Question: My wife and I own four pieces of residential real estate. We have four children and would like to give each of them one of these properties. Is there some way we can make annual gifts of these at the rate of $20,000 per year?
Answer: Yes. The strategy, among the hottest new estate-planning techniques these days, involves forming a family limited partnership with your children and granting to them every year through the partnership an interest in the property.
But instead of granting your children an interest worth just $20,000 each year, estate planners note that you can justify a slightly larger gift.
Why? Because you are not giving the child the property directly. Instead, you are giving him a minority interest in the family limited partnership equal to a certain value in the real estate.
Estate planners, accountants and the like argue that a minority interest in a partnership, because of its secondary status, is inherently less valuable than it would be if it were a majority share. Hence, you can discount its value, and effectively give a greater percentage of the real estate as your $20,000 annual gift. This strategy will accelerate the rate at which you give the properties to your children.
However, our experts warn that your strategy gives your children your tax basis in the homes, meaning that when they sell the properties they face potentially large tax consequences. The trade-off is that these gifts remove these properties from your estate, avoiding potential estate taxes. This strategy makes the most sense if your estate is large.
However, if your estate is worth less than the $600,000 exemption granted on estate taxes, you might want to consider holding on to the properties and leaving them to your heirs upon your death.
A qualified estate planning expert, familiar with your circumstances, can guide you.
Q: In a recent column you said a home purchased in a foreigcountry would qualify as a replacement house for the purposes of deferring the recognition of a gain on the sale of a home. Does this apply to exchanges of investment property as well?
A: No. Exchanges of investment properties under Section 1031 of the Internal Revenue Code must be made completely within the United States.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest.
Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.