3. Gifting

Question 1

lifetime gifting strategy

Answer 1

gratuitous transfer of assets for less than full and adequate consideration:
Tax reduction objectives:
-shift income tax liability to donee in lower income tax bracket
-leverage asset transfers to donee without application of gift tax
-gift can be made with actual sale, exchange, or transfer of property canminimize tax and take full advantage of tax deductions
Nontax benefits:
-experience donee enjoying gifted property
-observe gift being utilized
-provide donor joy of gifting

Question 2

Gifts

Answer 2

-sale, exchange, or other transfer of property for less than full and adequate consideration (sum paid for acquiring asset)
-outright transfer of gifts
-forgiveness of debt
-foregone interest on intra-family interest-free/below-market loan
-assignment of benefits of an insurance policy
-transfer of property to trust

Cancellation of a debt.
Gifts of checks or notes to third parties.
Exchanges of royalty rights for less than full consideration.
Transfers of partnership interests.

Question 3

Use of gifting

Answer 3

-If the donor owns asset w/ substantial amount of appreciation potential: If properly gifted during the donor’s lifetime, appreciation will avoid inclusion in the donor’s gross estate. Gifting this type of asset allows the donor to control the amount of estate tax liability that may be due upon death.

-see the donee use the gift during the donor’s lifetime.
- reduce probate costs and estate administration expense.
- easier to qualify for (other than closely-held stock, to which all of the following Internal Revenue Code (IRC) Sections apply):
- IRC Section 303 redemption of stock,
- IRC Section 6166 installment payout of taxes attributable to a closely held business interest, or
- IRC Section 2032A special use valuation for certain real property used for farming or closely-held business purposes.
- married estate owner wishes to equalize the estate of both spouses, enabling each spouse to own sufficient assets with which to fully utilize their respective estate tax exclusion amounts: under current federal law, an unlimited amount of assets may be gifted to a U.S. citizen spouse and not be subject to federal gift tax liability, but should consider state gift tax liability
- gifting an income-producing asset to donee in lower income to reduce income tax liability.

Question 4

Gifting requirements

Answer 4

-intend to make gift
-delivered to and accepted by donee

Question 5

Community property state issues

Answer 5

-One spouse can’t make a gift of community property without written consent of o/ spouse
-Needs to keep income from separate properties separate, otherwise commingled funds may result in gift tax
-If one spouse gives his/her interest to the other, marital deduction is available for entire amount of the gift

Question 6

Tax implications

Answer 6

-Removal of future appreciation from donor’s estate, income tax shifting and reducing estate tax liability

Question 7

A gift for the purpose of the gift tax is a transfer of assets from a donor to a donee, without adequate consideration of money or money’s worth. It can thus include:

Answer 7

Forgiveness of a debt, foregone interest on an intra-family interest-free or below market loan, the assignment of the benefits of an insurance policy or the transfer of property to a trust.

Question 8

The reasons for gifting are either to save tax or to see the donee benefit by the gift. Giving away assets more than three years prior to death, other than closely held stock will make it easier to qualify for:

Answer 8

an IRC Section 303 redemption of stock, an IRC Section 6166 installment payout of taxes attributable to a closely held business interest, and an IRC Section 2032A special use valuation for certain real property used for farming or closely held business purposes.

Question 9

Gift tax

Answer 9

Discourage taxpayers from making inter vivos (lifetime) transfers and to compensate gov’t for loss of estate and income tax revenues

Excise tax levied on right of individual to transfer money/property to another, based on progressive tax scale from 15-40% based on cumulative gifts from 1932-present

Question 10

Scope of gift

Answer 10

all gratuitous transfers- may be direct, indirect, outright, in trusts, subject to gift tax even if donee unknown on date of transfer and can’t be ascertained

Question 11

Lifetime gift advantages

Answer 11

Tax benefits:
-federal estate tax savings
-income tax shifting

Non-tax advantages
-privacy
-reduction of probate and admin costs
-financial well being of donee

Question 12

Unified Estate and Gift Tax Systems

Answer 12

Transfer Tax System is cumulative and progressive; therefore the value of taxable gifts made during the lifetime will increase the estate tax rate imposed on transfers of property made after death.

$12,920,000 (2023) is known as the exemption equivalent amount.

Unlimited marital and charitable deductions are used to offset lifetime gifts and estate taxes, therefore unified credits will not be reduced when gifts and/or bequests are made to spouses and charities.

