Chapter 5 - Lifetime Transfers by Gift - An Overview

Question 1

Gift

Answer 1

Under common law, a gift is defined simply as a voluntary transfer without equal consideration. For tax law purposes, neither the Code nor the Regulations specifically define what is meant by the term gift.

Value of property transferred – Consideration received = Gift

Question 2

Direct gifts

Answer 2

Direct Gifts — Cash or tangible personal property—is the subject of most transfers affected by the gift tax law. Delivery of the property itself generally effectuates the gift. Real property is typically given by the delivery of an executed deed.

Question 3

Forgiving a debt constitutes a gift?

Answer 3

Forgiving a debt constitutes a gift in no-business situations. For example, if a father lends his son $100,000 and later cancels the note, the forgiveness constitutes a $100,000 gift.

Question 4

Debt forgiveness in return for services?

Answer 4

Some forgiveness of indebtedness, however, constitutes income to the benefited party. If a
creditor tears up a debtor’s note in return for services rendered by the debtor, the result is the
same as if the creditor compensates the debtor for the services rendered and the debtor then
uses the cash to satisfy the debt. The debtor realizes income and does not receive a gift.

Question 5

Is the Transfer a Taxable Gift?

Answer 5

Is the Transfer a Taxable Gift?
The factors used to make the determination if a transfer is a taxable gift include whether the
• donor and donee were respectively competent to make and accept the gift
• donor fully gave up all ownership and control of the property
• property was transferred for less than its value in money or money’s worth
• property value exceeded the federal annual exclusion amount ($15,000 for 2019)
• delivery of the gift is made to the donee

Question 6

Gratuitous Services Rendered

Answer 6

Regardless of how valuable the services are that one person renders for the benefit of another, those services do not constitute the transfer of property rights, and therefore do not fall within the scope of the gift tax.

Question 7

Disclaimers (Renunciations)

Answer 7

Generally, a potential donee is deemed to have accepted a valuable gift unless it is expressly refused. However, in some cases, an intended donee may decide (for whatever reason) that he or she does not want or need the gift. If the donee 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.

Question 8

Qualified Disclaimer

Answer 8

A disclaimer that does meet those requirements is called a qualified disclaimer and is treated for gift tax purposes as if the property interest passes directly from the original transferor to the person who receives it because of the disclaimer. In other words, the disclaimant is treated as if no transfer of property or interest in property was made to the person to whom the interest passes because of the disclaimer. The property is treated as though it passed directly from
the original donor to the eventual recipient. This makes the qualified disclaimer an important estate planning tool.

Question 9

There are a number of requirements for a qualified disclaimer of gifted property under federal
law:

Answer 9

• The refusal must be in writing.
• The refusal must be irrevocable.
• The writing must be received by the transferor, or the transferor’s legal representative, or the holder of the legal title to the property no later than 9 months after the later of: (1) the date on which the transfer creating the interest is made (date of death); or (2) the date the person disclaiming becomes 21.
• The person disclaiming must not have accepted the interest or any of its benefits.
• Because of the refusal, someone other than the person disclaiming must receive the property interest. The person making the disclaimer cannot in any way influence the selection of who will be the recipient of the disclaimed property.

Question 10

An ordinary business transaction is defined as?

Answer 10

An ordinary business transaction, defined as a sale,
exchange, or other transfer of property (a transaction that is bona-fide, at arm’s length, and free from donative intent) made in the ordinary course of business is considered as if made for an adequate and full consideration in money or money’s worth.

An example is an employer who makes flood-relief
payments to employees from a feeling of affection, charity, or similar impulses. It is not a gift if the primary impetus for the payment is: (1) the constraining force of any legal or moral duty; or (2) an anticipated economic benefit.

Question 11

A bad bargain is?

Answer 11

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 was made in return for adequate and full consideration in money or money’s worth. This assumes the transaction is bona-fide, at arm’s length, and not donative in intent.

Question 12

What Is Not a Taxable Gift?

