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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7543
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Here's a scenario to consider, the question(s) follow(s): -

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Here's a scenario to consider, the question(s) follow(s):- A husband and a wife form a Family LLC to be used as a vehicle to pass wealth to their descendants in anticipation of an estate tax liability. At the time of formation the estate tax was 675000.- Their real estate properties were then contributed to the LLC- Over the years, they gift a percentage of shares in the LLC to various decendents.- The couple passes away.At this time of their passing, the LLC still exists. Only, at the time of death, the value of the properties held by the family LLC does not exceed the current estate tax exemption amount. So the family would have been better off had they not formed the family LLC. Because now, if the LLC sells property at any type of gain, they will have to pay capital gains tax, correct?How can the family cash out without having to pay capital gains tax? What would be their options? How could they minimize their exposure in a case like this?

Hello, my name is***** goal is to give you a complete & accurate answer. I am working on your request now & I will respond as soon as possible.

*.............thanks for asking for me.

This has become a common problem these days; someone devised an estate plan for these people but didn't update it as time went by and the estate tax - unified credit changed several times. In fact, since the gift & estate tax were basically combined, the original "plan" may not have been appropriate anyway, depending upon the value of all of the properties, the nature of the properties and the amounts transferred.

For example, if the owners occupied a personal residence that was included in their real estate LLC and were counting on the Annual Gift Tax Exclusion for their lifetime transfers, it's unlikely that the real estate transfers were effective in terms of the annual exclusion as that exclusion only applies to a present interest as I'm sure you know.

Given that, the original plan was probably flawed as the lifetime gifts of interests in real estate would have used up portions of the unified credit as they made these gifts.

Did the original owners transfer all of their ownership interest in the LLC prior to their death?

Did they actually transfer the shares of the LLC to their relatives?

Did they file Gift Tax Returns on Form 709?

One thing that I've seen done in similar situations is that when the owners don't give up possession of the real property (in the case of their residence for example), there is actually no completed gift because they haven't given up possession of the property.

Basically, and I have no idea if this could apply to your situation, there was actually no completed gift and the LLC holding the real property is actually still owned by the original owners. Again, the facts and circumstances would have to support such a finding.

If there was commercial property involved, what kind of tax returns were filed, who received the rent, etc. Often, these "transfers" are made of the shares but the owners retain the rent report the rental activity on their own tax return, etc. Again, these facts would support that there was actually no completed gift.

Steve G.

There's really no way out of this unfortunate situation.

Customer: replied 6 months ago.
Q: Did the original owners transfer all of their ownership interest in the LLC prior to their death?
A: No, among the two of them they retained the lion's share.Q: Did they actually transfer the shares of the LLC to their relatives? Yes, through amendments to the LLC Operating agreement. The individuals involved (recipients of the gifts) received K1 forms each year.Q: Did they file Gift Tax Returns on Form 709?
A: I imagine so, but I have to look into that and find out.Will follow up with more info later.

If they retained the "Lion's Share", then there may not be that big of a problem as their LLC shares would be adjusted to their fair market value at their respective dates of death which would be based upon the value of the real property at those dates times their percentage interests in the LLC ownership.

Further, if the Surviving Spouse received the decedent's (first to die) interest in the LLC, then the decedent's interest held by the Surviving Spouse would also be adjusted to the fair market value of the shares at the Surviving Spouse's date of death.

Steve G.

Customer: replied 6 months ago.
Question: are these QA threads here private or public?

They are public, but there is no disclosure of customer names or personal information. In fact when a customer discloses such information, we normally ask the SITE to suppress it. Of course we can't control what is written before it appears here, so some personal information listed by a customer may be public for some time before it is discovered and suppressed.

Steve G.

Customer: replied 6 months ago.
But if you call me by my name in one of your responses, that then becomes public, right?

In your case you used your name when you set up the account as it is disclosed in the information at the top of the page. However, it is just your first name that is listed above which is why I used it as a salutation in my initial response. It shows up this way:

"* has 1 open request."

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