Question 13

Inter Vivos Gifts Exclusions

Answer 13

Annual exclusions are available for lifetime gifts but are not available for bequests from a decedent’s estate. Gifts > $17,000 are taxable gifts, but donor’s unified credit offsets tax on taxable gifts

Question 14

Adjusted taxable gift

Answer 14

value-annual exclusion at time of gift, appreciation is not factored

Question 15

Valuation of gift

Answer 15

Value of Property Received – Consideration Received = Gift

Question 16

Intent

Answer 16

• donor legally competent to give
  -donee legally competent to accept
• clear intention of donor to irrevocably, give up control over gift property

Question 17

Money’s worth defined

Answer 17

To be exempt from gift tax, the value given must equal value received

Question 18

Sufficiency of Consideration Test

Answer 18

To be exempt from the tax, the consideration received by the transferor must be equal in value to the property transferred.

Question 19

Non-beneficial consideration

Answer 19

Consideration is not in money/money’s worth if it doesn’t benefit the transferor

Question 20

Consideration in Marital Rights

Answer 20

Does the relinquishment of MARITAL / SUPPORT rights constitute consideration in money or money’s worth?

Transfers of property/property interests made under written settlement agreement are deemed adequate consideration if final decree of divorce within 2 years

Question 21

Transfers Pursuant to Compromises

Answer 21

Compromise transfers are not considered taxable gifts because they are deemed to be made for adequate and full consideration.

Question 22

If a mother and a daughter are in litigation and the daughter is claiming a large sum of money, the compromise payment would be considered which of the following?

Answer 22

A compromise payment by the mother to the daughter is not a gift. However, in an interfamily situation in which the court is not convinced that a bona fide arms’ length adversary proceeding was present, the gift tax will be imposed.

Question 23

Direct gifts

Answer 23

cash or tangible personal property:

-delivery of property effectuates gift
-corporate stock- when endorsed certificates are delivered
-real property
-PV of right to royalties
- forgiveness of debt if nonbusiness

Question 24

Indirect gifts

Answer 24

payment of someone else’s expenses, such as when a parent makes payments on an adult son’s car or pays premiums on a life insurance policy his wife owns on his life.s
-shifting of property rights
–transfers by and to corporations

Double danger in corporate gifts, may be taxable as dividend to stockholders and stockholder made gift to recipient of transfe

Question 25

Life Insurance Indirect gift

Answer 25

• purchase of policy for another’s benefit
  -assignment of existing policy
  -payment of premiums

Must
-name beneficiary other than own estate
- retains no reversionary interest in self/estate
-make beneficiary designation irrevocable

Gift is measurable by replacement cost/interpolated terminal reserve + unearned premium at date of gift

Tax trap if parties are different, eg if wife owns policy on husband who dies and proceeds go to children/beneficiaries deemed as gift

Question 26

Assuming that the gift is complete, it can be subject to gift tax, if the donee is

Answer 26

an individual, partnership, corporation, foundation, trust or even unknown person

Question 27

Assuming that the donor was competent to make a gift, the donee was capable of accepting the gift, and there was a clear intention on the part of the donor to divest himself or herself of dominion and control over the gift property, what are the other requisites in gifting

Answer 27

An irrevocable transfer of the present legal title to the donee must be made so that the donor no longer has dominion and control over the property in question.
The donor must make a complete delivery to the donee of the subject matter of the gift or the most effective way to command dominion and control of the gift.
Acceptance of the gift by the donee.

Question 28

Property transferred that don’t involve gift tax

Answer 28

-property/interest in property that has not transferred
-certain transfers in ordinary course of business
-sham gifts

Question 28

Gratuitous services rendered

Answer 28

does not constitute transfer of property/interest in property; however if executor performs services of economic benefit to beneficiaries, which is considered income and waives the fee withing 6 months of appointment, considered as indirect gift and possibly taxable gift

Question 29

Does the right to use property such as money at no charge constitute a gift of property?

Answer 29

Yes. Interest-free and below-market-rate loans are treated as taxable gifts. A gift tax is imposed on the value of the right to use the borrowed money based on the rate of interest that the money could be expected to earn in a given situation.

Question 29

Qualified Disclaimers (Renunciations)

Answer 29

If donee disclaims/renounces gift and it goes to someone else, then qualified disclaimer is treated as if property went from original transferor to person who receives it- Requirements:
-refusal or rejection of the benefits must be in writing.
- writing must be received by the transferor/ legal representative/holder of the legal title to the property no later than 9 months after the later of:
the date on which the transfer creating the interest is made, or
the date the person disclaiming reaches age 21.
The person disclaiming must not have accepted the property interest or any benefits of the property.
-someone other than the disclaimant receives the disclaimed property interest. The person making the disclaimer cannot in any way influence the potential recipient of the property.

Question 30

Compensation for Personal Services

Answer 30

-May be considered taxable income if ordinary business transaction: sale/exchange/o/transfer of property that is a transaction that’s bona fide/at arm’s length/free from donative intent
=adequate and full consideration in money/money’s worth

Question 31

Bad bargain

Answer 31

sale, exchange, or other property transfer made in the ordinary course of business is treated as if it were made in return for adequate and full consideration in money or money’s worth, assuming transaction:
Bonafide,
At arm’s length, and
Not donative in intent.

