Special Valuations For Intrafamily Transfers, Gift Taxes and Lifetime Transfers

Saturday, December 26th, 2009 at 1:44 am

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Valuations on gifts when talking about intra-family transfer’s can be extremely difficult to prove satisfactorily to the government, especially when they involve a closely held business. There are four specific sections concerned with how to value intra-family transfers within the gift and estate tax codes. Those sections are 2701, 2702, 2703 and 2704.

Section 2701 applies to transfers relating to corporate or partnership interests when there is no established market for such interest.

Section 2702 applies to transfers in trust or term of interests. It’s good to remember that Term interests include any interest that will last only for a specified amount of time or a lifetime.

Section 2703 applies to restrictions on the right to acquire, use or sell property at less than fair market value or in a buy-sell agreement among business partners.

Section 2704 applies to liquidation issues.

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Sections 2701 and 2702 of the IRS code are the passages to pay attention to for help in determining just how to valuate lifetime transfers. The question becomes what makes this type of activity legal (so you don’t go to the pokey Al Capone style). When doing these transfers there are really three situations that must exist for the intrafamily transfer to be legitimate:

The transfer must be a gratuitous one, which is any transfer of property other than at fair market value.

Ownership interest in what is given away must be retained by the donor or a member of the donor’s family.

Donor and donee must be related. (I am not sure if kissing cousins count)

The rules of Sections 2701 and 2702 cannot be used if the transfer involves a sale, a transaction between strangers, or the transfer of the donor’s (and/or all applicable family members’) entire interest in the asset.

When the donor gives only a part of his interest in the asset, you have to subtract the value of what the donor has retained from what he owned prior to the transfer. The IRS under certain situations can rule this method, which is called the subtraction method, valuates the property at a zero valuation. If they do this you will have to pay gift taxes on the entire value of what was owner prior to the transaction.

Make no mistake about it, the government pays very close attention to these types of transfers because of the valuation games some taxpayers have played and the penalties can be high if you don’t value these gifts the right way. I suggest that you seek professional advise before attempting to do this.

Click Here For Secrets Of Winning The Estate Tax Game

Other Posts In This Series are:

War On Wealth – A Primer (Introduction)
The Accidental Philanthropist; but Uncle Sam! How Many Times Can You Tax The Same @#$% dollar?
How Not To Turn $20 Into A $75,000 Disaster
Maximizing The “Bank Of You Concept”; Setting Up Your Own Private Bank
Life Insurance As An Estate Planning Tool
Private Retirement Plans Vs. Employer Sponsored Retirement Plan Options
Special Valuations For Intra-Family Transfers, Gift Taxes And Lifetime Transfers
Why You Should Start A Personal Business?
Advantages And Disadvantages Of Investing In Annuities
How Owning Real Estate Can Help Me Save Taxes
How To Reduce Your Real Estate Taxes
Annuities, How They Work And Their Tax Advantages
The Three Proactive Strategies Of Asset Protection