Chapter 6 - Lifetime Transfers by Gift - An Overview of Federal Gift Taxation Flashcards
Inter Vivos Gift
A gift inter vivos, which means a gift between the living in Latin, is a legal term that refers to a transfer or gift made during the life of the grantor. Inter vivos gifts, which includes property related to an estate, are not subject to probate taxes since they are not part of the donor’s estate at death.
Testamentary Gift
Testamentary gift is a gift made by will. Such gifts do not become effective until the death of the donor.
The Advantages of Gifting
The Advantages of Gifting
• $15,000 federal gift tax annual exclusion (2019) ($30,000 if gift splitting)
• gross up rule—gift tax paid at least 3 years before donor’s death avoids gross estate
• appreciation in property not subject to estate tax
• income tax savings—transfer of property from high-income-tax-bracket donor to
lower-bracket donee
• achievement of other favorable tax treatment
- IRC Sec. 303 stock redemption
- IRC Sec. 6166 estate tax installment payouts
- IRC Sec. 2032A special-use valuation
• basic credit amount leverage
Gift Tax Allowable Redutions
Before the tax on a transfer is computed,
certain reductions are allowed. These reductions may include the following:
• gift splitting
• an annual exclusion
• a marital deduction
• a charitable deduction
Gift Splitting
One spouse makes the full gift of $30,000 but for the purposes of taxes it is claimed that both spouses made a $15,000 gift, therefor under the nonreportable gift allowance.
Only allowed while married.
Gift Tax Exclusion
Generally, the annual exclusion allows the donor to make up to $15,000 (2019) worth of gifts (other than future-interest gifts, defined below) tax free to any number of persons each year. Because an exclusion of up to $15,000 is allowed per donee per year, the total maximum excludible amount is determined by multiplying the number of persons to whom gifts are
made by $15,000. For example, if an unmarried man makes cash gifts in 2019 of $2,000, $8,000,
and $16,000 to his brother, father, and son, respectively, the $2,000 and the $8,000 gifts are fully
excludible; $15,000 of the $16,000 gift to his son is excludible.
Present Interest Gift vs Future Interest Gift
Enjoyment of the gift begins now vs later, the annual exclusion only applies to present value gifts.
Crummey powers
Demand Powers
The 5-and-5 Power Rule
Suppose Franny was a beneficiary of a trust established by her mother many years ago. The trust provided income to Franny for life and a noncumulative, annual general power of appointment over the greater of $5,000 or 5 percent of the trust corpus. Under the
trust Franny was given the power to appoint 12 percent (7 percent more than 5 percent under the 5-and-5 power) of the trust. If the value of the trust remains at all times at $800,000, each lapsing year Franny will be treated for gift tax purposes as if she made a
gift of 7 percent of the value of the trust, or $56,000.
Gifts to Minors & Qualifying for the Annual Exclusion
There are three basic means of qualifying
cared-for gifts to minors under Sec. 2503:
• a Sec. 2503(b) trust
Requires income produced by the trust to be distributed annually, it can be reinvested into a custodial account. Does not have to be distributed by age of majority.
• a Sec. 2503(c) trust
Requires that income and principal be paid when the minor reaches age 21.
• the Uniform Transfers (Gifts) to Minors Act
The custodian, who may be the donor, holds the property for the minor. UGMA accounts are permitted to hold cash, life insurance, securities, and annuities, but not real property. UTMA accounts, on the other hand, in addition to UGMA property interests, can hold any type of transferable property interests such as intellectual property, real property, patents, partnership interests, and so forth. Transfers to UTMA accounts are treated as completed gifts.
Requirements to Qualify for Gift Tax Marital Deduction
For a gift to qualify for the gift tax marital deduction, the following conditions must be satisfied:
• The recipient of the gift must be the spouse of the donor at the time the gift is made.
• The recipient spouse must be a U.S. citizen.
• The property transferred to the donee spouse must not be a terminable interest that disqualifies the gift for the marital deduction.
super-annual exclusion
a special provision was enacted to permit significant nontaxable transfers to an alien spouse as an exception to the rule. Transfers to an alien spouse qualify for a basic super-annual exclusion amount of $100,000 ($155,000 in 2019 as indexed for inflation) each year if
• the gift otherwise qualifies as an annual-exclusion gift
• the gift meets the requirements for a gift tax marital deduction (except for the requirement that the donee is a U.S. citizen)
Future Interest Gifts
A gift tax return (Form 709) is required for a gift of a future interest regardless of the amount of the gift. For example, if a grantor transfers $100,000 to an irrevocable trust payable to the grantor’s spouse for life and then to the grantor’s son, a gift tax return is required regardless of the value of the son’s remainder interest.
The gift of a life insurance policy will always qualify for the annual gift tax exclusion, whether the policy is transferred outright or to a trust?
False
A gift of life insurance is a present-interest gift if it is made outright. However, since it is not income-producing property, it is difficult or impossible to ascertain the value of the income interest. Therefore, a gift of life insurance is typically one of a future interest if it is transferred to a trust. Unless certain conditions are met, such a gift of life insurance to a trust will not qualify for the gift tax annual exclusion.
The Uniform Gifts to Minors Act allows gifts of all types of property to minors to qualify for the annual gift tax exclusion?
False
Under the Uniform Gifts to Minors Act, gifts in most states are limited to securities, cash, insurance policies, or annuities.
