Bryant - Course 6. Estate Planning. 3. Gifting Flashcards

Question

What are the Advantages of Lifetime Gifts?

Answer 1

The advantages of gifts are classified as non tax-oriented and tax-oriented. The non-tax advantages include: * privacy * potential reduction of probate and administrative costs * the financial well-being of the donee. The tax benefits associated with lifetime gifts include: * **potential federal estate tax savings** * **income tax shifting** (i.e., gifting income-producing assets from a high income-tax-bracket taxpayer to a low income-tax-bracket taxpayer)

Answer 2

**The unification of the estate and gift tax systems imposes the same tax burden on transfers made during the donor's lifetime, as well as after death**. * Both lifetime gifts and transfers after death are subject to the same tax rate schedule and are taxed cumulatively. * In other words, **the 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**. **The highest gift and estate tax rate is currently 40%**. **An applicable credit of $5,113,800 (2023) is available to each individual to offset all taxable gifts of up to $12,920,000**. * This amount of **$12,920,000 (2023) is known as the exemption equivalent amount**. * Use of the unified credit or the applicable credit as it is often referred to is mandatory. * **Consequently, each time a taxable gift is made the unified credit is reduced**. * **The unified credit will be reduced to zero once taxable gifts reach $12,920,000, and the donor will be required to pay a gift tax on any taxable gifts that exceed $12,920,000**. **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**.

Answer 3

Gifts are made while you are alive therefore they are referred to as **inter-vivos gifts**. In comparison, **property transfers made at death are known as bequests**. Many factors need to be considered before making gifts. **Taxable gifts that total more than $12,920,000 (2023) are subject to gift tax**. Would it make sense to make a gift and pay gift tax in one year if the gift tax rate would be lower for the same gift in a later year? It might if the appreciation potential of the property within that year is great. **Not all gifts are taxable gifts. An individual can give up to $17,000 (2023), known as the annual exclusion amount to an unlimited number of donees in the same calendar year and not pay any gift tax.** * Annual exclusions are available for lifetime gifts but are not available for bequests from a decedent's estate. * **Gifts that exceed the annual exclusion amount of $17,000 are taxable gifts, but the donor's unified credit is used to offset the tax on these taxable gifts**. * **Each time a taxable gift is made the unified credit is reduced**. * The donor must pay gift taxes on aggregate lifetime gifts that exceed $12,920,000 because the unified credit is reduced to zero at $12,920,000. This means that a person wishing to make gifts to 8 individuals every year, could make 8 times $17,000 of gifts on an annual basis, or $136,000 of annual exclusion gifts each year, without making any taxable gifts.

Answer 4

As an individual's spouse can also give such gifts, **a married couple may make totally gift-tax-free gifts up to $34,000 multiplied by an unlimited number of donees**. In the example above, the donor and spouse together could give up $34,000 annually on a gift-tax-free basis, for a total transfer of $272,000 that is not subject to gift taxes. In fact, one spouse can make the entire gift if the other spouse consents. The transaction can then be treated as if both spouses made gifts. This is known as **gift-splitting**. **Gift-tax-free transfers can translate into significant federal estate tax savings because they remove the value of the gift and any potential appreciation from the donor's gross estate**. * **Consider the estate tax savings potential if the amount given to the donees over the donor's life expectancy is invested in life insurance, annuities, and mutual funds**. **Any appreciation accruing between the time of the gift and the date of the donor's death escapes estate taxation**. * This **may result in considerable estate tax savings and probate and inheritance tax savings**. If a father gives his daughter stock worth $100,000, and it grows to $600,000 by the date of the father's death, only the $100,000 value of the stock at the time of the gift minus the annual exclusion of $17,000 enters into the estate tax computation. This is known as an **adjusted taxable gift**. * The $500,000 of appreciation would escape consideration in the calculation of the estate tax liability. This is an excellent example of leveraging a gift.

Answer 5

For example, let's assume that the **donor is the owner and the insured on a life insurance policy with a death benefit value of $4 million**. * **If the donor were to die in 2023, the gross estate would include the $4 million death benefit** (see IRC 2042 in the Gross Estate section). * However, if the donor gifted the insurance policy to another person or an irrevocable trust and died more than three years after making the gift, the $4 million death benefit proceeds of the life insurance policy would escape inclusion in the gross estate of the donor. * **A life insurance policy is often a good item to gift because it has a low gift tax value, and the death benefit may be removed from the insured's estate**.

Answer 6

In cases where **property is transferred for less than adequate and full consideration in money or money's worth**, the regulations dealing with the valuation of gifts provide that: **Value of Property Received – Consideration Received = Gift** This definition focuses on whether the property was transferred for adequate and full consideration in money or the equivalent of money, rather than turning on whether the transferor intended to make a gift. This is because Congress did not want to force the IRS to have to prove something as intangible and subjective as the state of mind of the transferor. This does not negate the importance of donative intent, but instead of probing the transferor's actual state of mind, an examination is made of the objective facts of the transfer and the circumstances in which it was made.

Answer 7

Intent Certain factors are examined by courts to determine if there was an intent to make a gift: * Was the **donor legally competent** to make a gift? * Was the **donee legally competent** to accept the gift? * Was there a clear and unmistakable intention on the part of the donor to absolutely, irrevocably and currently divest himself or herself of dominion and control over the gift property? Assuming that these three objective criteria are met, three other elements must be present. There must be: * **An irrevocable transfer of the present legal title to the donee** so that the donor no longer had dominion and control over the property in question. * **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**.

Answer 8

Money's Worth Defined There are **certain factors that can be used to determine the worth of a gift in terms of money**. **To be exempt from the gift tax, the consideration that the transferor receives has to be equal in value to the transferred property**. Transfers of property or property interests made under the terms of a written agreement between spouses in settlement of marital or property rights are deemed to be for adequate and full consideration. Such transfers are therefore exempt from the gift tax. Where a transfer is made pursuant to compromises of bona fide disputes or court orders, these transfers are deemed to be made for full and adequate consideration, and therefore, such transfers are not considered taxable gifts.

Answer 9

**The measure of a value of a gift is the difference between the value of the property transferred and the consideration received by the transferor**. * Therefore, a $100,000 building that is transferred from a mother to her daughter for $100,000 in cash does not constitute a gift. However, the mere fact that consideration has been given does not pull a transaction out of the gift tax orbit. **To be exempt from the tax, the consideration received by the transferor must be equal in value to the property transferred.** This is known as the **sufficiency of consideration test**. * If the daughter in the above example had paid $60,000, the excess value of the building, $40,000, would not be removed from the scope of the gift tax. * **To escape the gift tax, there must be adequate and full consideration equal in value to the property transferred**.

Answer 10

**Consideration is not "in money or money's worth when the consideration is moral consideration, past consideration or consideration in the form of a detriment to the transferee that does not benefit the transferor."** The classic example is the case where a man transferred $100,000 to a widow when she promised to marry him. In this case, **if the widow remarried, she would lose $100,000 interest in a trust established for her by her deceased husband**. The $100,000 transferred to her from her fiancé was to compensate her for the loss. The Supreme Court held that the widow's promise to marry her fiancé was not sufficient consideration because it was incapable of being valued in money or money's worth. Nor was her forfeiture of $100,000 in the trust sufficient consideration, because although the widow did in fact give up something of value, the benefit of that value did not go to the transferor, her fiancé.

Answer 11

Consideration in Marital Rights Two issues often arise in connection with the consideration question: * Does the relinquishment of marital rights constitute consideration in money or money's worth? * Does the relinquishment of support rights constitute consideration in money or money's worth? The Internal Revenue Code is specific in the case of certain property settlements. It provides that **transfers of property or property interests made under the terms of a written agreement between spouses in settlement of marital or property rights are deemed to be for an adequate and full consideration**. Such transfers are **therefore exempt from the gift tax, whether or not the agreement is supported by a divorce decree, if the spouses enter into a final decree of divorce within 2 years after entering the agreement**. A **spouse's relinquishment of the right to support constitutes consideration that can be measured in money or money's worth**. Likewise, a transfer in satisfaction of the transferor's minor children's right to support is made for money's worth. However, most transfers to or for the benefit of adult children are generally treated as gifts unless, for some reason, state law requires the transferor to support that child.

Answer 12

**Consideration is an important factor where a transfer is made pursuant to compromises of bona fide disputes or court orders**. **Such transfers are not considered taxable gifts because they are deemed to be made for adequate and full consideration**. Likewise, **the gift tax can be applied even in the case of a transfer made pursuant to or approved by a court decree if there is not an adversary proceeding**. For instance, if the property of an incompetent individual were transferred to his or her mother, the transfer would be a gift even though it was approved by court decree, as long as the incompetent individual had no legal duty to care for the parent.

