Discussion:Basis of Gift
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Discussion Forum Index --> Tax Questions --> Basis of Gift
| 15 June 2006 | |
| Normally, a gift's basis is the basis in the hands of the person making the gift. Assume that a FLP was set up with a portfolio of marketable securities with a FMV of 10 million. Also assume that periodically a valuation is done to support a discount to be applied to future gifts of partnership units to other partners / family members. What would be reported (in the year of the gift) on Form 709 as the basis of a future gift in the amount of 1 million? | |
| 15 June 2006 | |
| Assuming that the FLP meets the business purpose test, there are discounts available for liquidity and marketability that can hit the 30-40% range. Present value calculation on the discounted value would depend on how far out the gift was targeted and an internal rate of return based on Federal AFR. | |
Michaelstar (talk|edits) said: | 15 June 2006 |
| Tscpa - I agree fully with the answer that Dennis provided but do have something to add. Based on your assumptions - we are talking big bucks here. Your client can afford to get this correct and they should pay to have this done correctly. I have been receiving material for a number of years (and have been to seminars as well) from a company called FMV Options, Inc. The managing director's name is Lance Hall - 949-759-4499. They are based out of Irvine, CA. This is what they do for a living - providing value for FLP and the like. $10 million for a FLP will raise issues.
This site is not intended (my humble opinion only) to provide you with an answer on this topic to take and run with - but it should provide you with good direction. You may have another company that has their articles published time after time in national publications as well where you live that can also provide you assistance with this. Do your client a favor - get this valuation done by someone who does this for a living. It will be well worth your clients money and they will appreciate your value in protecting their gift. | |
| 15 June 2006 | |
| Thanks guys, but you are missing the point of the question. The question is in regards to the basis in the hands of the recipient, not the amount of discount, or the valuation of the FMV of the gift. That was done by a reputable valuation firm. What will the "basis" be in the hands of the recipient of the gift? | |
| 15 June 2006 | |
| The future interest discount is wasting. Liquidity and marketability stick. | |
| 15 June 2006 | |
| Doesn't the gift have to be a present interest to qualify for gift exemption. I don't think that a future interest in an FLP qualifies for gift exclusion. | |
| 15 June 2006 | |
| You are correct about the "present interest" aspect. Sorry to mislead you with that wording. What I meant was for gifts, regardless of when they are made, now or in the future. How should their "basis", or "adjusted basis" be computed? | |
| 15 June 2006 | |
| The valuation for donor and donee would be the same, however basis is likely to be determined in court. | |
| 15 June 2006 | |
| I don't think that the basis issue is as complicated as you are making it (unless I'm missing something which has happened more often than I'd like to admit). The basis in the hands of the gift recipient are the same as the basis in the hands of the giver. The discount affects the current value and the actual amount of the gift but it doesn't affect the basis. If you have a FLP with $10 million in assets and a 30% discount then the giver could gift a 1/7 interest to equal the $1 million gift amount. The basis to the recipient would be 1/7 of the giver's total basis in the FLP. | |
| 15 June 2006 | |
| Basis for gift is fair market value, basis for donee gain is donor's basis, basis for donee loss is lower of fmv or donor's basis. Discounts are not a slam dunk. I've seen the cases involving FLP's with only investment management as business purpose and this stuff is by no means settled law. | |
| 16 June 2006 | |
| Hi Warren you were almost there. Correct the discount has nothing to do with the basis. If in warren's case you give $1M real FMV (then take discount 30 or 40% for gift tax purposes) you have given away a 10% partnership interest(assuming total fmv of $10M). Your basis is 10% (not 1/7th) of the donors basis ignoring the loss issue. bye edit note warren upon reading you again if you give away a 1/7 partnership interest basis would be 1/7th to donee. | |
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