently, Washington State does not have a gift tax.

What are the benefits?

All future income from the gifted asset and all future appreciation of the asset itself is out of the donor’s estate, and instead, pass to the gift recipient. If the assets had not been gifted away, this income and appreciation would have further increased the donor’s estate and increased the base against which future estate tax at his or her death would have been measured.

Annual Exclusion Gifts

One special exemption that applies solely to lifetime gifts and not to estates is the “annual exclusion” from gift tax. For 2025, under the tax code, a donor can give up to $19,000 (indexed for inflation) in each calendar year to as many recipients as desired without these gifts being subject to gift tax. In the case of a husband and wife, a combined $38,000 may be transferred to each recipient. Use of the annual exclusion does not in any way reduce the estate and gift tax exemptions discussed above.

The only gifts the tax code recognizes as eligible for the annual exclusion are “present interests.” That is, the recipient is given the immediate right to the use of the gift. The most common example is an outright gift of cash or property. Many people are reluctant to make outright gifts, as all control is lost and the recipient may use or even lose the gifted asset in ways that were not anticipated by the donor.

Trusts may provide an alternate vehicle for gifting. To make a gift in trust qualify for the annual exclusion requires that the gift recipient be given a power or right that will convert the gift in trust into a qualifying present interest. Usually, this takes the form of a short-term unconditional withdrawal right. Assuming the right is not exercised during the 30 days or so of its existence, the right expires with respect to that gift and the assets remain in trust for the benefit of the recipient.

Over a period of years, if you chose a program of annual exclusion gifts, you could reduce estate taxes exposure significantly.

Tuition and Medical Expense Exclusions

You also may make tuition payments directly to an educational institution for the benefit of any person, without incurring gift tax. Similarly, you may also pay another person's medical expenses directly to the medical care provider without the payments being subject to gift tax. The tuition and medical expense exclusions are not limited to a specific amount. Proper use of these exclusions is in addition to, and does not in any way reduce, the annual exclusion nor the estate and gift tax exemptions.

A Life Insurance Trust with a New “Second-to-die” Life Insurance Policy

This tool combines lifetime action and death planning. For estate tax purposes, all life insurance proceeds on your life from policies in which you hold “incidents of ownership” at your death generally are includible in your estate for estate tax purposes. If your spouse is beneficiary, the proceeds can qualify for the marital deduction, and therefore, would not be subject to estate tax until the second spouse's death.

But in order to exempt life insurance from estate tax altogether, an irrevocable life insurance trust (ILIT) is used. An ILIT is a trust designed to own and be the beneficiary of one or more life insurance policies. You design it, set it up, and then fund it with cash gifts. The trustee applies for life insurance on your life. The trustee from the outset owns the policies. You simply gift funds into the trust. When the insured dies, he or she holds no “incidents of ownership” in the trust’s insurance policies. The trustee collects the insurance proceeds and deals with them under the terms of the trust, which may provide a continuing trust for your children or even grandchildren.

Typically, an ILIT must contain the withdrawal provisions discussed above, to qualify your gifts of cash to the trust for the gift tax annual exclusion. Otherwise, the gifts of money to the trustee are gifts of future interests, and so are taxable gifts, eating away at your lifetime exemption needlessly.

If you and your spouse are considering an ILIT, you do not need to have a separate ILIT for each spouse.  Instead, you would create a joint trust established by both of you, and be designed to hold a “second-to-die” policy on both spouses’ lives. A “second-to-die” policy does not pay until the second spouse’s death, and so is less costly than insuring both lives separately. It provides cash proceeds when the estate tax obligation actually becomes necessary to be dealt with. A new second-to-die policy held in a newly established ILIT offers the additional benefit that the trustee can use the insurance proceeds to assist the executors of the decedent's estate to pay estate taxes or other expenses without the proceeds themselves increasing the tax base of the estate tax. Although the ILIT cannot pay these expenses directly, the trustee nevertheless can lend money to the estate or buy assets from the estate for distribution on a tax-free basis to your children.