Question 32

Sham gifts

Answer 32

if the transfer has no real economic significance other than the hoped-for tax savings, it will be disregarded for tax purposes.

Question 33

Assignment of Income

Answer 33

income earned cannot be assigned to another simply to gain tax-favored treatment

Question 34

Exempt Gifts

Answer 34

a qualified disclaimer
a contribution to a political organization
certain transfers of property between spouses in divorce and separation situations
tuition paid directly to an educational institution for the education or training of an individual
This exemption exists regardless of the amount paid or the relationship of the parties. This means parents, grandparents, or even friends can pay private school or college tuition for an individual without fear of incurring a gift tax
qualifying medical payments made directly to the provider
Any donor can pay for the medical care of a donee without making a gift, as long as such medical care is not covered by insurance. This allows children or other relatives or friends to pay the medical expenses of needy individuals or anyone else without worrying about incurring a gift tax.

Question 35

Is the assignment of the right to next year’s rent from a building to a son taxable as a gift?

Answer 35

Yes, Assignment of income creates a situation where gift tax law might also recognize the transfer of a property right, and the present value of a donor’s future income could be subject to the gift tax.

Question 36

Completed transfer

Answer 36

A transfer is complete if the donor no longer has any power or control over the asset/irrevocably parted with dominion and control over the gift.
Requirements:

Question 37

When is a gift not complete?

Answer 37

• donor had power to change the disposition of the gift and thus alter
  the identity of the donee(s) or amount of the gift.
• donor can either alone or in conjunction with another party revoke the gift.

Question 38

causa mortis

Answer 38

gift in anticipation of imminent death - gift is considered incomplete when donor is alive, included in gross estate but avoids probate as a will substitute

Question 39

Examples of incomplete delivery

Answer 39

• when donor give personal check/note- not complete until paid/accepted by recipient
  -causa mortis gift while donor is still alive
  -creation of joint bank/brokerage account - gift not complete until donee withdraw funds
  -real estate not complete until deed is executed

Question 40

Cancellation of Notes

Answer 40

-simple means of giving gifts to several donees of property not readily divisible
- by forgiving over a number of years, can maximize $17,000 annual exclusion

Question 41

Incomplete Gifts in Trust

Answer 41

If donor transfers property into a trust but retains the right to revoke the transfer, considered incomplete

Question 42

Valuation date of property

Answer 42

Property is valued for gift tax purposes on date of completion, no alternate valuation allowed

Question 43

Indebtedness

Answer 43

If the donee’s assumption of liability exceeds the donor’s basis in the property, the excess is treated as income for the donor.

To qualify for an annual exclusion gift (a gift that is not subject to gift tax), the transfer of the asset must be a “present interest” transfer. In other words, the recipient (donee) should have immediate access to and control over the gifted property.

Question 44

Restrictions

Answer 44

Restrictions on donee’s use/ability to dispose property has persuasive/depressing effect on price

Question 45

Blockage Rule

Answer 45

The marketability and value of a massive number of shares of stock may have a lower value than the current per share market value of the same stock

Question 46

Computing the Gift Tax (Base)

Answer 46

FMV of the property transferred minus the annual exclusion minus any allowable deductions (marital or charitable).

Question 47

Gift splitting

Answer 47

applies to lifetime transfers, present and future interest gifts- all gifts made during calendar year must be split. must me married and US citizen/resident

Question 48

unlimited gift tax marital deduction

Answer 48

enable spouses to be treated as an economic unit by not taxing property that is transferred between the spouses

Question 49

terminable interest property

Answer 49

Exception to marital deduction if spouse gives terminable interest property where:
- donee-spouse’s interest in the transferred property will terminate upon the lapse of time or at the occurrence or failure of a specified contingency,
-Where the donee-spouse’s interest will then pass to another person who received his interest in the property from the donor-spouse, and
-That person did not pay the donor full and adequate consideration for that interest

Question 50

Requirements if donor spouse gives spouse qualifying income interest for life

Answer 50

-surviving spouse must be entitled to all income from property and must be payable at least annually
-no one has power to appoint any property to anyone other than surviving spouse
-property must be taxable at donee spouse’s death
-surviving spouse has right to convert trust corpus to income producing property

Question 51

Charitable Deduction

Answer 51

The gift tax deduction is allowed for all gifts made during the calendar year by U.S. citizens or residents if the gift is to a qualified charity.