Answer 13

Not a gift * **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**.

Answer 14

As previously noted, gifts can be classified as direct and indirect. * **Direct gifts include cash or tangible personal property**. * **Indirect gifts** include the **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**.

Answer 15

**Cash or tangible personal property is the most common type of transfer to which the gift tax would apply**. Generally, delivery of the property itself effectuates the gift. **In the case of corporate stock, a gift occurs when endorsed certificates are delivered to the donee** or his or her agent or the change in ownership is delivered to the corporation or its transfer agent. **Real property is typically given by the delivery of an executed deed**. If a person **purchases a U.S. savings bond, but has the bond registered in someone else's name, and delivers the bond to that person, a gift has been made**. * If the **bonds are titled jointly between the purchaser and another, no gift occurs until the other person has cashed in the bond or has the bond reissued in his or her name only**. **Income that will be earned in the future can constitute a gift presently subject to tax**. * For example, an author can give his or her right to future royalties to his or her daughter. * **Such a gift is valued according to its present value**. That is, the gift is not considered to be a series of year-by-year gifts valued as the income is paid, but rather **a single gift valued on the date the right to future income is assigned**. * Current valuation will be made even if, for some reason, the payments are reduced substantially or even if they cease. **No adjustment is required or allowed if the actual income paid to the donee is more or less than the valuation**.

Answer 16

**Forgiving a debt constitutes a gift in nonbusiness situations**. * For example, if a father lends his son $100,000 and later cancels the note, **the forgiveness constitutes a $100,000 gift**. * However, if the father lends the son $100,000 and the initial agreement is that the loan is repayable immediately upon the father's demand, no gift is made. **Some forgiveness of indebtedness, however, constitutes income to the benefited party**. * If a creditor tore up a debtor's note in return for services rendered by the debtor, the result would be the same as if the creditor compensated the debtor for the services rendered, and then the debtor used the cash to satisfy the debt. **The debtor realizes income and does not receive a gift**. **Payments in excess of one's obligations can be gifts**. * Clearly, a person does not make a gift when he or she pays his or her bills. Therefore, when a husband pays bills or purchases food or clothing for his wife or minor children, he is not making gifts. Courts have allowed considerable latitude in this area. * But if a father gives his minor daughter a $50,000 ring, the IRS may claim the transfer goes beyond his obligation of support. * **Payments made on behalf of adult children are often considered gifts**. * For example, if a father pays his adult son's living expenses and mortgage payments, or gives an adult child a monthly allowance, the transfer is a gift subject to tax. In another situation, the taxpayer, pursuant to an agreement incorporated in a divorce decree, created two trusts for the support of his minor children. He put a substantial amount of money in the trusts, which provided that after the children reached 21 they were to receive the corpus. * **The court measured the economic value of the father's support obligation and held that the excess of the trust corpus over that value was a taxable gift**. * **Only the portion of the transfer required to support the children during their minority was not subject to the gift tax.**

Answer 17

Indirect Gifts Indirect gifts, such as the **payment of someone else's expenses, are also subject to the gift tax**. * For instance, if a person makes payments on an adult son's car or pays premiums on a life insurance policy his wife owns on his life, such payments are gifts. The **shifting of property rights alone can trigger gift tax consequences**. * In one case an employee gave up his vested rights to employer contributions in a profit-sharing plan. **He was deemed to have made a gift to the remaining participants in the plan**. * Similarly, an employee who has a vested right to an annuity is making a gift if he irrevocably chooses to take a lesser annuity coupled with an agreement that payments will be continued to his designated beneficiary. **No gift occurs until the time the employee's selection of the survivor annuity becomes irrevocable**. **Third-party transfers may be the medium for a taxable gift**. * For example, if a father gives his son $100,000 in consideration of his son's promise to provide a lifetime income to the father's sister, **the father has made an indirect gift to his sister**. * **Furthermore, if the cost of providing a lifetime annuity for the sister is less than $100,000, the father also has made a gift to his son**. **The creation of a family partnership may involve an indirect gift**. * **The mere creation or existence of a family partnership that is often useful in shifting and spreading income among family members and in reducing estate taxes does not, per se, mean a gift has been made**. In other cases, where **new partners are to contribute valuable services in exchange for their share of the partnership's earnings and the business does not contain significant capital assets, the formation of a family partnership does not constitute a gift**.

Answer 18

**Transfers by and to corporations are often forms of indirect gifts**. * Technically, the gift tax is not imposed upon transfer by corporations. * But **transfers by or to a corporation are often considered to be made by or to corporate stockholders**. * The regulations state that **if a corporation makes a transfer to an individual for inadequate consideration, the difference between the value of the money or other property transferred and the consideration paid is a gift to the transferee from the corporation's stockholders**. Generally, a transfer to a corporation for inadequate consideration is a gift from the transferor to the corporation's other shareholders. **For example, a transfer of $120,000 by a father to a corporation owned equally by him and his three children is treated as a gift of $30,000 from the father to each of the three children**. * The amount of such a gift is computed after subtracting the percentage of the gift equal to the percentage of the transferor's ownership. **A double danger lies in corporate gifts**. The IRS may argue that: * In reality, **the corporation made a distribution taxable as a dividend to its stockholders**, and * **That the shareholders, in turn, made a gift to the recipient of the transfer**. * As any distribution from a corporation to a shareholder generally constitutes a dividend, as long as the corporation is a C corporation, to the extent of corporate earnings and profits, the IRS could claim that a transfer was first a constructive dividend to the shareholders and then a constructive gift by them to the donee. * For example, if a family-owned corporation sold property with a fair market value of $450,000 for $350,000 to the son of its shareholders, the transaction could be considered a $100,000 constructive dividend to the shareholder-parents, followed by a $100,000 constructive gift by them to their son.

Answer 19

Children to their father * A gratuitous transfer of property by a family-owned corporation to the father of the shareholders of a corporation could be treated as a gift from the children to their father.

Answer 20

**Life insurance or life insurance premiums can be the subject of an indirect gift**. This may happen in three types of situations: * The **purchase of a policy for another person's benefit** * The **assignment of an existing policy** * **Payment of premiums** If an insured purchases a policy on his or her life, he or she has made a gift measurable by the cost of the policy if he or she: * **Names a beneficiary other than his or her estate** * **Does not retain the right to regain the policy or the proceeds or revest the economic benefits of the policy**, that is, retains no reversionary interest in self or estate * **Does not retain the power to change the beneficiaries or their proportionate interests**, that is, makes the beneficiary designation irrevocable **All three of these requirements must be met, however, before the insured will be deemed to have made a taxable gift.** **If an insured makes an absolute assignment of a policy or in some other way relinquishes all his rights and powers in a previously issued policy, a gift is made**. * The **gift is measurable by the replacement cost**. * In the case of a **whole life policy**, the **value of the gift is generally equal to the interpolated terminal reserve plus unearned premium at the date of the gift**. * This **can lead to an insidious tax trap**. * However, the **basis of the trap is the fact that the owner, insured and beneficiary of the policy are all different**.

Answer 21

Assume a wife owns a policy on the life of her **husband**. **She names her children as revocable beneficiaries**. * At the death of her husband, **the IRS could argue that the wife has made a constructive gift to the children**. * The IRS has held that the wife constructively received the death benefit proceeds and made a gift of the proceeds to the kids. An extension of this reasoning, which was successfully applied by the IRS, is a case where the **owner of policies on the life of her husband placed the policies in trust for the benefit of her children**. * **As she reserved the right to revoke the trust at any time before her husband died, she had not made a completed gift until his death**. * **It was not until his death that she relinquished all her powers over the policy**. * **When the husband died, the trust became irrevocable, and therefore the gift became complete**. * The **value of the gift was the full value of the death proceeds rather than the replacement value of the policy when it was placed in trust**.

Answer 22

* **The technical definition of a gift**: For gift tax purposes, **the value of a gift is equal to the value of the property transferred less any consideration received**. The three conditions that must be satisfied for a **completed gift** are: 1. An **intention by the donor** to make a gift; 2. The **donor must make an irrevocable transfer of the present legal title to the donee** so that the donor no longer has dominion and control over the property in question; and 3. **The donee must accept the gift**. This includes making sure that the donor was competent to make a gift and that the donee was capable of accepting the gift. * **Types of gifts**: Gifts can be broadly **classified as direct and nondirect**. Both direct and indirect gifts are subject to gift tax. **Some examples of direct gifts are cash and tangible property where the delivery of the property itself effectuates the gift**. Direct gifts also include intangible property such as **corporate stock gifted by delivering endorsed certificates and real property gifted by delivering the executed deed**. **Bonds** purchased by a person in another's name and gifted to this person are a direct gift. **Even income that will be earned in the future, forgiving debt in nonbusiness situations and payments in excess of one's obligations can constitute direct gifts**. * **Indirect gifts include payment of another person's expense, third-party transfers and life insurance or life insurance premiums**.