Charitable Giving

A donor who makes a lifetime gift to a charitable organization generally receives an income tax deduction for all or a portion of such gift. In addition, generally, such charitable gifts are not subject to gift tax. Charitable gifts may also be made at death (under a trust or will, for example) and typically are eligible for an estate tax charitable deduction.

Many charitable gifts are made outright in the form of direct transfers of cash, securities, or other property. However, in addition to making such outright gifts to charity, a donor may wish to consider more sophisticated forms of charitable giving. Alternatives to consider include the establishment of a private foundation to serve as the clearinghouse for an individual's charitable giving, or the implementation of a special charitable trust (such as a charitable lead trust or charitable remainder trust) which can provide benefits to both selected charities and designated non-charitable beneficiaries.

Charitable Remainder Trusts

You might consider one or more charitable remainder trusts (CRT). The CRT is a “split interest” trust, i.e., the trust offers benefits to two different groups of beneficiaries, one group consisting of one or more selected charities and the other consisting of one or more specified individuals (which may include the individuals who established the trust, or their children or grandchildren).

A CRT offers deferring or avoiding capital gains taxes, reducing income and estate taxes, and providing current income to the donor or the other designated individuals. To implement a CRT, an individual creates a trust and funds that trust with selected assets. The governing trust document provides for a specified income stream to be paid back to the donor or to other specified individuals for a designated term (either for their lifetime or for a selected period of years). At the end of the term, whatever is left in the trust (the “remainder”) passes to one or more designated charitable organizations.

When establishing a CRT, you as donor receive an income tax deduction for a portion of the assets gifted to the trust. The exact amount of the deduction is an actuarial calculation. If the trust’s non-charitable beneficiary is someone other than the donor, there may be a gift tax payable on funding. However, gift tax will not be assessed on the (actuarially calculated) charitable portion of the trust.

A CRT is exempt from payment of federal income tax. The owner of appreciated property may wish to diversify their holdings while avoiding significant capital gains taxes. With a CRT, the trust can sell appreciated property, reinvest the full proceeds in a diversified investment portfolio, and provide the donor with an income stream from this diversified portfolio.

Charitable Lead Trusts

The charitable lead trust (CLT) follows the reverse order of the CRT. It still has two classes of beneficiaries, charitable and non-charitable. But the initial income stream goes to designated charities for a designated term. At the end of that term, the remaining assets pass to designated individual beneficiaries (either outright or in further trust). This technique thus addresses the needs of grantors who wish to benefit charitable organizations for a period of years yet wish for designated individuals to be the ultimate recipients of trust assets.

One benefit for most donors is the fact that the CLT offers a potential opportunity to make future gifts to your intended beneficiaries at a discounted gift tax cost. The gift tax consequence of the CLT is determined at the outset of the trust based upon actuarial rules mandated by the IRS. If the CLT increases in value beyond that projected in the assumptions used in the IRS formula, these ultimate beneficiaries may actually receive far in excess of what was initially projected, with all of the increased performances passing to the designated beneficiaries with no additional gift or estate tax.

If this technique is used in a testamentary plan (in a will or trust), it can generate significant charitable deductions from the estate tax because it will establish a term of payouts to charities, followed by distributions of the assets to the non-charitable (i.e., family) beneficiaries.

Private Foundations

One of the finest tools for philanthropy is the private foundation. Not only does a foundation offer substantial tax and estate planning incentives, but also for many families, it provides a means for sharing important values with members of the younger generation. You can create a foundation and fund it during life; you can use it as a vehicle not only for your own charitable activities, but also for encouragement of your children and even grandchildren, by permitting and encouraging participation by your family members.

While certain rules must be adhered and procedures followed to obtain and preserve the charitable classification of a foundation, you can, in its design and establishment, exercise a high degree of control over the use and disposition of your assets.

And very significant tax benefits are available. All contributions to your private foundation made through your will or trust are 100% deductible from estate tax, and for gifts during your lifetime in general, you may deduct cash contributions to a private foundation up to 30% of your adjusted gross income.

Generation-Skipping Tax Exempt Trust

A generation-skipping tax exempt trust (GST trust) can help ease the estate planning burdens of an entire family by avoiding imposition of multiple layers of estate taxes as assets pass from generation to generation.

