Gift x Estate Tax Compliance and Calculation Flashcards
List the elements of a gift.
- donor must have the intent to make a voluntary transfer
- donor must be competent to make the gift
- donor must part will all dominion/control of gifted property
- donee must be capable of receiving the gift
- donee must take delivery of the gift
Definition of a gift.
- a voluntary transfer, for less than full consideration, of property from one person to another person/entity
GIFT Lou transfers $10K to her gradnson; her grandson has not worked for, sold, or transferred anything to Lou for the $10K. Lou has made a $10K gift to her grandson.
NOT A GIFT Lou transfers $15K to Mae. Mae transfers the title of her car (with a FMV of $15K) to Lou. Lou has not made a gift to Mae.
Even if they later find the car to have a FMV less than $15K, Lou did not have an intent to transfer an amount greater than the belived FMV. Thus, it is a sale and not a gift.
Define full and fair consideration.
- consideration is the value of property transferred in return for other property
- a gift is made whenever an exchange of property occurs and one of the parties does not receive full and fair consideration for their property
List the types of gifts.
- direct gift
- indirect gift
- complete gift
- incomplete gift
- net gift
- reversionary interest
Define a direct gift.
- a donor gives property directly to the donee
- the donor does not retain any control over the property after the exchange
DIRECT GIFT
Joe gives his car to Jason.
Define an indirect gift.
- a payment or exchange is made from one party to a third party for the benefit of the donee
- Ivan pays tuition for his nephew William. He makes the payment directly to the university.
- when one person titles property in joint tenancy with another person and the other person had not paid for their ownership share
- April buys a vacation home and titles it in joint tenancy with rights of survivorship with her brother Billy. If Billy has not paid anything towards the purchase of the vacation home, April has made an indirect gift to Billy equal to 1/2 of the equity in the property.
- an interest free or below market loan is considered an indirect gift
- Jill lends $25K to her sister for cosmetic surgery for repayment over 5 years at 6% interest. One year later, Jill forgives the debt.
Define a complete gift.
- a gift is completed when the donor no longer has “dominion and control” over it
Brandon opens a joint checking account with his brother Shane. Brandon deposits $30K into the account and Shane deposits nothing. 3-months later, Shane withdraws $15K. The gift is complete when Shane removes the money as Brandon will no longer have dominion or control over it.
TrDefine an incomplete gift.
- transfers that include naming a revocable beneficiary or transfers to a revocable trust are incomplete gifts
- in this transfer, the donor has kept the ability to direct the ultimate dispositon of the property or make changes to the beneficiaries, thus they have retained dominion and control of the property
- because the donee has not been given dominion and control of the property, the gift is incomplete
Define a reversionary interests.
- interests in property that have been transferred away but may revert back to the original donor “in the event
or “on the condition” that something specific happens - the value of the gift is not the FMV, rather the value of the gift is the present value of the right to use the property
- subject to both gift and estate tax consequences
Define net gifts.
- a gift made on the condition that the donee pay the gift tax
- do not product gift tax savings, rather offer a strategy for reducing the gift’s value for gift tax purposes
- Bob plans to get Mae 1M.
- At the current gift tax rate of 40%, the gift would incur $400K in gift tax.
- If Mae agrees to pay the tax, the value of the gift is reduced as follows: $400K ÷ (1 + 40%) = $285,714 gift tax due
- If the gift is not cash but appreciated property, any tax Mae pays above Bob’s basis will result in Bob paying capital gain taxes.
- Bob gifts Mae property with FMV of 1M, basis of 200K. If Mae payes $285,714 in gift taxes, Bob will be required to pay capital gains tax on the $85,714 ($285,714 - $200,000)
List the imputed interest rules for no-interest and below-market loans.
- $0-$10K loans = $0 imputed interest
- $10K-$100K = the lesser of:
- borrower has net investment income less than $10K
- interest calculated using AFR minus “interest” being charged on the loan
- $100K or more = interest calculated using AFR minus “interest” being charged on the loan
How is the creation of a joint bank account where one person contributes the entire amount treated for gift tax purposes?
- it is not considered a gift when the person who contributes the funds opens the account and alerts the other person of it
- it is considered a complete gift only when the other person withdraws from the account
Discuss the requirements and limitations of the annual exclusion.
- REQUIREMENTS
the gift must be of present interest
- LIMITATIONS
the annual exclusion is the amount a person may gift another person, per year without incurring gift tax (15K for 2020)
annual exclusion is a per person/per year exclusion, a person could give 15K to 100 people and not incur gift tax
special annual exclusion for non-citizen spouses of $157K; citizen spouses receive unlimited deductions
in addition to the 15K annual exclusion, each person has a $11,580 lifetime exclusion (equal to $4,577,800 tax)
Define a taxable gift.
- a taxable gift is any gift in excess of the annual exclusion
- a taxable gift will only be subject to tax if the total of lifetime gifts exceeds the lifetime exemption of 11.7M or its tax credit equivalency of 4,680,000
Explain the advantage of using the election to split gifts.
- allows a married couple to gift twice as much as an individual without being subject to a gift tax
- 2020/2021 annual gift exclusion is $30,000 for a couple
Dave and Dani want to help their son put an addition on his home which will cost $21K. Knowing they would be subject to gift taxes on the funds if they wrote a $21,000 check, the couple decide to gift-split. Dave writes one check for $10,500 and Dani writes another for the same amount.
By keeping their individual gift amount under the $15,000 limit they avoid the 6K gift tax incurred had they written one check for $21K (21 - 15 = 6).