Answer 23

An excise tax * The gift tax is an excise tax, a tax levied not directly on the subject of the gift itself or on the right to receive the property, but rather on the right of an individual to transfer money or other property to another.

Answer 24

A trust A foundation A partnership An unknown identity * Almost any party can be the donee or recipient of a gift subject to tax. The donee can be an individual, partnership, corporation, foundation, trust or other person. In fact, a gift can be subject to the tax, assuming the gift is complete even if the identity of the donee is not known at the date of the transfer and cannot be ascertained.

Answer 25

A complete delivery to the donee of the gift Acceptance of the gift by the donee An irrevocable transfer of the present legal title * 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, three other elements must be present. 1. 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. 2. 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. 3. Acceptance of the gift by the donee. * **The measure of a gift is the difference between the value of the property transferred and the consideration received by the transferor**. * **When the consideration received by the donor against a gift is equal to the value of the property transferred, it does not amount to a gift and amounts to the equivalent of a purchase**.

Answer 26

To ensure that you have an understanding of gratuitous transfers, the following topics will be covered in this lesson: * Gratuitous Services Rendered * Promise to Make a Gift * Sham Gifts * Exempt Gifts Upon completion of this lesson, you should be able to: * List the types of transfers not subject to gift tax * Explain why gratuitous services do not attract gift tax * Define tax implications of interest-free loans and disclaimers * Describe the effects of promises to make gifts * State the types of transfers that constitute sham gifts * List the transfers exempted from gift tax

Answer 27

In a number of property transfer cases, the gift tax is not imposed since these transfers do not involve gifts in the tax sense. These situations fall into three basic categories: * Where property or an interest in property has not been transferred, * Certain transfers in the ordinary course of business, and * Sham gifts.

Answer 28

The gift tax is imposed only on the transfer of property or an interest in property. **The term property does not include services that are rendered gratuitously**. Regardless of how valuable the services one person renders for the benefit of another, those services do not constitute the transfer of property rights and do not, therefore, fall within the scope of the gift tax. If an executor performs the services required in the course of the administration of a large and complex estate, the services are clearly of economic benefit to the estate's beneficiaries. Yet, they do not constitute a transfer of property rights. If the executor formally waives the fee within six months of appointment as executor or fails to claim the fees or commissions by the time of filing and indicates through action or inaction that he or she intends to serve without charge, no property has been transferred. **Conversely, once fees are taken or if the fees are deducted on an estate, inheritance, or income tax return, the executor has received taxable income**. * If he or she then **chooses not to or neglects to actually receive that money, and it goes to the estate's beneficiaries, he or she is making an indirect and possibly taxable gift to those individuals**.

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**.

Answer 30

Generally, **a potential donee is deemed to have accepted a valuable gift unless he or she expressly refuses it**. * If he or she disclaims the right to the gift, that is, refuses to take it, it will usually go to someone else as the result of that renunciation. As long as the disclaimer rules are satisfied, it will not be treated as if the disclaiming donee is making a transfer of property. * A disclaimer that meets those rules is called a **qualified disclaimer**. * **For gift tax purposes, a qualified disclaimer is treated as if the property went directly from the original transferor to the person who ultimately receives the property**.

Answer 31

* The refusal or rejection of the benefits **must be in writing**. * The **writing must be received by the transferor**, his legal representative, or the holder of the legal title to the property **no later than nine 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.

Answer 32

Although income that will be earned in the future can be the subject of a gift, **the promise to make a gift in the future is not taxable even if the promise is enforceable**. This is because a mere promise to make a transfer in the future is not itself a transfer. The IRS agrees to this as long as the gift cannot be valued. But **if the promise is enforceable under state law, the IRS will attempt to subject it to the gift tax when it becomes capable of valuation**.

Answer 33

Compensation for Personal Services Situations often arise in business settings that purport to be gifts from corporate employers to individuals. **The IRS often claims that such transfers are, in fact, compensation for personal services rather than gifts**. The IRS argues that the property transfers **constitute income to the transferee rather than a gift** by the transferor. In these cases, the focus changes to the effect on the transferee: **Has the transferee received taxable income or has he or she received a tax-free gift?** Payment may be taken out of the normal gift tax rules and considered taxable income to the recipient since the gift tax rules state that **the gift tax is not applicable to ordinary business transactions**.

Answer 34

An ordinary business transaction, defined as: * a sale, * exchange, or * other transfer of property that is a transaction that is * bona fide, * at arm's length, and * free from donative intent made in the ordinary course of business. Transactions meeting the above criteria will be considered as if made for an adequate and full consideration in money or money's worth, and therefore, **not subject to gift tax**. A situation will be considered an **ordinary business transaction** if it is free from donative intent. Therefore, such a transaction would **have income tax ramifications**. The taxpayer-recipient, the donee, of course, would like to have the transaction considered an income-tax-free gift. However, the IRS would reap larger revenues if the transfer were considered compensation and treated as taxable income.

Answer 35

When will a payment be considered a tax-free gift to the recipient rather than taxable income? **A gift is deemed to have been made if the donor's dominant reason for making the transfer was detached and disinterested generosity**. An example would be where an employer makes flood relief payments to his employees because of a feeling of affection, charity, or similar impulses rather than consideration for past, present, or future services of the recipient employees. A transfer is not a gift if the primary impetus for the payment is * The constraining force of any legal or moral duty, or * The anticipated benefit of an economic nature. Among the factors typically studied in examining the donor's intent are: * The duration and value of the employee's services. * The manner in which the employer determined the amount of the reputed gift. * The way the employer treated the payments in corporate books and on tax returns. That is, **was the payment deducted as a business expense?**

Answer 36

The corporation's characterization of payment is often persuasive where the corporation makes a payment or series of payments to the widow of a deceased employee. * **The employer generally prefers to have such payments taxed as compensation to the employee's survivors** so that the corporation **can deduct payments as compensation** for past services of the employee. For example, an employer gave the taxpayer a car after the taxpayer had furnished him with the names of potential customers. The car was not a gift but was intended as payment for past services as well as an inducement for the taxpayer to supply additional names in the future. In another case, however, the employer had made a payment of $20,000 to a retiring executive when he resigned. After examining the employer's esteem and kindliness, and the appreciation of the retiring officer, the court stated that the transfer was not an income taxable transfer. **Usually, the intra-family transfer will be considered a gift even if the recipient rendered past services**. **Transfers to persons outside the family will usually be considered compensation.**

Answer 37

**A bad bargain is another ordinary course of business situation**. A 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. As noted before, this assumes the transaction is: * Bonafide, * At arm's length, and * Not donative in intent. **There are a number of court-decided examples of bad bargains that have not resulted in gift tax treatment**. * In one case, certain senior executive shareholders sold stock to junior executives at less than fair market value as part of a plan to give the younger executives a larger stake in business profits. The court noted that the transfers were for less than adequate consideration but stated that the **key question in determining gift tax purpose is whether the transaction is a genuine business transaction, as distinguished, for example, from the marital or family type of transaction**. **Bad bargains, sales for less than adequate money's worth, are made every day in the business world for one reason or another**. * But no one would think that any gift is involved. **Another example of a no-gift situation would be where a group of businessmen conveys real estate to an unrelated business corporation with the expectation of doing business with that corporation sometime in the future**. But the ordinary course of business exception has its limits. **No protection from the gift tax law would be afforded where the transferor's motive was to pass on the family fortune to the following generation**.

Answer 38

**It is often advantageous for income or estate tax purposes to characterize a transaction as a gift**. * For example, the taxpayer may hope to shift the burden of income taxes from their high marginal tax brackets to a lower bracket relative age 19 or older. * But if the transfer has no real economic significance other than the hoped-for tax savings, it will be disregarded for tax purposes. * That is, if the transaction does not have meaning apart from its tax implications, **it will not be considered a gift by the IRS or by the courts** and will **therefore not shift the incidence of taxation**.

Answer 39

The golfer * In this situation, the court held that the entire series of transactions had no tax impact and that the income was completely taxable to the golfer.