In estate planning, it is crucial to consider the impact of inherited wealth on future generations. Most individuals with large estates generally wish to provide generously for their children and grandchildren but face two common concerns with respect to this aspect of their estate planning. First, they face the potential specter of massive estate, gift, and other transfer taxes. Second, they often are concerned that the promise of inherited wealth might erode their beneficiaries’ desire to build their own productive lives and careers. A GST trust can help these clients to address both of these concerns.

On the issue of taxes, it is important to realize that the children of wealthy individuals confronting a large estate tax burden may well face a similar burden in their own estate planning someday. After all, estate taxes historically have been assessed once at each generational level, a tax paid on assets when they pass from parents to children, another tax when those children pass assets to grandchildren, and additional series of taxes as assets pass through the generations. For this reason, many families traditionally sought to “skip” a generation or two of these estate taxes by passing their wealth directly to their grandchildren or great-grandchildren or to trusts that would continue for the benefit of future generations. Since 1986, Congress has restricted this strategy by imposing the Generation Skipping Transfer (GST) tax, which is a separate tax, calculated in addition to any estate or gift tax that may be due. The GST tax rate is 40% in 2025. The tax is assessed whenever a taxable gift or bequest is left directly to a grandchild or more remote descendant, or when a trust terminates in favor of, or makes a distribution to, a grandchild or more remote descendant of the trust grantor.

Fortunately, the GST tax does not apply to every single gift or bequest. The annual exclusion and medical/educational exclusion apply to many (but not all) transfers which otherwise would trigger GST tax. In addition, a limited amount of each individual's assets, currently $13,990,000, is exempted from the GST. Many individuals utilize this exemption to establish a GST trust for the benefit of their children, their grandchildren, and future generations. Such a trust may be established by will or lifetime trust agreement and can be drafted to reflect your specific wishes regarding your selected beneficiaries.

Once assets up to the maximum exempt amount are placed in a properly drafted GST trust, they remain shielded from estate taxes and the GST tax, even if the assets grow by a significant amount before they are distributed several generations later.

Actually, the term “generation skipping” trust is a bit of a misnomer, and clients often mistakenly assume that such a trust cannot provide any benefits to the client’s children (i.e., must “skip” the children). In fact, the children can benefit from such a trust during their lives, with any remaining unused trust assets continuing in trust for future generations at the children's deaths. In essence, all that is “skipped” is the payment of unnecessary taxes.

Establishing a properly drafted and professionally administered GST trust also can help ensure that trust beneficiaries do not lose their incentive to build their own productive lives and careers. As with other trusts, the trustee of a GST trust can be given discretion to control the amount and timing of trust distributions. A skilled trustee will utilize this discretion in a manner that will enhance the lives of trust beneficiaries and their families while still encouraging these beneficiaries to pursue their educations and make valuable contributions to society.

Dynasty Trusts

Generally, the law limits the length a trust can last before it must terminate. A dynasty trust can avoid these traditional limits, protect, and preserve assets for future generations. Traditionally, under a longstanding rule of law known as the "Rule against Perpetuities," a trust cannot last longer than 21 years after the death of all of those individuals who were living at the time of the trust’s creation. In Washington, the Rule against Perpetuities has been simplified to a flat 150 years.

Accordingly, under this general rule, a trust can last for no more than a few generations. Once the maximum period has expired, the trust must terminate and the trust assets must be distributed outright to one or more of the trust beneficiaries. In the case of a trust such as a credit shelter trust or GST trust that had been compounding free of estate taxes, reaching this mandatory termination date ends such tax exempt status. At that time, the trust assets once again become subject to estate and gift taxes in the hands of the individual beneficiaries.

Several states, including Alaska, Delaware, New Jersey, and South Dakota, have eliminated or greatly curtailed the Rule against Perpetuities. In these states, a client can establish a trust that will last virtually forever. Such a perpetual trust often is referred to as a dynasty trust. In most cases, even a non-resident of a given state can avail himself or herself of the opportunity to establish a dynasty trust under that state’s laws, if the governing trust document is properly drafted and all state law requirements are met. In most cases, these requirements make it mandatory for a non-resident donor to select a trustee that is located in the desired state. The list of "dynasty trust" jurisdictions continues to grow as more state legislatures pass these favorable tax laws.

