Optimal Gifting Strategies for Tax Purposes

Gifting Strategies for Property to Be Valued Later

If you plan on gifting property before the year’s end and determine its value later, there are several strategies that are important to know. The following will explain all the processes that are involved in gifting property that will be valued later. First there is a formula that works in terms of valuing a gift. Additionally, addressed below is an explanation of how to gift cash that is later used to purchase property after appraisal and then lastly, listed below is the how-to for making a gift by promissory note that is paid with property after it is appraised.

Taxpayers often make gifts at the end of the year to use their gift tax annual exclusions and applicable exclusion amounts. However, it is best for to gift property that is likely to appreciate in value, rather than gifting cash. But how does one establish a value that will not be challenged for gift and estate tax purposes. It is generally done by having professional appraise the property prior to the gift. But in cases where it is not possible to do an appraisal in time—which often happens with harder to value gifts like real estate, or jewelry—there are winning strategies that you can apply.

Here are three effective gifting strategies to gift now and value the property later:

Gifting by Formula

When making a gift of hard-to-value property, some taxpayers have tried to incorporate a savings clause that would adjust a gift’s value to whatever was assessed by a court or the IRS. This is typically unsuccessful. Basically, with this strategy any excess gift would be returned to the donor. Savings clauses were successfully challenged in court by the IRS and determined to be ineffective for restricting gift values until the end.

So in the case of hard-to-value gifts, two basic types of value clauses were developed in lieu of the ineffective savings clause. The first is formula allocation and the second is formula transfer.

A formula allocation clause allocates an asset’s value among various taxable and non-taxable donees, such as an irrevocable trust and a charity.

An example: a donor gifts 1,000 shares of closely held stock so that $5M of stock goes to irrevocable trust for donor’s children with the remaining balance allocated to a preferred charity. The allocation formula is approved by courts but many taxpayers do not like it because of the administrative complexity and charitable component.

Thus, here is another option…

A formula transfer clause allocates the number of units needed to represent a specific dollar amount. However because of a challenge by the IRS and eventual litigation, although it is approved, there are precedents that would allow the IRS to challenge the use of a formula transfer clause.


Gifting Cash Followed by Purchase

This method is used for a donor who wishes to make a cash gift to a grantor trust, and later, when the property has been appraised, the trustee can then use the cash to buy the property from the donor for its fair market value. As long as the trust is a grantor trust, neither the trust nor the donor will recognize income on the sale.