Answer 40

The **assignment of income doctrine** was established in the decision to **U.S. Supreme Court case Lucas v. Earl, 281 (1930)**, states that "**the fruits cannot be attributed to a different tree from that on which they grew.**" In other words, income earned or belonging to one individual, cannot be assigned to another simply to gain tax-favored treatment. Assignment of income issues are among the **most common** and **often involve inconsistent property, gift, and income tax results**. For example, a person could agree to give his son one-half of every dollar he or she earned in the following year. * The agreement might be effective for property law purposes, and the son could have an enforceable legal right to one-half of his father's income the next year. * **Gift tax law might also recognize the transfer of a property right, and the present value of a father's future income could be subject to the gift tax**. * Yet **for income tax purposes, the father would remain liable for taxes on the entire earnings**. A general agent for a life insurance company assigned renewal commissions to his wife. The wife had a property law right to the commissions. The **present worth of the renewals the wife would receive was treated as a gift**. Yet, the general agent was subject to income tax on the commissions as they were paid. In a similar case, a doctor transferred the right to accounts receivable from his practice to a trust for his daughter. Again, the court held that as the trustee received payments from the doctor's patients, those sums were taxable to the doctor even though he had made an irrevocable and taxable gift to the trust. **Gifts of income from property meet a similar fate**. For example, if a person assigns the right to next year's rent from a building to her daughter or next year's dividends from specified stock to her grandson, **the transfers will be effective for property law purposes and will generate gift taxes**. But the **income will be taxable to the donor for income tax purposes**. **Gifts of property, however, produce a more satisfactory result to the donors.** * **If the property is given away, the income it bears will be taxable to the new owner**. * Thus, if the donor in the examples above had given the building and the stock, gifts equal to the value of those properties would be made. * The income produced by those assets would be taxed to her daughter and grandson respectively. Likewise, if stock that cost the donor $1,000 is transferred to a donee at a time when it is worth $2,500 and is later sold by the donee for $3,000, the donee takes the donor's cost, that is $1,000, as his basis, and is taxed on the gain, that is $2,000.

Answer 41

Some gratuitous transfers are exempt from the gift tax. Examples include: * **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.

Answer 42

* **Promises to make a gift**: **These are not taxable if the gift cannot be valued even if the promise is enforceable**. Although income that will be earned in the future can be subject to gift tax, **a mere promise to make a transfer in the future is not considered a transfer**. However, if the promise is enforceable under state law, the IRS will attempt to subject it to the gift tax when it becomes capable of valuation. The IRS considers business gifts that are claimed as being gifts from corporate employers to individuals to be compensation or income for personal services, rather than gifts. **The gift tax is not applicable to ordinary business transactions**. An ordinary business transaction is defined as a sale, exchange, or other transfer of property, which is bona fide, and free from donatives intent, made in the ordinary course of business. A transfer is not a gift if the primary impetus for the payment is the constraining force of any legal or moral duty, or anticipated benefit of an economic nature. A gift is deemed to have been made if the donor's dominant reason for making the transfer was detached and disinterested generosity. Similarly, **a bad bargain in the ordinary course of business cannot be treated as a gift even though the sale may be for less than adequate money's worth**. * **Sham gifts**: Defined as** transfers that have no real economic significance other than to shift the burden of income tax from a high to a relatively lower income tax bracket**. If the transaction does not have meaning apart from its tax sense, it will not be considered a gift by the IRS or by the courts and will therefore not shift the incidence of taxation. * **Exempt gifts**: These include **gratuitous transfers such as qualified disclaimer**, certain **transfers of property between spouses** in divorce and separation situations, **tuition paid to an educational institution** on behalf of an individual, and **payment of qualifying medical care regardless of the relationship of the donor** to the donee.

Answer 43

The refusal must be in writing. The person disclaiming must not have accepted the interest or any of its benefits. * The refusal must be in writing for it to be a valid and qualified disclaimer. The person disclaiming must not have accepted the interest or any of its benefits. The writing must be received by the transferor, his legal representative or the holder of the legal title to the property no later than nine 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. Due to the refusal, someone other than the person disclaiming receives the property interest, but the person making the disclaimer cannot in any way influence who is to be the recipient of the disclaimed property.

Answer 44

The novelist must pay tax on a gross taxable income of $300,000. * This is a sham gift and so the entire series of transactions had no gift tax effect. The income was completely taxable to the novelist. Taxable income is $200,000 + 0.10 x $1,000,000 = $300,000, on which the novelist is liable to pay income tax.

Answer 45

A property bequeathed and disclaimed by son Transfer of property as per divorce settlement enforcement Tuition fees paid for undergraduate course of a daughter paid directly to the school Medical care payment for a parent paid directly to the health professional * 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. A qualified disclaimer and payment of medical care are some of the few types of gratuitous transfers that are statutorily exempted from the gift tax. Certain transfers of property between spouses in divorce and separation situations are also exempt from gift tax. Tuition paid to an educational institution for the education or training of an individual is exempt from the gift tax regardless of the amount paid or the relationship of the parties.

Answer 46

Upon completion of this lesson, you should be able to: * List the requirements for a completed transaction * Describe incomplete delivery * State the gift tax implication of cancellation of notes * Explain how incomplete transfers to trusts can take place * Define the importance of correct valuation of property * Determine the effect of indebtedness and restrictions

Answer 47

A completed transfer is necessary before the gift tax can be applied. The phrase **completed transfer implies that the subject of the gift has been put beyond the donor's recall**. In other words, **the donor has irrevocably parted with dominion and control over the gift**. A gift is not complete if * the donor had the power to change the disposition of the gift and thus alter * the identity of the donee(s) or * amount of the gift. * the donor can either alone or in conjunction with another party revoke the gift. **Parting with dominion and control is a good test of completeness**. However, in some cases, it may be difficult to ascertain when that event has occurred. Some of the more common problem areas are: * Incomplete delivery situations, * Cancellation of notes, and * Incomplete transfers to trusts.

Answer 48

**Incomplete delivery involves transfers where certain technical details have been omitted or a stage in the process has been left incomplete**. For example, a gift is not made when the donor gives the donee a personal check or note. **The transfer of a personal check is not a complete gift, and therefore subject to gift tax, until it is paid or certified or accepted by the recipient or it is negotiated for value to a third person**. For instance, if a check is mailed in December, received in late December, but not cashed until January of the following year, no gift is made until that later year. Since the maker of a check is under no legal obligation to honor the check until it is cashed, presented for payment, or negotiated to a third person for value, a completed gift has not been made. Likewise, **a gift of a negotiable note is not complete until it is paid**. An individual on his or her deathbed will sometimes make a **gift causa mortis** (**a gift in anticipation of his imminent death**), and then quite unexpectedly recover. Assuming the facts indicate the transfer was made in anticipation of death from a specific illness, and the gift was contingent on the donor's death, **neither the original conveyance nor the return of the property to the donor is subject to the gift tax if the transferor recovers and the transferee returns the property**. * A **gift causa mortis is therefore incomplete as long as the donor is alive but becomes complete at the donor's death**. * For this reason, **the property is included in the donor's gross estate at death but avoids probate as a will substitute**. **A gift of stock is completed on the date the stock was transferred or the date endorsed certificates are delivered to the donee** or his agent or to the corporation or its transfer agent. **The creation of a joint bank account, either checking or savings, constitutes a common example of an incomplete transfer**. * Typically, the person making a deposit can withdraw all of the funds or any portion of them. Therefore, **the donor has retained a power to revoke the gift, and it is not complete**. * **When the donee makes a withdrawal of funds from the account and thereby eliminates the donor's dominion and control, a gift of the funds occurs**. A similar situation occurs in the case of a joint brokerage account. The **creation and contribution to a joint brokerage account held in street name is not a gift until the joint owner makes a withdrawal for his personal benefit**. * **At that time, the donee acquires indefeasible rights, and the donor parts irrevocably with the funds**. **Totten trusts** are **bank savings accounts where a deposit is in trust for the benefit of another**. * The donor, the creator of the account, retains possession of the savings book. * **Since this type of trust is revocable, no gift is made until the donee makes a withdrawal from the account**. Some property cannot conveniently be delivered to the intended donee. * For example, a father owned cattle he wished to give his minor children. The court held that the gift was complete when he branded the livestock with each child's initials even though he kept the cattle with others he owned. The court held that the father was acting as the natural guardian of the children and had done everything necessary to make a completed gift. **Real estate is transferred by executing a deed in favor of the donee**. But if the donor retains the deed, does not record it, makes no attempt to inform the donee of the transfer, and continues to treat the property as his own, no transfer occurs.

Answer 49

In many cases, property transfer may be made with the transferor taking back installment notes from the transferee. **The transaction will be treated as a sale for income tax purposes**. * However, **if the transferor forgives the notes, the forgiveness would be a gift**. **Cancellation of notes is a frequently used technique for two reasons**: * It **provides a simple means of giving gifts to several donees of property that is not readily divisible**. * **By forgiving the notes over a period of years, the donor could maximize the use of the $17,000 annual exclusion (2023), as well as the unified credit.** A good example is a situation where the donor deeds real estate to her sons and takes back notes payable on an annual basis. Each son is required to pay his mother $10,000 per year. But when the notes become due, the donor marks the note "cancelled by gift." The gift would occur in the year each note was cancelled, as long as there is no pre-established and pre-determined plan for the donor to forgive notes systematically in future years. Although the annual exclusion would eliminate the gift tax consequences, **there is an income tax liability since the donor is actually selling the real estate to her sons**. **The difference between the donor's basis, that is, her cost in the property plus or minus appropriate adjustments, and the amount she'll realize on the sale is taxable under the installment sales rules** (the notes are payable over more than one tax year).