Generally, a dynasty trust is designed to hold assets that are exempt from the GST tax discussed above. Thus, such a trust can serve to protect and grow assets for the use of future generations without the imposition of any estate or GST tax as the trust continues from one such generation to the next. No one can accurately predict what challenges might confront future generations or what future legislative changes might affect dynasty trusts. Accordingly, it is crucial to structure such a trust to give maximum flexibility and discretion to the trustee. In addition, the fact that a dynasty trust is designed to continue well beyond the lifespan of any living person generally makes the selection of a corporate trustee preferable to naming an individual in such capacity.

Grantor Retained Annuity Trust

A grantor retained annuity trust (GRAT) allows a donor to give away trust assets to designated beneficiaries but keep an income stream from the gifted assets for a period of years. If the assets dramatically increase in value during the trust term, this excess appreciation will pass to the designated beneficiaries at a dramatically reduced estate and gift tax cost.

A GRAT is an irrevocable trust to which property is contributed by a grantor. The grantor retains the right to receive a fixed annuity payment from the trust for a specified period of years (typically from 2 to 7 years). At the end of the trust term, any remaining trust property is distributed as the grantor specifies in the governing trust agreement. Generally, this distribution is made either outright to or in further trust for the grantor's children or other family members.

The attractiveness of the GRAT technique results from the manner in which it is treated for federal gift tax purposes. When a GRAT is established, it is subject to federal gift tax. However, tax is not assessed on the full value of the property gifted to the GRAT. Rather, using formulae and assumptions provided by the IRS, the donor calculates the amount that can be expected to remain in the trust at the end of the trust term (after the donor has taken back all of the annual payments to which he or she is entitled). Only this actuarially computed remainder is subjected to gift tax. In most cases, the GRAT is structured so that the actuarial value of the annuity payments (calculated using an IRS assumed rate of interest) is approximately equal to the value of all of the property initially contributed to the trust. In such a GRAT, the projected trust remainder is nearly zero. Such a GRAT often is referred to as a zeroed out” GRAT.

It is important to note that should the donor die during the trust term, the value of the GRAT would be included in the decedent’s taxable estate, which will result in the forfeiture of any tax savings that could have been generated by this technique. However, assuming the rosier scenario under which the grantor survives the GRAT term and the property in the trust appreciates at a rate greater than that reflected in the IRS assumptions (which in recent years often have been in the 6% to 8% range), the excess appreciation will pass to the remaindermen free of gift or estate tax. Accordingly, a GRAT often is employed by clients who own a particular asset they feel is likely to dramatically appreciate in value in a relatively short time (such as stock options in a growth company or equity in a closely held business which might soon make its initial public offering). A GRAT offers these donors an opportunity to allow children or other beneficiaries to enjoy the fruits of superior investment performance while also providing a generous annuity stream back to the donor.

Sale to a Grantor Trust

Aggressive clients considering implementing a GRAT alternatively may wish to consider a sale to a grantor trust, a similar technique offering even more dramatic potential tax savings.

To understand the basis for the sale to a grantor trust, one must know that the rules governing trusts for estate and gift tax purposes are not identical to the rules governing such trusts for income tax purposes. As a result, it is possible for a donor to establish a trust that will remove trust property from his or her taxable estate for gift and estate tax purposes but not for income tax purposes. In such a case, the donor remains responsible for the payment of income taxes on the income generated by trust assets, even though the donor has gifted those assets to an irrevocable trust. Such a trust may be called alternatively either a grantor trust, a defective grantor trust or an intentionally defective grantor trust. In this case, establishing a defective trust is not necessarily a bad thing. Rather, despite the negative connotations of the word “defective,” a defective grantor trust actually may offer several estate planning benefits.

One advantage of a grantor trust is that under current law, a donor is not treated as having made an additional gift when he or she pays income tax on income earned by the trust. This benefits the trust beneficiaries because a trust obviously will increase in value more rapidly if such trust is relieved of the burden of income taxes.

