If you're a business owner who wants to save on estate taxes, you might want to take a page from presidential candidate Donald Trump's playbook.
This month, the Trump International Hotel in Washington, D.C., kicked off a "soft opening," checking in its first guests.
The luxury facility is located in the Old Post Office Pavilion, a federal building that has undergone a $200 million makeover. The Trump Organization signed a 60-year lease in 2013 with the General Services Administration, allowing the firm to renovate and manage the building.
The lessee of the building, listed as "Trump Old Post Office LLC" is owned by a Delaware-registered group of limited liability companies, according to the lease document. DJT Holdings LLC holds a 76.725 percent membership interest in the company, and has made an equity contribution of more than $2.3 million, according to the lease. Members are considered owners of LLCs for tax purposes.
The lease document sheds light on an estate-planning technique the 70-year-old Trump appears to have used. Essentially, by giving the children an interest in the hotel now, Trump's estate would save a bundle on future taxes when the hotel stake presumably will be worth much more.
LLC Ownership
Here's how it works:
Three other LLCs also have membership interests in the company that's leasing the building, according to the document. They are Ivanka OPO LLC, Don OPO LLC and Eric OPO LLC. These three entities each hold a 7.425 percent interest, and all are listed as making zero equity contributions, according to the document.
The Ivanka Trump Revocable Trust is listed as the sole owner of the Ivanka OPO LLC. The owners of the Don OPO LLC and Eric OPO LLC could not be determined, though presumably these entities are also owned or controlled by Donald Jr. and Eric, two other of Donald Trump's five children.
"This is the typical estate plan, where you have a senior generation that wants the junior generation involved in an activity," said Stephen J. Bigge, partner with Keebler & Associates, a tax advisory firm in Green Bay, Wisconsin.
Because the children's LLCs appear to have no equity interest in the deal, according to the document, their stakes are considered gifts for estate planning purposes, attorneys say.
Taxable gifts
When it comes to gift taxes, the donor is responsible for picking up the tab. In 2016, you can give up to $14,000 per recipient free of taxes ($28,000 if you are making this gift with your spouse). Over your lifetime, you can make gifts up to $5.45 million free of taxes.
In Trump's case, if the value of the ownership interests given to the children exceeds his gift exclusion, he will likely have to pay some tax on the gift. A gift tax return would provide some clarity on how the majority LLC valued the smaller stakes. Trump to date has declined to release his tax returns.
But here's where smart planning kicks in: If the hotel is successful, the stakes in the deal will become much more valuable over time.
By gifting an interest in the hotel to his children now, Trump is paying taxes in the present — rather than having his estate pay a 40 percent levy to the federal government in the future when the hotel's value has likely appreciated.
"If this hotel is successful, it could be worth a great deal of money," said Bruce D. Steiner, who is of counsel at Kleinberg, Kaplan, Wolff & Cohen in New York City. "Trump gets nearly a quarter of it out of his estate."
Details of the Trump entity that's holding the lease came to light this summer in a previously redacted lease document, available here. BuzzFeed News originally revealed some details in this document via the Freedom of Information Act.
"Don Jr., Ivanka and Eric are and have been, and continue to be, actively involved in the development and management of the hotel," a spokeswoman for the Trump Organization wrote in an email. "Consistent with standard real estate industry practice, Don Jr., Ivanka and Eric each received a profits interest in the hotel partnership for their services."
Smaller scale
You don't have to be a real estate mogul to structure a deal like this one.
Estate planning attorneys say they use similar arrangements for entrepreneurs who want to keep their children active in the business.
Why an LLC? These entities offer some degree of personal liability and asset protection to the members.
Limited liability firms can also ease the succession process. Let's say you are the sole proprietor of an auto parts business. With an LLC, you can gift units of the business to your child over time, and then eventually hand over the controlling units.
"LLCs have a general partner and limited partners," said Bigge of Keebler & Associates. "The parent holds on to the general interest — which has all of the control — until the child is ready to take control of the company."
If you choose to go this route, don't go it alone.
"You should meet with an attorney or an accountant to help structure this transaction," said Bigge. "For the most part, you'll need a bona fide reason for organizing this entity."