Clients should be making their Section 2503(b) or “annual exclusion” gifts, if they have not done so already.
A donor can use the 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 of each year, adhering to the concept that it is always better to gift “sooner rather than later” so the gift can start appreciating as soon as possible in the recipient’s hands. Other clients wait until the last minute and make their annual exclusion gifts in December of each year. However, when those annual gifts utilize assets that require valuation by an independent appraiser (e.g., because there is no readily available market price) and/or have values that can be discounted (e.g., for lack of control or lack of marketability), it may make more sense to employ a “December/January” strategy.
If a client gifts to his or her child on or about December 31, 2013, and then gifts to that child again on January 1, 2014, 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 December/January strategy. The same valuation report can be used for both gifts, assuming the value of the asset(s) 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 (one in 2013 and one in 2014, because the timing between the two gifts does not lend itself to utilizing one report), the client saves on the appraiser’s fees, and also can save on the attorney’s fees associated with reviewing the appraiser’s work product and the time spent effectuating the gifting transactions (assuming it is more efficient to work on two transactions a day apart, rather than two transactions further apart in time).
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 asset(s) of the FLLC (one in 2013 and then one again later in 2014) and two entity-level appraisals to quantify the discount for lack of control/minority interest and lack of marketability associated with the FLLC interests being transferred, the client can use one appraisal for the underlying assets(s) and one appraisal to quantify the discount.
Particularly in the context of annual exclusion gifts that are relatively limited in size, these savings can mean the difference between a client proceeding with a gift transaction or not. 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.
