Tax-Efficient Ways To Transfer Property
Consider establishing joint ownership. Jointly owned property with rights of survivorship is another simple way to transfer property to a partner. Joint ownership of assets can be tricky for estate planning. Adding a partner to the title of the asset may be a gift for federal tax purposes, and yet the full value of the property will be included in the estate of the first to die unless the survivor can prove his or her percentage of contribution. On the other hand, estate inclusion has a silver lining in the form of a step-up in basis to fair market value. This can prove to be a boon to the surviving partner when the asset is sold.

Note that the establishment of a bank or brokerage account in joint names does not normally constitute a gift until the donee withdraws money. On the other hand, reregistering a house or stock in joint names is an immediate and perhaps taxable gift.

Gifting through trusts. Gifts between nontraditional partners are limited to a federal annual gift tax exclusion of $12,000 a year (2008). Gifts over $12,000 will reduce the donor's $1 million lifetime exclusion. If the couple is more than 37½ years apart in age, the generation-skipping transfer tax (GSTT) is an issue. The GSTT is a flat rate equal to the maximum estate tax rate (45% in 2008) and is imposed in addition to any other taxes due.

For the high-net-worth couple, the key is to maximize both the annual and lifetime exclusions through discounting. While the IRS scrutinizes any attempt to take discounts for gifts made to family members, these rules do not apply to nontraditional couples. Thus, grantor retained trusts (GRTs), split-interest gifts, limited partnerships, and other estate freeze techniques are all available. These techniques can also help overcome the biggest impediment to making gifts, that is, the loss of an asset that is generating income for the donor.

If property is retained until income is no longer needed, the value of the asset may be substantially greater. Delaying the gift only aggravates the tax problem. Instead, the property owner can give away the asset while retaining the right to the income. This is similar to selling land but retaining the oil rights. The value of the land is reduced by the value of the oil rights. With estate freeze techniques, the value of the gift is established immediately and is reduced by the present value of any interest retained by the donor.

There are two popular types of GRTs: the grantor retained interest trust (GRIT), which pays all income to the grantor, and the grantor retained annuity trust (GRAT), which limits the income to an amount established at the time the trust is created. In both cases, the wealthier partner retains the right to the trust's income for a term of years. If he or she survives the term, the trust's assets are removed from his or her estate. The gift tax value is reduced by the present value of the anticipated income. After the term ends, the other partner receives the trust's income or is transferred the asset outright.

A GRT that holds a residence is called a qualified personal residence trust (QPRT). A QPRT allows the donor to live in the house until the end of the term and to rent it thereafter from the ultimate beneficiary, the other partner. Like the GRT, the gift to the other partner is reduced by the economic value of occupying the residence during the term. Or the grantor can purchase the house back before the end of the term with cash. The house comes back into the estate and receives a step-up in basis at death while the couple was able to shift a sizable amount of cash in trust.

Family limited partnerships and limited liability companies are ways to jointly own property without giving up complete control, and, if set up correctly, the gift can be discounted for lack of marketability and control. The donor, as general partner, makes all management decisions, while the limited partner can receive income from the business entity. Though this type of entity does not have to be a business in the usual sense of the word, it is recommended that it has a "business purpose" in order to be recognized by the IRS. Merging the couple's investment portfolios to get economies of scale and central management may be a suitable business purpose.

Setting up a life estate. Like traditional couples in a second marriage, couples with children from another relationship are often torn between sharing a home with their partner and preserving the family estate for their children. This can be solved with a life estate, which is a type of split-interest bequest. For example, a homeowner can give a partner the right to live in the home for life; at the partner's death, the house reverts to the ultimate beneficiaries.

Charitable remainder and charitable lead trusts. For the couple without children or close family, one partner can create a life estate for the other while at the same time making a charitable bequest. While most charitable remainder trusts (CRT) are established during life in order to defer income taxes on a highly appreciated asset, CRTs can also be created at death to provide a means of support for the surviving partner. Only the present value of the beneficiary's income stream is included in the deceased's estate. The donor's estate is credited the difference as a charitable estate tax deduction.