Answer 50

Donors will sometimes transfer property into a trust but retain the right to revoke the transfer. **Such a transfer into a revocable trust is not a completed gift**. **A gift is complete only when the donor relinquishes all control over the transferred property. Therefore, a transfer of property into an irrevocable trust would constitute a completed gift.** **Gift tax liability is based upon the value of the transferred property at the time the gift has been made complete**. **Tax liability is measured by the value at the moment the gift becomes complete** rather than at the time of the transfer. This **can have harsh tax consequences**.

Answer 51

**The gift will be complete, however, when the donor relinquishes control. When the donor's control is relinquished, the value of the stock at that time will be the value of the gifted property (for gift tax purposes). As a result, the donor may be responsible for paying a gift tax liability on an asset that has substantially appreciated in value**.

Answer 52

**Valuation is the first step in the gift tax computation process**. Only after the property is valued can the applicable annual exclusion and various deductions be applied to arrive at the value of the taxable gift, and then the gift tax liability. **The value of the property on the date the gift becomes complete is the value of the gift**. For gift tax purposes, value is defined as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. Although the provisions of the law on gift tax dealing with valuation parallels those for the estate tax in many respects, there is **one major difference: property transferred during the lifetime is valued for gift tax purposes on the date the gift is made. No alternate valuation is allowed.**

Answer 53

Indebtedness **Generally, when the subject of a gift is encumbered or otherwise subject to an obligation, only the net value of the gift, the value of the property less the amount of the obligation, is subject to the gift tax.** Under this rule, which assumes the donor is not personally liable for the debt, **the amount of the gift is the donor's equity in the property**. **However, if the donor is personally liable for the indebtedness, that is secured by a mortgage on the gift property, a different result occurs**. * **In this case the amount of the gift may be the entire value of the property, unreduced by the debt**. The reason for the difference is that where an insolvent donor makes a gift subject to a debt and the creditor proceeds against the pledged property, the donee is, in effect, paying the donor's personal debt. * In some cases, this makes the donee a creditor of the donor. If the donee can then collect from the donor the amount he or she has paid to the donor's creditor, the donee has received the entire value of the gift rather than merely the equity. * A third possibility is that the donor-debtor is personally liable for the indebtedness secured by a mortgage on the gifted property, but the donee has no right to step into the creditor's shoes and recover the debt from the donor. In this case, **the amount of the gift is merely the amount of the donor's equity in the property**. **Where the donee has no right to proceed against the donor and recover the debt, actual facts must determine the result.** * **If the donor in fact pays off the liability after transferring the mortgaged property to the donee, he or she is making an additional gift**. * But if the donee pays off the liability or if the mortgage forecloses, **the gift was only the donor's equity**. **Among the obligations that could be imposed upon a donee is a requirement that the donee pays the gift tax**. * This is called a **net gift**. * The **donor has the primary liability to pay the gift tax**, and the **donee is only secondarily liable**. The donor could expressly or by implication require the donee to pay the donor's gift tax liability. If the donee is required to pay the gift tax imposed on the transfer, or if the tax is payable out of the transferred property, **the value of the donated property must be reduced by the amount of the gift tax**. Therefore, **the value of the gift will be reduced**.

Answer 54

Restrictions **Value is affected by restrictions placed on the donee's use or ability to dispose of the property received**. The general rule is that **most restrictive agreements do not fix the value of such property, but often have a persuasive effect on price**. In the example above, a court would probably state that **the existence of a restrictive agreement would not fix the purchase price, because the circumstances requiring purchase, either retirement or death, do not exist at the date of the gift**. But the existence of the agreement itself is likely to have a depressing effect on the market value of the stock, thereby resulting in a **discounted gift tax value**.

Answer 55

**Another principle, which applies to lifetime gifts as well as a transfer after death, is the so-called blockage rule**. The blockage rule is not based on a forced sale value. Instead, it **attempts to value gifts of large blocks of stock based on the price the property would bring if the stock were liquidated in a reasonable time in some way outside the usual marketing channels**. 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**. This is because of the depressive effect on the stock value if the block were dropped into the market all at once. **The utility of blockage evaluation is diminished and may be inapplicable when a large block is divided among a number of donees or when gifts are spread over a number of tax years**.

Answer 56

* **Valuation of Property**: Valuation is the first step in computing the taxable gift. **The annual exclusions and deductions can be applied only after the property is valued**. **The property should be valued on the date the gift becomes complete**. For gift tax purposes, the value of gifted property is defined as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, both having reasonable knowledge of relevant facts. **Specific rules are applied when valuing property in unique situations, for example, indebtedness with respect to transferred property, restrictions on the use or disposition of property, transfers of large blocks of stock, and valuation of mutual fund shares, life insurance, and annuity contracts**.

Answer 57

Upon completion of this lesson, you should be able to: * State the gift tax implications of gift splitting * Describe the purpose, applications, and effects of annual exclusions * Distinguish between present and future interest * Explain the effect of marital deduction on gift tax * Define charitable deductions and when they are allowed * Calculate taxable gifts * Calculate gift tax payable with no previous taxable gifts * Calculate gift tax payable with previous taxable gifts * Calculate the amount of unified credit remaining * Explain the impact of lifetime gifting on gross estates

Answer 58

When a married donor, with the consent of the non-donor spouse, elects to treat a gift to a third party as though each spouse has made one-half of the gift, it is called **gift splitting**. This **increases the maximum gift from the married couple to an unlimited number of recipients to $34,000 (2023**), the individual $17,000 annual exclusions multiplied by 2. * The **election must be made on the applicable gift tax return of the donor spouse**. * Gift splitting **only applies to lifetime transfers not to transfers at death**, and is available for both present and future interest gifts. * Gift splitting is not necessary if all gifts are present interest gifts under $17,000. **Gift splitting is an artificial mechanism: even if one spouse makes the entire gift, for gift tax computation purposes, it is treated as though each spouse made only one-half of the gift**. * This means that **the rate of tax that each spouse will pay is separately calculated by reference to his or her own prior taxable gifts**. Furthermore, if a non-donor spouse has agreed to treat one-half of the donor spouse's gift as his or her own, it **will have a direct effect on future gift tax, as well as the estate tax that spouse will eventually have to pay if the gift exceeds the annual exclusion**. * Even though the consenting spouse did not actually make one-half of the gift, to the extent the value of the gift exceeds the $17,000 annual exclusion this amount **will be considered an adjusted taxable gift of the consenting spouse and utilized for calculating future gift and estate tax liability**. Gift splitting, which can only be utilized by married couples when making gifts to third parties, was introduced into the **tax law to equalize the tax treatment of common-law taxpayers with that of community-property residents**. When one spouse earns a dollar in a community-property state, fifty cents is automatically deemed to be owned by each spouse. Therefore, if the couple gave that dollar to their daughter, each spouse would be treated as having given only fifty cents each. Gift splitting places the common-law resident in the same relative position. **If the spouses elect to split gifts, all gifts made by either spouse during that calendar year must be split**. The privilege of gift splitting is available only with regard to gifts made while the couple is married. * Therefore, **gifts the couple makes before they are married may not be split even if they are later married during the same calendar year**. * Likewise, gifts made after the spouses are legally divorced or one spouse dies may not be split. * However, gifts made before one spouse dies may be split even if that spouse dies before signing the appropriate consent or election. * The deceased spouse's executor can make the appropriate election or consent. * Gift splitting cannot be used if one spouse in not a U.S. citizen or resident. **A gift tax return, an IRS Form 709, must be filed by both spouses if split values exceed the annual exclusion amount of $17,000**.

Answer 59

$10,000 * For purposes of the gift tax computation, the individual is considered to have given only $10,000. Their spouse is treated as giving the other $10,000, even if none of the gift was the spouse’s property.

Answer 60

A de minimis rule is instituted primarily to avoid the bother of administrative record-keeping. The annual gift tax exclusion is a classic example of such a rule. As previously stated, **the annual exclusion generally allows the donor to transfer up to $17,000 per year (2023) to any number of people**. This gift must constitute a present interest to qualify for the annual exclusion.

