Estate and Elder Law

Outright Gifting of Property Interests

From the donor's perspective, the simplest alternative for transferring a family home to children and grandchildren is to make outright gifts of real property interests. In this Analysis, Nancy G. Henderson discusses gifting with the annual exclusion, issues with gift tax, a relevant perspective of tenancy-in-common agreements, and continued use of the property. She writes:

     (1)  Outright Gifting with the Annual Exclusion. With the possible exceptions of certain vacation timeshares and campground memberships, it is unlikely that there are many family properties that could be entirely transferred to children in a single round of gifts using the gift tax annual exclusion. However, gifts of fractional interests in real property are, in most cases, gifts of present interests in property that qualify for the gift tax annual exclusion. Further, such fractional interest transfers should be discounted for gift tax valuation purposes by some reasonable factor that takes into account the lack of marketability and lack of control inherent to co-ownership of real property as tenants-in-common.

     The annual exclusion is indexed for the effects of inflation, presently allowing a donor to give up to $13,000 in cash or property to any individual donee during any calendar year free of gift tax. The annual exclusion can be effectively doubled if the donor's spouse participates in the gifting program, either because the donor's spouse is a co-owner of the property or because the donor's spouse agrees to gift splitting. It is therefore possible to make incremental annual gifts of interests in a family home to children, grandchildren or others which, over time, can result in the complete transfer of the property without gift tax.

     There are many disadvantages to this strategy, however. First, annual gifting of interests in real property generally requires a reappraisal of the property before each round of gifts to maximize the benefits of the exclusion without exceeding it. Such appraisals can be expensive, particularly if they involve the determination of the appropriate fractional interest discount, which typically must be done by a business interest appraiser or an expert in the valuation of Tenancy in Common interests. Another disadvantage of gifting direct real property interests in small annual increments is that, over time, title to the property can become complicated, and it may be difficult after several years of fractional interest transfers to calculate the interests acquired by each donee as compared to the donor's remaining interest in the property.

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