Using Business Entities to Make Asset Gifts or Sales

You can use business entities to make asset gifts or sales.   While it’s true there are pitfalls business owners face when they violate asset gifting rules, adherence to the “bona fide sale” rule, a test used by the IRS and the courts to determine whether a “real, actual, or genuine” sale has taken place, will keep you out of trouble and able to gift assets at the same time.  

In short, here are some of the problems that can arise if you violate asset gifting or asset sale rules:  

1.     Gifts that don’t qualify for the IRS gift tax exclusion and create a large tax liability;  

2.     Invalid gifts that return to the donor’s estate and create estate tax problems;  

3.     Asset sales that fail the “bona fide sale” test and go back into your taxable estate;   

4.     Asset gifts or sales that leave the original owner with unlimited liability for the asset.  

One recent gift tax court case, which has already become “a classic,” demonstrates the problem with encumbering gifts. In Hackl vs. Commissioner of Internal Revenue, Albert Hackl created an LLC and put about $12 million in assets into it. He and his wife then began transferring LLC ownership interests to their family members on an annual basis. The Hackls called these transfers gifts and sought to use the gift tax exclusion.

The IRS audited the Hackls and disallowed all their gift tax exclusions. In court, the IRS pointed out that Albert Hackl had structured his LLC so he retained a very high degree of control over it. Namely:

1.      Albert served for life as manager, or until resignation, removal, or incapacity;

2.      Albert had the power to appoint his own successor and also to dissolve the company;

3.      Albert controlled any financial distributions, and the children needed his approval to withdraw from the LLC or sell their membership units;

4.      If any family members transferred his or her membership units without Albert’s consent, the LLC rights of the recipient would be severely curtailed.

Albert had so encumbered his gifts that they became “future interests” – his family couldn’t really sell, use, or enjoy the assets as they saw fit until after he died. The gift tax penalty to the Hackls was about $400,000. Bulletproof Veil can evaluate your planned or completed asset sale to see if you have any problems, and resolve any that may exist. Visit the BulletproofVeil.com website, or simply call 1-888-716-3180 for a free, 15-minute consultation.