Bobby’s Blog

Real Estate Developers May Be Able to Avoid Gift Taxes When Passing On Developer Units

In February 2016, two Central Park condos owned by then-candidate Donald Trump had an estimated market value of $790,000 and $800,000. In April 2016, Trump sold these condos to his son, Eric Trump, for pennies on the dollar ($350,000 each, to be exact).

For most people, this family-friendly sweetheart deal would typically incur hundreds of thousands of dollars in gift taxes. Not so for Donald Trump. Why? Because he was a real estate developer.

A real estate owner who sells a piece of property for less than it’s estimated worth typically has to pay gift tax on the difference between the sale price and the true market value, according to MSN.com. Any personal gifts worth more than $14,000 in a given year are subject to a federal tax that could be as high as 40 percent. However, in Trump’s case, since he the building’s developer selling the condos for the first time, he enjoyed a level of flexibility within the law to determine the estimated value of the condos.

Other taxes paid on the transaction indicate gift taxes were not paid by Trump. He reportedly paid a total of $13,000 in city and state transfer taxes, according to New York City property records. Those transfer taxes, according to a spokeswoman for the city’s Department of Finance, are not usually paid when “bona fide gifts” are involved. Furthermore, when a home sale is reported as a gift, buyers and sellers typically disclose that the sale is taking place between two relatives in the transfer records. The Trumps did not have such an indication.

The condo sales were disclosed in President Trump’s 2017 federal financial disclosure, which was released by the U.S. Office of Government Ethics. The buyers of the two condos were listed as two limited liability companies that were managed by Eric Trump.

This transaction likely means that Eric Trump will probably be able to sell the condos later on at a much higher price.

Strategies for Avoiding Unnecessary Gift Taxes

Obviously, unless you are a real estate developer, the gift tax avoidance strategy described above probably will not apply to you. However, there are other strategies you could potentially utilized under the tax code. For example, under current IRS regulations, if you make a gift in excess of $14,000, you must file a Form 709 to report the gift and pay tax on the amount above $14,000.  The gift tax threshold for married couples is $28,000 per donee.

Here are some strategies that you could consider in making a gift in excess of the exemption amount without being subject to gift taxation:

  • Pay someone’s medical expenses. Just make sure the payments are made directly to a third party medical institution or physician. The gift can’t be given to the donee directly or else it’s subject to the exemption limit.
  • Paying someone’s college tuition. Like with the medical expenses, make sure the payments are made directly to a third party educational institution. If the payments go directly to the student, you fall in the gift tax zone.
  • Make a gift to a qualified charitable organization formed under IRC 501(c)(3). This has a double benefit in that the contribution is tax deductible and is exempt from the gift tax limitation.

To learn more, sit down with an experienced trust and estate planning attorney in your area.

How to Properly Establish a Living Trust

One of the best estate planning tools you can utilize is a living trust. Establishing a trust allows your loved ones to avoid lengthy and complicated probate and may save your family money in administrative expenses and taxes. So how do you set up a living trust? The requirements of a trust to be considered legally valid include:

  • You need to have the intent to create a trust. This is a fairly simple requirement to meet by stating your intent in the trust document.
  • You need to have the testamentary capacity to create a trust. This means you need to have the mental capability to create and sign the trust document.
  • Your trust must have a specific, legitimate purpose (e.g., for management of assets in your estate plan).
  • The trust must convey some form of property. This means you cannot simply create a trust and it be barren. Future interests in property are acceptable, but they must be in existence at the time you created the trust. Speculative property, such as future earnings from a non-existent business, is not valid.
  • You must name a trustee. This is the person in charge of holding the trust and transferring trust assets to a beneficiary, or beneficiaries.
  • Relatedly, you must name a beneficiary. This is the person, or individuals, who will receive the trust assets.
  • Sign the trust document in front of a notary public.
  • Some states also require that witnesses are present to see you sign the trust document.

Generally, living trusts take one of two forms – revocable and irrevocable. You, in consultation with your estate planning attorney, can decide what form the living trust will take at the time of creating and signing the trust document.

