Dear Michael: We've had some recent mineral activity and we don't know whether anything will come of it. We've also helped our son get started in farming. Year's back, some land came up for sale that he needed but he couldn't get the financing. We'd like to sell it to him for what we paid for it, but now the land has doubled and tripled in value. How do we have our son pay what we paid for the land? We know we can gift $13,000/year and that's not going to cover the difference between FMV and the price we want to charge. We'd also like to set up a trust or a Limited Liability Partnership to handle the minerals – which I assume would entail further gifting? Any suggestions? – Tis the Season
Dear Tis: It 'Tis the Season' for gifting, in many more ways than just stocking stuffers and presents for everyone.
The reason? Because in 2011, the Unified Tax Credit and the Lifetime Gifting Amount were reunified and will stay at five million dollars per person or ten million dollars per couple until January 1st of 2013.
Many people believe they are limited to the annual exclusion of $13,000/donor/donee and that's where they stop. However, the rules on 'excess gifts' – or gifts given over this mark per year – has been greatly expanded. You may gift $13,000 per year to as many people as you like, but the excess gift has no consequence other than it is deducted from your Unified Credit estate tax at death.
In 2001, the lifetime gift amount was at $1,000,000/person and stayed that way throughout the decade following – even as the Unified Tax Credit amount rose every two years from $1,000,000 to an unlimited amount in 2010. Meanwhile, the lifetime gift amount remained at $1,000,000 until this year. In December of last year, the estate tax credit and the lifetime gift amount were reunified at $5,000,000/person and $10,000,000 per couple.
The new law also changed the Unified Credit to include 'portability' – meaning in layman's terms if one spouse died and left all of their property to their spouse and nothing to other heirs, the spouse also inherited the remainder credit of the decedent spouse – or, again in layman's terms – the survivor could now pass up to $10,000,000 of property estate tax free upon his or her death. This solves the problem of 'splitting estates' so that each decedent spouse got full credit for estate taxes as we've done over the past thirty years.
The problem is many people have yet to change their wills and still have their share of the property going to a trust or to children, etc. reflecting outdated estate planning methods. You'd hate to see all of your property go to such a trust leaving your spouse dependant on trust income rather than being able to make decisions on his or her own view of the world beyond the death of the first to die.
In any case, for minerals or for any other type of gifting – such as selling land lower than fair market value, here is your easy calculation. Take the FMV of the gift less the $13,000/donee and this is the 'excess gift'. This gift is then reported to IRS on a very simple tax form which states what the value of the gift was, the $13,000 deductions, and IRS makes a note that they need to deduct this when you die.
By filing these with IRS, they have two years to disagree with your valuation of the asset in question. If they say it's more, you may have to deduct more from your Unified Credit upon death. If they don't respond within two years, then the value you stated stands. In thirty some years of estate planning, I've never seen IRS disagree with a valuation on gifts given – but don't count that they won't if you use a ridiculously low number.
When we are setting up mineral trusts, mineral LLP's, land transfers, life estates – all of these different estate planning methods normally require a gift of some value.
With land, an estimate will do and, as I said before, IRS has two years to dispute the value. As long as you're in the ballpark, we shouldn't worry about it. But if they do change it there's no penalty – just a change in the value.
With minerals, however, you need to get a certified appraisal as IRS is watching this whole oil thing very, very, VERY (did I say very?) closely. Your estimate won't do – nor will the amount you are paid in leases for the minerals.
To answer your question, Tis the Season, now is a wonderful time to take advantage of the new tax laws and truly is the 'season' for giving. Sell your land to your son for whatever you want, report the difference between FMV and sales price as a gift (which you know comes off your ten million at death), and get your minerals appraised so we know what the true value of this gift is going to be when you set up either an LLP or a trust.
Last but not least, I want to thank the hundred or so people who attended my seminars last week in Dickinson, Killdeer and Sidney as well as the wonderful people who let me stay in their homes during my travels. Merry Christmas to one and all.