Question 52

Qualified charity per section 170(c)

Answer 52

-Residing in the U.S., a state, territory or any political subdivision or the District of Columbia if the gift is to be used exclusively for public purposes.
- church, synagogue, or other religious organization;
- war veterans’ organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions;
- nonprofit volunteer fire company;
- civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services);
- domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes;
- nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.
- community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals

Question 53

Calculating Gift Tax Payable

Answer 53

Annual exclusion of lesser of actual net value or $17,000pp

Question 54

When must Form 709 be filed

Answer 54

-If spouses agree to split a gift of $40,000 then each spouse has made a gift of $20,000. That results in a taxable gift of $3,000 for each spouse ($20,000 gift minus the individual annual exclusion amount of $17,000). Each spouse would need to file Form 709 to report they have made a taxable gift of $3,000.

-If spouses agree to split a gift of $20,000 then only one spouse must file Form 709. The other spouse must indicate their consent to split the gift on the same form. The reason for using only one Form 709 in this instance is that the split gift of $10,000 for each spouse is less than the $17,000 annual exclusion amount, so the gift is not taxable to either spouse. Consider that if the $20,000 gift were not split, then one spouse would have a taxable gift of $3,000 to report.

-If spouses agree to split a gift of $10,000 then neither spouse must file Form 709 because the gift is already less than the annual exclusion amount and is not taxable.

Question 55

Determining Unified Credit

Question 56

Future interest

Answer 56

gift tax return is required for a gift of a future interest regardless of the amount of the gift

Future interest gift is one where the donee does not have the unrestricted right to the immediate use, possession or enjoyment of the property or the income from the property

Question 57

Present Interest

Answer 57

a return must be filed when a gift to one person in one year exceeds $17,000, even if no gift tax would be due (e.g., a gift splitting provision eliminated the tax).

Question 58

Gift to Charities

Answer 58

-Must be reported if non charitable gift over $17k was made
-checks to charities need not be cashed before the end of the year to count as a deductible gift.
- if an individual establishes a charitable remainder trust with payments to his daughter for life and the remainder payable to charity at her death, a gift tax return must be filed.

Question 59

donee’s gift tax

Answer 59

donor’s tentative tax ÷ (1 + donor’s gift tax rate)

Question 60

When can extension be made to pay gift tax?

Answer 60

the party liable to pay the tax will suffer a substantial financial loss, eg forced sale

Question 61

Cost Basis of Gifts

Answer 61

-If FMV>donor’s adjusted basis, then use donor’s basis
- If FMV<donor’s adjusted basis, and sold at/<FMV, then donor’s basis and holding period will be FMV on date of transfer
-If FMV<adjusted basis and property sold for gain, then use donor’s basis and holding period
-If sold in between, then no loss/gain
-Holding period for inherited property subsequently sold is LTCG
- When property with mortgage is gifted, only net amount is subject to gift tax
-when selling to family at a bargain, the difference between sale price and FMV is considered gift, and the difference between cost basis and price sold is taxable gain

Question 62

New Basis once gift tax is paid

Answer 62

• If FMV>donor’s basis, then gift tax is included in donee’s new basis
• If FMV<donor’s basis, the gift tax adjustment is not made to donee’s basis
  Donee’s Basis = {[Appreciation ÷ (FMV - Exclusions - Deductions)] x Gift Tax Paid} + Donor’s Basis

Question 63

In the current year, David makes a total gift of $1,000,000, of which $25,000 is a gift to a war veteran’s association that is a qualified charitable organization. The remainder he divides equally among his daughters. What is the amount of his gift tax charitable deduction?

Answer 63

25,000

Question 64

gratuitous transfers that are gift tax exempt

Answer 64

-a contribution to a political organization
-tuition paid directly to an educational institution for the education or training of an individual
-payment(s) made directly to a medical provider, as long as such medical care is not covered by insurance.

Question 65

In addition to an outright transfer of assets to an individual, gifts can take what forms

Answer 65

The forgiveness of a debt
Foregone interest on an intra-family interest-free or below market loan
The assignment of the benefits of an insurance policy
The transfer of property to a trust.

Question 66

Doug purchased stock several years ago for $100,000.

He gifted the stock shares to his nephew, Kurt, when the FMV was $80,000. Kurt sold the stock six months later for $110,000.

What is Kurt’s basis?

Answer 66

Although the stock was gifted by Doug at a loss, Kurt ultimately sold the stock for a gain.

As a result, Kurt receives the carryover basis of $100,000, as well as Doug’s holding period.

Upon sale, a $10,000 long-term capital gain was realized.————

Question 67

Gifting may be used in any of the following situations

Answer 67

if the donor owns an asset that has a substantial amount of appreciation potential.

If the asset is properly gifted during the donor’s lifetime, all asset appreciation will avoid inclusion in the donor’s gross estate. Therefore, gifting this type of asset allows the donor to control the amount of estate tax liability that may be due upon his or her death.