Here is a video where Bobby discusses some of the basics of a trust:

A Trust is Only One Component of an Estate Plan

Establishing a trust is a wise estate planning strategy, but it is not the end-all-be-all of your estate plan. You also need to have a legally valid Last Will and Testament, a Durable Power of Attorney, proper beneficiary designations for your IRAs, pensions, and other savings accounts, a list designating beneficiaries for family heirlooms and items with intangible value to you and your loved ones, and so on and so forth. This is why it makes sense to speak to an estate planning attorney to ensure you have a fully developed estate plan that is updated annually.

Is a Trust Permanent After It is Created?

A revocable trust can be terminated by you (the trustor) at any time and you can repossess the property that was transferred to the trust. Terminating an irrevocable trust is more complicated but it is possible if the trust has been drafted properly and the attorney understands the nuances. Both types of trusts avoid probate and estate tax protection if assets are properly titled in or to the trust (we see this as the biggest flaw in most of the trusts we review), but only irrevocable living trusts provides asset protection for you during your lifetime (if maintained properly).

Is My Living Trust Enforceable Across the Country?

Yes. Living trusts created in Virginia, Maryland, or D.C. are enforceable in any state. Similarly, a living trust created under another state’s laws is likewise enforceable in the DMV.

Other Benefits of Establishing a Trust

Living trusts offer an array of benefits including the ability to share property ownership with multiple family members and loved ones, the aforementioned potential to minimize estate taxes and the protection of your assets from creditors. This protects your property from potential legal seizure and sale.

A trust also empowers you to specifically explain how you want the trust to distribute money and property to each beneficiary and include stipulations on those distributions. For example, if you have a minor child, you can include provisions on when they can access their inheritance and a yearly or quarterly amount they can receive as well as protect the assets from divorce and other creditors.

Speak to an Experienced Trust and Estates Lawyer

Establishing a legally valid trust can get complicated, especially if you have a large estate with properties in different states and a large family of potential beneficiaries. This is why it makes sense to sit down and speak to an experienced estate planning attorney in your area.

As Insight Law, we can help both establish your trust and represent the personal representative or trustee through the administration process when that service is needed.

Contact our office today to schedule a meeting.

Passing On Your Lessons in a Metaphorical Message in a Bottle

Randy Pausch was an accomplished academic who taught computer science at both the University of Virginia and Carnegie Melon University. He became known across the country after giving a heart-wrenching “last lecture” to students at Carnegie Melon making him a Lou-Gehrig-like symbol of the beauty and briefness of life, according to the New York Times.

Professors at Carnegie Melon are sometimes asked to give lectures on what wisdom they would impart if they knew it was their last chance. Hence, the title, “last lecture.” Dr. Pausch accepted that challenge after learning he had only a few months left to live.

Dr. Paush’s advice to attendees of his “last lecture” was simple and clear – have fun and approach life with childlike wonder.

Here is a condensed version of his lecture that he presented on Oprah Winfrey’s show:

Metaphorical Message in a Bottle

Dr. Pausch also spoke of the immense love he had his wife and had a birthday cake for her wheeled on stage during his lecture. He also spoke glowingly about his three young children saying he

made a decision to speak to them mostly through video memory. Dr. Pausch described this as putting himself in a metaphorical bottle that his children might someday discover on a beach.

You Too Can Pass Your Wisdom and Advice on to the Next Generation

At Insight Law, we want to ensure your legacy is preserved and passed on to your children, grandchildren, and other loved ones. The real wealth in life is the living declaration of who we are as a unique human being. The experiences we’ve had in life; the trials, tribulations, and accomplishments. That is why Insight Law offers clients the ability to partake in “Priceless Conversations.” This service provides a structure for you to share your memories, accomplishments, and your meaning of life. We capture and preserve these conversations as a permanent legacy for you to pass on to the next generation. We can record your Priceless Conversations by audio or video and provide you with copies to share with family and friends.

To learn more, contact our office today.