An additional attribute of a grantor trust is that under current law there are no capital gains or other income taxes generated when a donor enters into a purchase or sale transaction with a grantor trust he or she established. This attribute is the foundation for the technique known as a sale to a defective grantor trust. To implement this strategy, a donor sells assets to a grantor trust he or she previously established. In exchange for the transferred property, the trust gives the donor a promissory note in an amount equal to the value of the transferred property, with interest payable at a prescribed IRS rate. If the trust thereafter generates an investment return that exceeds the interest payments the trust must make to the donor, the excess earnings will accumulate in the trust for eventual distribution to trust beneficiaries. No gift or estate taxes will be paid as these assets accumulate.

This technique is similar to a GRAT in that any appreciation in excess of the applicable interest rate is effectively transferred to designated beneficiaries free of tax. An advantage of this technique versus a GRAT is that the applicable interest rate for a promissory note generally is lower than the interest rate used in GRAT gift tax calculations. Additionally, it is not necessary for a grantor to survive the term of the installment note to achieve some estate tax savings from this technique. In contrast, death during the term of a GRAT will result in the forfeiture of all estate tax savings generated by that technique.

Qualified Personal Residence Trust (QPRT)

A qualified personal residence trust (QPRT) provides a means to transfer a residence to selected beneficiaries at a greatly reduced estate and gift tax cost. The QPRT technique applies solely to the gift of an interest in a personal residence (either a client's principal residence or one other residence). When implementing a QPRT, an individual (the grantor) transfers a personal residence into a trust drafted specifically to own such residence. The QPRT runs for a chosen term of years, during which time the grantor receives no income but has the right to rent-free use of the residence owned by the trust. When the selected term expires, the residence can continue in trust for, or pass outright to whomever the grantor has designated as the beneficiary in the trust instrument, known as the remaindermen. Often the remaindermen are children or other family members.

The primary advantage of this technique is that it allows the residence to be transferred to desired beneficiaries at a significantly lower tax cost than an outright gift or bequest. This is because for gift tax purposes, the value of the grantor’s retained right to reside in the residence for the selected term of years is subtracted from the value of the residence. The longer the term of the trust, the greater the value attributed to the grantor’s retained right and hence the lower the value of the gift. However, in order for the property to be kept out of the grantor’s estate, the grantor must survive the selected trust term. Accordingly, it is crucial to carefully consider the proper term of the trust when implementing this technique. To illustrate, if a 69-year-old grantor puts a residence worth $2,000,000 into a 10-year QPRT in a month when the applicable IRS interest rate is 7.4%, he or she is not considered to have made a gift of the full amount in arriving at the amount of gift tax due on the transfer. Rather, the actuarial value of the grantor’s interest in the QPRT is subtracted from the $2,000,000 current value of the residence. Based on the applicable interest rate and treasury life expectancy tables, the gift tax value of the grantor's retained interest in this example is $1,331,600 (approximately 67%) and the gift tax value of the remainder interest is only $668,400 (approximately 33%). Only this $668,400 is subject to federal gift tax (and may be shielded from tax altogether if the grantor previously has not used his or her lifetime exemption from gift tax). When the trust terminates after 10 years, the residence (which, with appreciation, may well be worth in excess of the original $2,000,000) will then pass to the remaindermen free of gift or estate taxes.

For clients who are considering relocating during the trust term, the QPRT still may be a viable technique. The QPRT is permitted to sell the residence (but not to the grantor) during the trust term and either purchase a new residence or retain the sales proceeds. If the sales proceeds are retained, the trust must be converted to a GRAT and the grantor must receive annuity payments in lieu of the right to live in the residence. If the grantor does not wish to relocate even after the chosen term has ended, the grantor can arrange to rent the trust property from the remaindermen at a fair market rental.