Answer 61

Gift Tax Marital Deduction An **individual who transfers property to a spouse**, who is a U.S. citizen, is entitled to an **unlimited deduction for this transfer**. This is known as the **unlimited gift tax marital deduction**. The purpose of the gift tax marital deduction is to **enable spouses to be treated as an economic unit by not taxing property that is transferred between the spouses**. The unlimited marital deduction is **also available to a decedent spouse on their estate tax return**. * This **marital deduction is for property that is transferred to the surviving spouse through the decedent's will**. * The **property transferred to the spouse will avoid taxation in the decedent spouse's estate**. * As a result, the unlimited marital deduction **delays the taxation of the property until the surviving spouse's death**. Be aware that there is **one exception to the unlimited marital deduction rule for transfers made between spouses**. * **The donor spouse or the decedent spouse who gives the other spouse terminable interest property will not receive a marital deduction for the value of the property transferred**. **The terminable interest rule for marital deduction gifts is similar to the rule employed for estate tax purposes**. Essentially, **the effect of these rules is that generally no marital deduction will be allowed where**: * The 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.

Answer 62

A donor spouse establishes a trust which allows the income to be distributed to his wife for her life, with the trust corpus available to his son at his wife's death. * Here, **the husband gave his wife a terminable interest in the trust because her interest in the trust will end at her death and the husband, not the wife, chose the trust's remainder beneficiary**. * **The husband will not receive a marital deduction for the present value of his wife's income interest, but he can use his annual exclusion to offset a taxable gift**.

Answer 63

The exception is for a gift of **Qualified Terminable Interest Property (QTIP)** assets. In the past a gift or bequest of a terminable interest in property, one which could end for instance at a spouse's death and therefore escape taxation, would not have been eligible for the gift or estate tax marital deduction. **Current law now provides that if a donor spouse gives a donee spouse a qualifying income interest for life, it will qualify for a gift or estate tax marital deduction**. To qualify: * The surviving spouse must be entitled to all the income from the property, and it must be payable annually or more frequently. * No person can have a power to appoint any part of the property to any person other than the surviving spouse. * **The property must be taxable at the donee-spouse's death**. In the case of a bequest, the first decedent's executor makes an irrevocable election that the property remaining at the surviving spouse's death is taxable in her estate. * The surviving spouse must have the right to convert the trust corpus to income producing property. In the example above, if the husband had made an election on his gift tax return (Form 709) to qualify the life estate in trust for the marital deduction, then he could receive a marital deduction for his wife's lifetime income interest. However, since the husband transferred the property using a marital deduction to avoid gift taxation, **then the full FMV of the trust's assets will be included and taxed in the wife's estate at her death**. **Had the husband given his wife a life estate in the trust with a general power of appointment over the trust corpus, then the value of the wife's income interest would have qualified for the gift tax marital deduction**.

Answer 64

* The Donor’s Spouse - Must be a U.S. Citizen at the time the gift is made or the unlimited marital deduction is denied. Gifts to a green card holder or non-U.S. citizen spouses qualify for a $159,000 (2021) maximum exclusion. * Property Transferred to the Donee-Spouse - Must not be the type of terminable interest that will disqualify the gift for the marital deduction. * The Recipient of the Gift - Must be spouse of the donor at the time the gift was made.

Answer 65

IRS Publication 526 offers a quick reference to deductible and nondeductible charitable contributions. **In certain cases a donor will transfer a remainder interest to a qualified charity**. A personal beneficiary will be given all or part of the income interest in the transferred property, and the **charity will receive the remainder at the termination of the income interest**. Where a charitable remainder is given to a qualified charity, **a gift tax deduction is allowable for the present value of that remainder interest only if at least one of the following conditions is satisfied**: * The transferred property was either a personal residence or a farm. * The transfer was made to a charitable remainder annuity trust (CRAT). * The transfer was made to a charitable remainder unitrust (CRUT). * The transfer was made to a pooled income fund (PIF). **Charitable gifts made during a donor's lifetime may result in charitable income tax deductions that will reduce a donor's income tax liability in the year the gift was made**. **Inter vivos charitable gifts also reduce the value of a donor's gross estate, since the gifted property and any future appreciation on that property are removed from the donor's gross estate**.

Answer 66

Charitable Deduction **A donor making a transfer of property to a qualified charity may receive a charitable gift tax deduction equal to the value of the gift, to the extent not already excluded by the annual exclusion**. * The **net effect of the charitable deduction, together with the annual exclusion, is to avoid gift tax liability on gifts to qualified charities**. * There is **no limit on the amount that can be passed gift tax-free, to a qualified charity**. 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. According to Section 170(c) of the IRC, a qualified charity is defined as: * 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. * A church, synagogue, or other religious organization; * A war veterans' organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions; * A nonprofit volunteer fire company; * A 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); * A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes; * A 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. * A 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;

Answer 67

The process of computing the gift tax payable **begins with ascertaining the amount of taxable gifts in the current reporting calendar year**. To find the amount of taxable gifts, it is first necessary to value all gifts made. If appropriate, **the gift is then split**, and **annual exclusions and marital and charitable deductions are applied**. Assume a single donor in the last month of 2023 makes certain outright gifts: $160,000 to his son $125,000 to his daughter $8,000 to his grandson That is a total of $293,000. Although there were three donees, the **annual exclusion was $40,000** and did not total three times $17,000, or $51,000. This is because the **annual exclusion is the lower of $17,000 or the actual net value of the property transferred**. In this example, the gift to the grandson was only $8,000, which limits the annual exclusion for that gift to $8,000. ($17,000 + $17,000 + $8,000 = $42,000)

Answer 68

Gift splitting is only permitted between spouses who are U.S. citizens. **Both spouses must mutually agree to make gifts to others in equal amounts**. Gift splitting **reduces the potential gift tax liability for each spouse by cutting that liability in half**. Gift splitting cannot be applied when spouses make gifts to each other. How can the IRS determine that both spouses have consented to gift splitting when there is no IRS form for filing joint gift tax returns? The answer is that **individual gift tax returns or Form 709**. Form 709 must be filed in the following situations: * **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**. Gift tax returns are due on April 15th following the calendar year that gifts have been made.

Answer 69

PRACTITIONER ADVICE Note that gift splitting does not pertain to gifts made to spouses.

Answer 70

When the total value of taxable gifts for the reporting period is determined, then the actual tax payable can be computed. Taxable gifts are gifts that have been reduced by gift splitting, annual exclusions, marital deductions and charitable deductions.

Answer 71

* Step 1. Compute gift tax on all taxable gifts regardless of when made. The tax on $15,383,000 is $6,099,000 * Step 2. Compute gift tax on all taxable gifts made prior to the present gifts: $0 * Step 3. Subtract Step 2 result from Step 1 result: $6,099,000 * Step 4. Enter gift tax unified credit remaining: $5,113,800 * Step 5. Subtract the Step 4 result from the Step 3 result to obtain gift tax payable: $985,200 * The widow must file a gift tax return, an IRS Form 709.

Answer 72

* **Gift and estate taxes are progressive**. * This means that tax **rates range from 18% to 40%**. * Gift and estate taxes are also **cumulative**. * All taxable gifts made from 1932 to the present are added to current taxable gifts to determine the current year's gift tax liability. * **Since gift taxes are cumulative and progressive, each new taxable gift will increase the donor's gift tax liability before the unified credit is applied to reduce the overall tax**. * **For estate taxes, all taxable gifts made from 1977 to the present are added back to calculate the estate tax at a higher rate**.

Answer 73

**This illustrates the cumulative nature of the gift tax and the progressive rate structure**. (The $100,000 prior taxable gifts pushed the present $15,383,000 of taxable gifts into a higher gift tax bracket)

Answer 74

Determining Amount of Unified Credit Remaining The Ryans also want to know how much of their individual unified credit is left after making taxable gifts in 2022 and 2023. * They **each started with a unified credit that was reduced each time they made a taxable gift in 2022 and 2023**. * They each made taxable gifts of $14,000 in 2022 and $14,000 in 2023 for total taxable gifts of $28,000. * **The tax on $28,000 is $5,560, so their unified credit is reduced by this amount**. * **The unified credit amount in 2023 is $5,113,800**. Each spouse has a unified credit of **$5,108,240 remaining to offset future taxable gifts**. Note that **when each spouse dies, the $28,000 they made in taxable gifts will be added into their estate tax calculation as an adjusted taxable gift**. * The reason is that the estate tax is also cumulative, adding in all taxable gifts made after 1976.

Answer 75

The **donor must report gifts made during the current year by filing a gift tax return**. * This is known as the **Form 709**. * The IRS sets out the guidelines to specify under what conditions reporting of a gift is required and when it is not required.

Answer 76

**A gift tax return is required for a gift of a future interest regardless of the amount of the gift**. Example #1 An individual transfers $100,000 to an irrevocable trust payable to the grantor's wife for life and then to the grantor's son, **a gift tax return would be required regardless of the value of the son's remainder interest**. The term future interest is defined the same as for annual exclusion purposes. It is a **gift in which the donee does not have the unrestricted right to the immediate use, possession or enjoyment of the property or the income from the property**.

