Many farmers have created limited partnerships or limited liability companies (LLC) to hold their farmland. As part of this process, gifts are made to children and grandchildren for estate planning purposes. For 2012, each person can give $13,000 (most likely rising to $14,000 in 2013) to as many people as they want and not have this gift counted toward their lifetime gift exemption amount (currently $5.12 million). However, in order for this annual gift annual exclusion to count, the gift must be of a present interest, not a future interest.
A present interest is "An unrestricted right to immediate use, possession, or enjoyment of property or the income from the property". A gift of cash, stock, land, etc. is a present interest.
A future interest is a more technical term related to some delay in the donee being able to use the gift. For example, if the donor retains the use of the property for ten years and then it transfers to the donee, this is considered a future interest and the donor would not be able to use their annual exclusion amount.
In a recent case of the Estate of George Wimmer, the Tax Court decided in the favor of the taxpayer regarding the gifts of limited partnership interests. The key rulings of the case deciding the gifts to be present interests were:
- The partnership would generate income (it owned dividend paying stocks),
- Some portion of that income would flow steadily to the limited partners (the partnership had a history of distributing income to its partners), and
- The portion flowing to the limited partners could be readily ascertained (since the investments were in dividend paying stocks, they could readily determine the amount of income generated)
In applying this case to our farm clients, it is very important that any gifts of limited partnership or LLC interests be structured to meet all three tests. If the farmland is being rented on a cash basis and there is a history of making at least annual distributions, then you should be able to use your annual gift tax exclusion. However, if income is very sporadic and there is a history of no payments to limited partners (i.e. the general partners take all of the income to live on), then you are at a much greater risk of losing the annual exclusion and may have other tax consequences as well.