• Whenever you make a gift, during life or at death, it is subject to federal gift or estate taxes. Exceptions: 

     •• You can give, during life or at death, an unlimited amount of assets to your U.S. citizen spouse or qualified charities without paying a gift or estate tax. 

     •• You can pay an unlimited amount of any person’s qualified tuition or qualified medical expenses directly to the educational institution or medical provider, without paying a gift tax. 

     •• Every year you can gift a certain amount of assets per donee, without paying a federal gift tax. This is known as the “annual exclusion.” The annual exclusion is indexed for inflation (in $1,000 increments) and is $12,000 in 2006. Any gift to a non-spouse, non-charitable donee in excess of the annual exclusion (and that does not qualify for the tuition or medical expense exclusions) is a “taxable gift.” 

     •• You have a $1 million exemption from the federal gift tax. In other words, you can make up to $1 million worth of taxable gifts during life without paying a gift tax. 

     •• You also have an exemption from the federal estate tax at death. In other words, you can leave a certain amount of assets to non-spouse, non-charitable beneficiaries. For decedents dying in 2006, 2007 and 2008, the exemption is $2 million, and in 2009 it will increase to $3.5 million. The federal estate tax exemption is reduced by the amount of gift tax exemption you have used during life. In other words, if you have made $1 million worth of taxable gifts during life, you can leave only $1,000,000 to non-spouse, non-charitable beneficiaries at death if you die in 2006.

• In 2006, the top marginal federal gift and estate tax bracket is 46%. It is reached as soon as the cumulative value of all lifetime taxable gifts exceeds $2 million or, at death, as soon as the cumulative value of all lifetime taxable gifts plus the value of the estate exceeds $2 million. The top bracket will be reduced to 45% in 2007.

• The value of an asset for federal gift and estate tax purposes is its “fair market value,” defined generally as the price at which a hypothetical willing seller and a hypothetical willing buyer would settle upon, assuming each had relevant information and neither was under a compulsion to sell or buy. 

     •• Accordingly, an asset such as fractional interest in real estate will not be valued for gift and estate tax purposes at its pro rata share of the whole. In other words, the value of an undivided 10% interest in a $100,000 parcel of real estate is not $10,000. An undivided interest is, among other things, not readily marketable, so the buyer is not likely to be willing to pay $10,000. The difference between the fair market value of the interest and the interest’s pro rata share of the entire value is known as a fractional interest discount, and it can range anywhere from 10% to perhaps as much as 35%. For example, if the discount is 20%, then an undivided 10% interest might be valued at $8,000 for federal gift and estate tax purposes. 

     •• Similarly, an asset such as a 10% membership interest in an LLC that owns a $100,000 parcel of real estate is likely to be valued at something less than $10,000 if the member cannot unilaterally withdraw from the LLC and receive $10,000 for his or her interest. The interest is unmarketable and illiquid and the member, as a minority owner, has no ability to control the management of the LLC. Discounts for such LLC interests can range anywhere from 10% to as much as 60%. So if the discount is 30%, then a 10% membership interest in such an LLC might be valued at $7,000 for federal gift and estate tax purposes.

     ••  Valuation discounts should be arrived at and supported by an appraisal by a qualified appraiser.

• If someone gives you an asset as a gift, you acquire the donor’s cost basis in the asset. If you inherit an asset from someone, you acquire a cost basis equal to the asset’s value on the date of the donor’s death.