Answer 12

• transfer in which transferor receives consideration equal to transferred property’s
value
• transfers made due to court orders
• transfers made due to dispute compromises
• promises to make a gift
• gratuitous services
• qualified disclaimed property
• transfers in ordinary course of business
• transfers within the annual exclusion amount
• certain transfers between spouses pursuant to divorce
• transfers to providers of educational or medical services
• transfers to political organizations
• incomplete gifts

Question 13

Exempt Gifts

Answer 13

Exempt Gifts
• qualified disclaimer
• educational tuition
• medical care
• political organization contributions

Question 14

gift causa mortis

Answer 14

Such a gift is called a gift causa mortis. It is a gift conditional upon the donor’s dying as he or she anticipates. What happens if the donor recovers? Assuming the facts indicate that the gift was indeed a gift causa mortis (that is, the transfer was made in
anticipation of death from a specific illness, and the gift was contingent on the occurrence of 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 a conditional gift that becomes complete only at the donor’s death and is, therefore, incomplete as long as the donor is alive.

Question 15

Totten trusts or pay-on-death (POD) account

Answer 15

Totten trusts (bank accounts in which the donor who is the named "trustee" makes a deposit for the donee—"Joanne Q. Donor in trust for James P. Donee"—and retains possession of the savings book) are typical revocable transfers. Because the donor retains the right of withdrawal until death (when the balance passes to the beneficiary), no gift occurs at the creation of the account, and the named donee is not generally entitled to the property until the donor's death.
This type of nonprobate arrangement is also called a pay-on-death (POD) account. Generally, a Totten trust or pay-on-death account may be in the form of a checking account, savings account, money market account, or certificate of deposit.

Question 16

Nontax Advantages of Lifetime Gifts

Answer 16

• privacy that would be impossible to obtain through a testamentary gift
• potential reduction of probate and administrative costs
• protection from the claims of creditors
• vicarious enjoyment of seeing the donee use and enjoy the gift
• opportunity for the donor to see how well—or how poorly—the donee manages business or other property
• provision for the donee’s education, support, and financial well-being

Question 17

Net Gift

Answer 17

One of the obligations that can be imposed upon a donee is a requirement that the donee pay
the gift tax. With a net gift, the value of the donated property is reduced by the amount of the gift tax.

Question 18

Gift Tax Property Valuation Problem Areas

Answer 18

Gift Tax Property Valuation Problem Areas
• encumbrance of debt or obligation
- fair market value diminished by debt amount (unless donor has personal  liability for debt)
• restrictions in use or disposition
- fair market value diminished by limitations
• transfers of large blocks of stock
- valuation discount may apply
• patents
- sales of comparable properties
- replacement costs
• life insurance
- replacement value of similar policy

Question 19

Under the blockage rule, a block of stock is valued at its full listed market value?

Answer 19

False
Under the blockage rule, a block of stock is valued with consideration of an appropriate discount for a transfer of a large quantity of stock at one time.

Question 20

A valid disclaimer of a gift may be either oral or written to be exempt from gift taxes?

Answer 20

False
One of the requirements for a qualified disclaimer is that the refusal of the gift must be in writing. An oral refusal is not acceptable.

Question 21

Forgiveness of a debt between family members does not constitute a gift?

Answer 21

False

Forgiveness of a debt constitutes a gift to the borrower even between family members.

Question 22

A Totten trust or pay-on-death (POD) account is an arrangement in which a donor makes a completed gift to a donee during lifetime, but the donee must wait until the donor’s death to take possession of the asset?

Answer 22

False
A Totten trust or pay-on-death (POD) account is an incomplete gift because the contributor/depositor of the account retains dominion and control over the account during lifetime.

Question 23

A gift is defined as a voluntary transfer without equal consideration?

Answer 23

True

Question 24

The contribution of one’s services can be considered a taxable gift if the services are rendered to an individual rather than a charity?

Answer 24

False
Gifts of services are not considered gifts that would fall within the scope of the gift tax. Only transfers of property or interests in property are treated as gifts potentially subject to the gift tax.