Answer 77

**No gift tax return is due if no future interest gifts are made, until present interest gifts made to one individual exceed the $17,000 annual exclusion (2023)**. * At that point, **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)**.

Answer 78

A married woman gave $16,000 to her son and split the gift with her husband, each would have made a gift of $8,000 ($16,000/2) and the transfer would be tax-free. * A gift tax return must be filed by the wife to show that the husband consented to gift-splitting.

Answer 79

A **gift tax return must be filed and the gift tax due, if any, on reported gifts must be paid by April 15 of the year following the year in which the taxable gifts were made**. * When an extension is granted for filing an income tax return, that automatically extends the time limit for filing a gift tax return

Answer 80

Gift to Charities **No return must be filed, and no reporting is required for charitable contributions of $17,000 (2023) or less unless a non-charitable taxable gift is also made**. In that case, the charitable transfer must be reported at the same time the non-charitable gift is noted on a gift tax return. **If the value of the charitable transfer exceeds $17,000, the general rule is that the transfer must be reported on a gift tax return for that year unless the transfer is of the donor's entire interest in the property**. **A person making an end-of-year gift to a charity must send the check prior to January 1st of the new year to get a charitable income tax deduction**. * Unlike checks to individuals, **checks to charities need not be cashed before the end of the year to count as a deductible gift**. If a split-interest gift is made to a charity, a transfer with charitable and non-charitable donees of the same gift, the donor will not be able to claim a charitable deduction for the entire value of the transfer. For example, 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.

Answer 81

Net Gift The **donor of the gift is primarily liable for the gift tax**. However, if the donor for any reason fails to pay the tax when it falls due, **the donee becomes liable to the extent of the value of the gift**. This **liability begins as soon as the donor fails to pay the tax when due**. If a donor makes a gift and the donee decides, voluntarily, to pay the gift tax out of the property just received, the **gift tax value of the gift is the entire fair market value of the property**. In other words, if the donee is not obligated by the terms of the gift to pay the gift tax but chooses to pay it anyway, **he or she must pay a tax based on the full fair market value of the property received, based on the donor’s gift tax bracket**. Conversely, **if the terms of the gift obligate the donee to pay the gift tax, the value of the gift, and therefore the amount of the gift tax liability, is reduced**. If a gift is made subject to an express or implied condition at the time of transfer that the gift tax is to be paid by the donee or out of the property transferred, **then the donor is receiving consideration**. **Therefore, the donor would report taxable income if the amount of gift tax paid by the donee exceeds the donor’s adjusted basis in the property**. The **value of the net gift is measured by the fair market value of the property passing from the donor, less the amount of any gift tax paid by the donee**. * **The donor’s unified credit must be used first for this technique to apply**. The formula used to compute the **donee’s gift tax** is: **The donor’s tentative tax ÷ (1 + donor’s gift tax rate)**

Answer 82

The formula used to compute the donee’s gift tax is: **The donor’s tentative tax ÷ (1 + donor’s gift tax rate)**

Answer 83

The first step is to calculate the taxable gift of $16,000,000 ($16,017,000 - $17,000 annual exclusion). * The donor’s tentative tax on a taxable gift of $16,000,000 is $1,232,000 (Use the table below to calculate the tax on $16 million, then minus the uncle’s unified credit of $5,113,800) * When the uncle dies, the net amount of the gift will be added onto his estate tax return (Form 706) as an adjusted taxable gift. The net amount of the gift is $14,768,000 (gift of $16 million – $1,232,000 gift tax paid by his niece) * The gift tax credit on the uncle’s Form 706 is $1,232,000 * If the uncle dies within 3 years of making this gift, the $1,232,000 gift tax paid will be included in his gross estate under the “gross up” rule. * The niece’s net value of the gift is $16,017,000 - $1,232,000 = $14,785,000

Answer 84

Generally, **the gift tax must be paid at the same time the return is filed**. * However, reasonable extensions of time for payment of the tax can be granted by the IRS, but only **upon a showing of undue hardship**. * This **means more than inconvenience**. It must appear that the party liable to pay the tax will suffer a substantial financial loss unless an extension is granted. * A forced sale of property at a sacrifice price would be an example of a substantial financial loss.

Answer 85

**When a lifetime gift is made by a donor to a donee, the donee does not have to pay any tax when the gift is received**. * However **if the donee subsequently sells the gifted asset, a capital gains tax may be assessed at that time**. * To calculate a tax on the property sold, **the donee must first determine their carry over basis**.

Answer 86

In this situation, **the donee's new cost basis and holding period will depend upon what price the donee eventually sells the asset for**. * If the FMV on the date of the gift is less than the donor's basis, and the donee sells the property at that price (FMV) or lower, then **the donee's new basis will be the FMV of the gift at the date of transfer.** Furthermore, t**he donee's holding period also begins on the date the gift is made**. Example #1 * A father's basis in stock is $12,000 and he gifts the stock to his son when it is worth $10,000. The son then sells the stock six months later for $8,000. The son's carry over basis is $10,000 because the FMV was lower than the donor's basis and the sale price was lower than the donor's basis. * In addition, a new holding period began on the date of the gift. Since only 6 months passed between receipt of the gift and the son's sale, there is a short-term capital loss of $2,000.

Answer 87

If the **donee subsequently sells the property at any price greater than the FMV at the time of the gift but less than the donor's basis**, **there is no gain or loss recognized on the sale**. Example #2 A mother's basis in stock is $20,000 and she gifts the stock to her daughter when it is worth $16,000. If the daughter sells the stock for $18,000 her carryover basis is $16,000, but **since the sale price falls between the mother's original basis ($20,000) and the carryover basis ($16,000), she recognizes no capital gain or loss on the sale**.

Answer 88

If a donor gifted property whose FMV was less than his adjusted basis and the donee subsequently sells the property for a gain, **then the donee's basis is the donor's adjusted basis. The donee will assume the donor's full holding period**. Example #3 An uncle purchased volatile stock several years ago for $50,000. He gifted this stock to his nephew when the FMV was $30,000. When the nephew sold the stock six months later for $60,000 **his carry over basis was his uncle's adjusted basis of $50,000**. The nephew's **long-term capital gain was $10,000 (the full holding period applies)**.

Answer 89

The **holding period for inherited property that is subsequently sold is a long-term capital gain, regardless of the actual holding period**. Example A son inherited stock from his father with a stepped-up basis of $100,000. The son sold the stock four months later for $110,000, therefore, the son will have a $10,000 long-term capital gain.

Answer 90

When **property with a mortgage is gifted, only the net amount is subject to gift tax**. Example Jim bought waterfront property many years ago for $225,000. The property is now worth $800,000 and has a mortgage of $500,000. Jim gifted this property to his daughter Kate, and the gift is valued at $300,000 ($800,000 - $500,000). Jim's capital gain is $275,000 based on his mortgage debt of $500,000 minus his basis of $225,000. Kate's new basis in the land is $500,000 derived from Jim's basis of $225,000 plus Jim's capital gain of $275,000.

Answer 91

A **bargain sale is part sale and part gift**. * The **sale price is below FMV and the difference between the sale price and FMV is the gift**. * Bargain sales **can be made with charities, so that the donor gets cash from the sale** (gains must be reported) and a **partial income tax deduction for the gift**. * **A bargain sale with family members could result in a taxable gift**.

Answer 92

* Linda's taxable gain is $300,000 ($400,000 sale price minus basis). * Dave's basis is $400,000, his purchase price. * Linda's gift is $200,000 minus the annual exclusion [i.e., $185,000 ($200,000 - $15,000)].

Answer 93

**A donor who gifts over $12,920,000 (2023) in his lifetime must pay gift taxes on any subsequent taxable gifts**. **If the donor must pay a gift tax when a gift is made, and the FMV of the gift is greater than the donor's basis, then the gift tax is included in calculating the donee's new basis in the gifted property**. If gift taxes were paid **when the FMV of the gift was less than the donor's basis, then the gift tax adjustment is not made to the donee's basis**.

