Maximizing Your Inheritance Value

Transferring, gifting or leaving sizable cash assets to family members as part of an estate plan could be subject to significant taxes. But, transferring real estate investments of equal value could bring significant discounts.

For real estate investments where the investor transfers less than 50 percent of the asset, the lack of control or voting rights can be taken into account when determining the value for tax purposes, leading to discounts on the ultimate value—hence, lower taxes.

 When evaluating potential asset transfers, therefore, it’s essential to talk to an accounting professional steeped in estate tax law to determine the best assets to transfer, the potential tax liability and the possibilities for discounts greater than what you might have otherwise expected to pay.

“Let’s say you have a situation where a building is valued at $10 million and the client owned 45 percent and wanted to give that away,” says Robert Gilman, a partner and real estate practice co-chair at the accounting firm Anchin, Block & Anchin LLP.

“They have a minority interest, so they don’t really have control over the building, and they can’t sell it when they want to sell it. Therefore, their interest is really worth less, which can result in a potential discount of approximately 25 percent, or possibly 35 percent.”

Even if an individual owns 100 percent of a property, they are entitled to a discount if they give less than a 50 percent interest to any one individual. Let’s say an owner has three children. If the owner gives each child 33 percent yet retains a 1 percent full voting interest, each 33 percent interest is eligible for a discount as minority interests with no voting rights.

The first step in determining the tax liability and potential discount is to have the asset in question appraised. Then, you’ll need an accountant to wade through the complexities of IRS Section 2704, which determines the nature and potential valuation of the discounts you may be entitled to.

“There are a lot of factors that go into it,” Gilman says. “You can have somebody who owns 40 percent of an asset, yet they have voting rights greater than the other people. There’s no set amount. We work with appraisers to pursue the highest discounts for which our clients are eligible.”

Gifting real estate is just one potential strategy for handling a sizable portfolio. When considering inheritance planning, it’s best to tackle that sooner rather than later, which means talking with your accountant about how your beneficiaries will handle the potential tax burden you’ll be leaving them.

“If you own real estate and your descendants will have to come up with estate taxes, where’s that cash coming from? This is a question anyone with sizable real estate assets has to deal with starting now,” Gilman says. “You don’t want to have to have a fire sale of assets. That’s why it’s very important to address this early in the planning process.”

If you have real estate you know will generate sizable taxes for your beneficiaries over time, you want to start having these conversations with your accountant now, rather than putting them off. The earlier you plan, the better prepared they will be for the tax onslaught to come.

“With values constantly increasing in real estate, we may address certain key questions annually with clients,” Gilman says, “including the current value of their portfolio, potential estate tax and the plan in place to pay the expected tax liability.”