Family Limited Partnership (FLP)/LLC

A family limited partnership (FLP) or limited liability company (LLC) provides an efficient means for parents to gift assets to children and/or grandchildren but keep considerable control over the gifted assets. A FLP or LLC can be a useful planning device for maintaining control of family assets, consolidating those assets, and providing a collective family business venture. At the same time, a FLP or LLC can provide a convenient vehicle with which to effectuate lifetime gifts, including annual exclusion gifts, since limited partnership or LLC units can be used for gifts to family members or trusts for their benefit. As discussed below, certain discounts may be available to reduce the value of these transfers for gift tax purposes.

A FLP or LLC is generally a family business entity operating in the form of a partnership. The “business” conducted by this enterprise varies widely from family to family. Some FLPs and LLCs are in the business of running farms, exploring for natural resources, or managing real estate holdings.

A FLP is governed by a written partnership agreement, while an LLC is governed by an operating agreement. In the case of a FLP, this agreement specifies that there are two types of partners in the FLP, general partners and limited partners. The general partners are the active managers of the partnership enterprise and have responsibility for all investment and managerial decisions. In addition, distributions of profits are made to the partners in the discretion of the general partners. In contrast, limited partners essentially have no control over the day-to-day affairs of the partnership entity. Notwithstanding these crucial differences in responsibilities and control, the partners generally are treated equally for distribution purposes. In other words, a limited partner owning 1% of the total partnership will receive essentially the same economic benefits and profit distributions from the partnership as would a general partner owning the same percentage interest in the partnership. The key distinction is that the general partner would control the timing of when such distribution would be made to these two classes of partners.

In most families implementing this technique, one or both parents establish the FLP or LLC, contribute the initial assets to the partnership, and act as the general partner(s) or members. They then give a portion of the partnership/LLC to one or more of their children or other chosen beneficiaries, either outright or in trust, but make these gifts in the form of limited partnership or LLC units rather than general partnership units. This allows these younger beneficiaries to enjoy economic benefits from the partnership, while leaving management and control in the hands of the senior (parents’) generation. The transferred limited partnership interests or LLC interests will not be subject to estate tax in a partner's or member’s estate on his or her death even though that general partner or member has maintained management control over the FLP or LLC.

For gift tax purposes, a FLP or LLC often provides an added benefit in that certain discounts reduce the value of gifted limited partnership or LLC interests below the proportionate value of the underlying assets. Specifically, since a limited partner or minority LLC member cannot exert any control over the FLP or LLC entity, respectively, the gift tax value of limited partnership or LLC interests given to that partner generally will reflect a discount for this “lack of control.” In addition, professional appraisers generally apply a further “marketability discount” to reflect the fact that there is not a ready market available for a FLP or LLC interest. These combined discounts can reduce the value of the gifted limited partnership or LLC interests significantly. In some recent court cases, discounts in excess of 40% have been approved. In such a case, for example, a gift of a 10% limited partnership interest in a FLP owning $10,000,000 worth of farmland might be valued for gift tax purposes at $600,000 rather than $1,000,000. As such, these discounts provide a means to effectively increase the amount of assets that can be transferred utilizing the use of the annual exclusion and the lifetime gift tax exemption, i.e., a means to “leverage” these exemptions.

Family limited partnerships and limited liability companies remain a highly useful and popular estate planning technique. Nevertheless, clients considering establishing a FLP or LLC should be aware of a few areas of concern. First, it is crucial to keep in mind that only a professional appraiser who is familiar with applicable state law and has studied the governing partnership agreement can render a useful valuation of partnership units for gift tax purposes. Second, notwithstanding some notable successes enjoyed by taxpayers in recent court cases, the IRS continues to routinely challenge valuation discounts taken on FLP and LLC interests, especially where the FLP or LLC consists solely or largely of marketable securities. Accordingly, a gift of FLP or LLC units may trigger a gift tax audit.

Conclusion

As you can see, there are a myriad of tools available to maximize the benefits to you and your descendants and favored charities and defer or reduce estate taxes. The proper choices to be made depend upon you and your wishes and desires. We look forward to assisting you to determine what you would most like to accomplish with your wealth, and to implement the proper tools to carry out those intentions.

Reach out to our team—we’re here to guide you every step of the way. Contact us at 425-440-3494 or office@dlolawgroup.com.