If clients are undecided about whether to gift at the end of the year or the start of the new year, advisors may want to consider doing transactions in both years.
This is the time of year when clients should be making their Section 2503(b) or “annual exclusion” gifts, if they have not done so already.
A donor can use this exclusion to gift an amount ($14,000 per donee in both 2013 and 2014) to as many donees as the donor wishes in any given year. Many clients make these gifts in January, believing that it is better to gift sooner rather than later so the gift can start appreciating as soon as possible.
Other clients wait until the last minute and make their annual exclusion gifts in December. However, when those annual gifts utilize assets that require valuation by an independent appraiser because there is no readily available market price or have values that can be discounted, possibly because of lack of control or marketability, it may make more sense to use a December/January strategy.
If a client gifts to his or her child on or about December 31 and then gifts to that child again on January 1 or shortly thereafter, the $14,000 annual exclusion could apply to both gifts. If any appraisal report is commissioned for these gifts, the client can save time and money with this two-month strategy. The same valuation report can be used for both gifts, assuming the value of the assets transferred does not vary from the December transfer date to the January transfer date—a good assumption for many assets.
By using one valuation report that covers both the 2013 and the 2014 transfers made a day or so apart, rather than two reports, the client saves on the appraiser’s fees and also can save on the attorney’s fees associated with reviewing the appraiser’s work and the time spent on the gifting transactions (assuming it is more efficient to work on two transactions that take place a day apart).
If the transaction calls for multiple layers of appraisals—for example, a transfer of interests in a family limited liability company (FLLC) that holds real estate, private equity interests or other assets without a readily available valuation—the time and cost savings can be significant. Rather than having to obtain two appraisals of the underlying assets of the FLLC and two entity-level appraisals, the client can use one appraisal for the underlying assets and one appraisal to quantify the discount.
Particularly with annual exclusion gifts that are relatively limited in size, these savings can determine whether nor not a client proceeds with a gift transaction. Advisors should recommend this efficiency to clients where appropriate.
Jay E. Rivlin and Christiana M. Lazo are partners in the private client department of McDermott Will & Emery LLP.