August 5-August 18, 2015 —
COLORADO REAL ESTATE JOURNAL
— Page 19
Law & Accounting
M
uch has been said
about how the cur-
rent status of the
estate tax law has made estate
planning unnecessary (other
than some basic adjustments
to take full advantage of the
current rules) for most taxpay-
ers, largely due to the ability to
avoid estate tax if asset values
are below $11 million or so
(half of that for unmarried per-
sons). However, the large valu-
ations and generally persistent
appreciation associated with
real estate often make develop-
ers and active investors in real
estate the exception. Further-
more, if real estate is the family
business, succession planning
and preserving core assets for
future generations is key.
I don’t have room here for a
complete discussion of estate
tax planning, but I would like
to share some select techniques
that work particularly well
with real estate assets. If you
are interested in making life-
time transfers to the next gen-
eration (which is not always
the right answer), here are
some points to consider:
• Significant discounts to
market value can be obtained
by transferring partial inter-
ests (directly or via partner-
ship interests) in real estate.
That is, a transfer of a 10 per-
cent interest in a partnership
worth $10 million is not valued
at $1 million, but rather at a
lower amount (after reflect-
ing the impact of minority/
marketability [or other] dis-
counts). This is the basis for
the classic family partnership,
and by consistently doling
out gifted interests to the next
generations, significant value
can not only be removed from
the estate, but also the future
asset appreciation is removed
as well. Gift tax impact can
also be minimized by taking
advantage of the annual gift
tax exclusion.
• An often-overlooked
method to shift asset value to
future generations is for the
older generation to never take
ownership in the asset at all.
That is, let the older generation
provide their skill and exper-
tise in real estate projects for a
fee, but have the ownership in
the investment vest to the next
generations.
• Another
ove r l ooked
concept
is
that most of
the apprecia-
tion in real
estate resides
with
the
land, not the
built assets.
A
transfer
of the land
underneath
a building to
the next gen-
eration (via a
discounted gift as discussed
above or an installment sale –
note payments can be funded
via ground lease payments) can
provide many advantages. For
instance, if sold for a gain, the
seller could offset that gain by
using any available suspended
passive losses. Also, you can
avoid some of the issues with
related party transfers since the
land is not a depreciable asset
(also means there is no depreci-
ation recapture associated with
the sale). Of course, advance
planning for this technique is
required to arrange an accom-
modation with the mortgage
lender to allow the transfer,
which is often available within
controlled groups.
Transferring assets at dis-
counts to value and freezing
the appreciation (in rough
terms, you are saving half of
the future appreciation by
avoiding estate tax on it) are
powerful tools and worth
considering if they are right
for a particular asset. Further,
income tax savings can result
by shifting the income from the
transferred asset to taxpayers
in a lower tax bracket.
Another feature of the estate
tax rules is that an asset passing
through an estate benefits by a
step up in basis to the value at
the date of death – that is, an
asset sold immediately by the
heirs would have no gain (and
hence, no income tax). A life-
time gift of an asset, while sub-
ject to gift tax, does not receive
this benefit, so the recipient
still bears the full income tax
impact upon sale. Therefore,
an asset that has substantially
appreciated and/or has been
fully depreciated, particularly
if it has been aggressively lev-
eraged to fund distributions
to owners, may not be suit-
able for a lifetime transfer. In
fact, many real estate owners
who are loathe to sell an asset,
since the after-tax proceeds
may not even cover the debt,
plan instead to hold the asset
into their estate to obtain the
step up.
The best thing a real estate
owner-investor can do before
talking to their tax adviser
(something that is critical in
this area – you can really shoot
yourself in the foot in this area
if you don’t do things right) is
to sort out your assets by the
asset characteristics and place
within the organization. That
is, are they high-value, low-
basis assets or the other way
around? Does the asset have
high appreciation potential
relative to current value? Is
the asset a legacy asset that is
desirable or necessary to con-
tinue the family business, or
perhaps a family retreat that
will be used by future gen-
erations? Armed with this
information, your adviser can
develop an efficient estate plan
that fits comfortably with your
business and family plans.
s
Zane Dennis
Tax partner and real
estate practice leader,
Richey May & Co.,
Englewood
An often-
overlooked method
to shift asset
value to future
generations is for
the older generation
to never take
ownership in the
asset at all. That
is, let the older
generation provide
their skill and
expertise in real
estate projects for
a fee, but have the
ownership in the
investment vest to
the next generations.