Answer 94

Ruthie can use an annual exclusion of $17,000 (2023) to reduce the gift tax since she has not made any other gifts to Mary this year. Therefore, her taxable gift is $48,000 for which the gift tax is calculated to be $19,200. * Donee's Basis = {[Appreciation ÷ (FMV - Exclusions - Deductions)] x Gift Tax Paid} + Donor's Basis

Answer 95

* **Marital Deduction**: An individual who transfers property to a spouse is allowed an unlimited deduction called the **gift tax marital deduction**, as long as the spouse is a U.S. citizen. A marital deduction cannot be taken if the donee spouse is not a U.S. citizen. However, a transfer to a non-citizen spouse qualifies for an annual exclusion of $175,000 in 2023, which is indexed for inflation. This allows spouses to be treated as an economic unit. * **Charitable Deduction**: Available to a donor who makes a gift to a qualified charity. The gift tax charitable deduction is e**qual to the value of the gift minus the annual exclusion**. Where a charitable remainder is given to a qualified charity, a **gift tax deduction is allowable for the present value of that remainder interest if the transfer was a personal residence or farm, or it was made to a charitable remainder annuity trust, unitrust or a pooled income fund**. * **Calculating Gift Tax Payable**: Begins with the step of **ascertaining the value of all gifts made in the current year, from which the amount of taxable gifts is calculated**. The process of calculation **involves gift splitting, deducting the annual exclusion per donee, and taking marital deductions and charitable deductions**. * **Reporting of Gifts**: Done through filing **gift tax returns and completing Form 709**. A **gift of future interest requires filing of a gift tax return regardless of the amount of the gift**. If present interest gifts made to any one donee exceeds $17,000, a gift tax return must be filed. No reporting is required for charitable contributions of $17,000 or less in value **unless a non-charitable taxable gift is also made in the same year**. The **donor of the gift is primarily liable for the gift tax**. The **gift tax must be paid at the same time the return is filed**, unless the IRS grants an extension due to undue hardship.

Answer 96

$11,500 * Each spouse has made a taxable gift of $11,500 for a combined taxable gift of $23,000. Calculation: Gift-splitting: $23,500 divided by 2 = $11,500.

Answer 97

$25,000 * The $25,000 charitable is not included in gifts that are subject to tax.

Answer 98

$18,000 Each spouse has made a taxable gift of $12,000 for a combined taxable gift of $24,000. Calculation: Gift: $40,000 x 3 children = $120,000. Gift-splitting: $120,000 divided by 2 = $60,000. Annual Exclusions: $17,000 x 3 = $51,000. $60,000 minus $51,000 = $9,000 in taxable gifts for each spouse, or the couple made $18,000 in taxable gifts this year. Each spouse's taxable gifts of $9,000 are offset by their applicable credit of $5,113,800 (2023), so gift taxes do not need to be paid.

Answer 99

* **Gratuitous Transfers**: The IRS does not consider certain gratuitous transfers as qualified gifts. **Gratuitous services are not a transfer of property or interest in property, and so do not qualify as a gift.** **Promises to make a gift are not subject to gift tax** even if the gift is enforceable. **Sham gifts made so that tax liabilities are shifted from a high income tax bracket to a lower income tax bracket are not considered gifts for tax purposes because they have no real economic significance other than shifting tax**. There are certain gifts that are **totally exempt from gift tax**. They include **qualified disclaimers, certain transfers of property between spouses in divorce and separation situations, tuition paid to an educational institution and payment of medical care**. * **Completed Transfer**: A gift is **subject to gift tax only when the transfer of property is complete.** If the gift is beyond the donor’s recall, and the donor does not have any power to change the disposition of the gift, such as altering the identity of the donee or the amount of the gift, it is a completed transfer. T**he most common cases of incomplete gifts are incomplete delivery, cancellation of notes, or incomplete transfers to trusts**. Valuation of a gift for gift tax purposes must be done on the date the transfer becomes complete. * **Computing the Tax**: A married donor has the option of gift splitting with the consent of the non-donor spouse. The gift is treated as though each spouse has made one-half of the gift. The annual gift tax exclusion allows a donor to make a tax-free gift of up to $17,000 per donee to any number of donees. **An individual who transfers property to a spouse is allowed an unlimited deduction called the gift tax marital deduction**. A marital deduction cannot be taken for gifts to a non-citizen spouse, but an annual exclusion of $164,000 (2022) can reduce the gift tax liability. **Charitable deductions are equal to the value of the gift to the charity, less the annual exclusion**. The first step in calculating the gift tax is valuation of the property gifted by the donor. The next step is to apply the annual exclusions and deductions allowed to get the net taxable gifts amount. **Gift tax must be paid on this amount unless sheltered by the applicable credit amount.** The gifts thus computed must be **reported to the IRS by filing a gift tax return, known as the Form 709**. The **gift tax must be paid at the same time the return is filed**, unless the IRS grants an extension due to undue hardship.

Answer 100

$17,000 * The annual exclusion generally allows the donor to make transfers of up to $17,000 (2023) per year to any number of people. * To qualify for the annual exclusion, this gift must constitute a present interest.

Answer 101

I, III, and IV * To be considered a completed gift for gift tax purposes, three requirements must be met: The donor must intend to make the gift. The gift must be delivered to the donee. The gift must be accepted by the donee. Form 709 completion is not a requirement to be considered a completed gift.

Answer 102

I and II * To gift-split the donor must be married and obtain consent of non-donor spouse. * Gift-splitting increases the maximum annual individual gifts to $34,000 for an unlimited number of recipients * Gift splitting only applies to lifetime transfers not to transfers at death and is available for both present and future interest gifts. * If the spouses elect to split gifts, all gifts made by either spouse during that calendar year must be split.

Answer 103

Income shifting * The tax-oriented benefits associated with lifetime gifts include: potential federal estate tax savings and income tax shifting (i.e., gifting income-producing assets from a high income-tax-bracket taxpayer to a low income-tax-bracket taxpayer)

Answer 104

$445 * Unearned Income $3,500 Standard Deduction Minus $1,250 Taxed at child's rate Minus $1,250 Net Unearned Income $1,000 Taxed at Parents' Rate Times 32% Kiddie Tax $320 $1,250 @ 10% Plus $125 Total $445

Answer 105

donor; donee * With respect to lifetime gifts, there are two definitions we must be familiar with: The donor is the person making the gift. The donor is the person who makes the gratuitous transfer of assets to another person or entity. The donee is the person or entity that is the recipient of the lifetime gift from the donor.

Answer 106

$2,265,200 * Gift to daughter $18,600,000 minus the annual exclusion of $17,000 equals a taxable gift of $18,583,000. * Total taxable gifts equal $18,583,000. * Step 1. Compute gift tax on all taxable gifts regardless of when made. The tax on $18,583,000 is $7,379,000 * Step 2. Compute gift tax on all taxable gifts made prior to the present gifts: $0 * Step 3. Subtract Step 2 result from Step 1 result: $7,379,000 * Step 4. Enter gift tax unified credit remaining: $5,113,800 * Step 5. Subtract Step 4 result from Step 3 result to obtain gift tax payable: $2,265,200 The father must file a gift tax return, an IRS Form 709.

Answer 107

Property has not been transferred * In a number of property transfer cases, the gift tax is not imposed since these transfers do not involve gifts in the tax sense. These situations fall into three basic categories: * Where property or an interest in property has not been transferred, * Certain transfers in the ordinary course of business, and * Sham gifts. A situation where interest in property has been transferred may be considered a gift and, as a result, would receive taxable treatment.

Answer 108

I, II, III, and IV * All of these are taxable gifts. * A taxable gift may include direct, as well as indirect gifts, gifts made outright and gifts in trust (of both real and personal property). * A gift tax is imposed on the shifting of property rights, regardless of whether the property is tangible or intangible.

Answer 109

If the donor owns an asset that has a substantial amount of depreciation. * Gifting may be used 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.

Answer 110

Form 709 * The donor must report gifts made during the current year by filing a gift tax return. * This is known as the Form 709.

Answer 111

whether the donee has reached the age of majority * Certain factors are examined by courts to determine if there was an intent to make a gift: * Was the donor legally competent to make a gift? * Was the donee legally competent to accept the gift? * Was there a clear and unmistakable intention on the part of the donor to absolutely, irrevocably and currently divest himself or herself of dominion and control over the gift property?

Answer 112

all of the above * 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. * According to Section 170(c) of the IRC, the following organizations, and several others, are considered qualifying charities. * A war veterans' organization * A church, synagogue, or other religious organization * A civil defense organization created under federal, state, or local law

Answer 113

the father * The assignment of income doctrine states that income earned or belonging to one individual, cannot be assigned to another simply to gain tax-favored treatment. * By directing right’s to next year’s rent earned from the condominium to his daughter, the father has assigned income and, consequently, will be taxed.

Answer 114

completed transfer * When the donor has irrevocably parted with dominion and control over the gift a completed transfer has occurred. * A completed transfer is necessary before the gift tax can be applied.

Answer 115

9 months * To treat a disclaimer as qualified. The refusal or rejection of the benefits must be in writing. The writing must be received by the transferor, his legal representative or the 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.

Answer 116

Inter Vivos Gifts * Gifts are made while you are and are referred to as inter vivos gifts. * **Transfers of property made at death**, in comparison, are known as **bequests**.

Bryant - Course 6. Estate Planning. 3. Gifting Flashcards

(149 cards)