Gifting Flashcards
Use of Gifting
Use of Gifting
Gifting may be used in any of the following situations:
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 of the 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.
When a donor would like to see the donee use the gift during the donor’s lifetime.
When the donor would like to reduce probate costs and estate administration expense.
When giving away assets (other than closely held stock, to which all of the following Internal Revenue Code (IRC) Sections apply) will make it easier to qualify for:
An IRC Section 303 redemption of stock,
An IRC Section 6166 installment payout of taxes attributable to a closely held business interest, or
An IRC Section 2032A special use valuation for certain real property used for farming or closely held business purposes.
When a married estate owner wishes to equalize the estate of both spouses, enabling each spouse to own sufficient assets with which to fully utilize their respective estate tax exclusion amounts.
Under current federal law, an unlimited amount of assets may be gifted to a U.S. citizen spouse and not be subject to federal gift tax liability. However, it is important to consider any state gift tax liability as well as the federal gift tax liability.
When the donor has the opportunity to reduce his or her income tax liability by gifting an income-producing asset.
For example, a property owner in a high marginal tax bracket (e.g, 37%) may make a gift to a donee in a lower marginal tax bracket (e.g., 12%) to reduce federal income tax.
Unearned income
Unearned income refers to items such as interest, dividends and capital gains. The Kiddie Tax applies when all net unearned income of a child is taxed to the child using the parent’s marginal tax brackets.
A child is defined as:
Age 18 and has not attained age 19 before the close of the tax year.
A full full-time student age 19-23 who does not earn more than half of their own support. Scholarships do not count as support.
Gifting Requiremennts
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.
A gift for the purpose of the gift tax is a transfer of assets from a donor to a donee, without adequate consideration of money or money’s worth. It can thus include:
A. Reassign of title of property in a community property state to a beneficiary
B. Forgiveness of personal debt
C. Forgiveness of interest on an intra family below market loan
D. Transfer of benefits of an insurance policy
E. Discounts on diamond purchases
Correct Answers: B., C. and D.
Explanation: In addition to direct transfers, gifts can also take the form of the forgiveness of a debt, foregone interest on an intra-family interest-free or below market loan, the assignment of the benefits of an insurance policy or the transfer of property to a trust. In community property states, one spouse cannot make a gift of the property to the third person, without the consent of the other spouse. Assignment of income or property done only for tax purposes is not considered a gift. Also, discounts and commissions offered as a normal business practice do not fall in the category of gifts.
The reasons for gifting are either to save tax or to see the donee benefit by the gift. Giving away assets more than three years prior to death, other than closely held stock will make it easier to qualify for:
A. an IRC Section 303 redemption of stock
B. an IRC Section 2503(c) uniform gifts to minors
C. an IRC Section 6166 installment payout of taxes attributable to a closely held business interest
D. an IRC Section 2032A special use valuation for certain real property used for farming or closely held business purposes
Correct Answers: A., C. and D.
Explanation: Giving away assets other than closely held stock will make it easier to qualify for an IRC Section 303 redemption of stock, an IRC Section 6166 installment payout of taxes attributable to a closely held business interest, and an IRC Section 2032A special use valuation for certain real property used for farming or closely held business purposes.
Sufficiency of Consideration Test
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.
Types of Gifts
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.
The gift tax is 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. In that sense it is:
A. An excise tax
B. A countervailing duty
C. An income tax
D. A indirect tax
Correct Answer: A. An excise tax.
Explanation: 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.
Assuming that the gift is complete, it can be subject to gift tax, if the donee is:
A. A trust
B. A foundation
C. A partnership
D. An unknown identity
Correct Answers: A., B., C. and D.
Explanation: 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.
Assuming that the donor was competent to make a gift, the donee was capable of accepting the gift, and there was a clear intention on the part of the donor to divest himself or herself of dominion and control over the gift property, what are the other requisites in gifting:
A. A complete delivery to the donee of the gift
B. Acceptance of the gift by the donee
C. Consideration received by the donor equals the value of the property transferred
D. An irrevocable transfer of the present legal title
Correct Answers: A., B. and D.
Explanation: 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. An irrevocable transfer of the present legal title to the donee must be made so that the donor no longer has dominion and control over the property in question. The donor must make a complete delivery to the donee of the subject matter of the gift or the most effective way to command dominion and control of the gift. Another requirement is the 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.
The requirements of a valid and qualified disclaimer are:
A. The refusal must be in writing.
B. The transferor or his legal representative must receive the writing no later than one year after the date the person reached an age of 21 or the date on which transfer creating interest was made.
C. The person disclaiming must not have accepted the interest or any of its benefits.
D. The person disclaiming must specify who is to be the recipient of the disclaimed property.
Correct Answers: A. and C.
Explanation: 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.
A well-known novelist contracted with a motion picture company to make a movie on one of his famous works. In return the novelist was to receive a lump sum of $200,000, plus a royalty on the earnings of the movie of 10% of the gross sales. Before the movie was released for public viewing, he sold his son the right to his services for $1. The son, in turn, transferred the rights to the contract to a trust. Assume that in the first month after release, that is December 2020, the movie grossed $1 million. Who was due to pay the taxes and how much is the gross taxable income?
A. The son must pay tax on a gross taxable income of $100,000.
B. The trust must pay tax on a gross taxable income of $100,000.
C. The novelist must pay tax on a gross taxable income of $100,000.
D. The trust must pay tax on a gross taxable income of $300,000.
E. The novelist must pay tax on a gross taxable income of $300,000.
Correct Answer: E. The novelist must pay tax on a gross taxable income of $300,000.
Explanation: Incorrect. 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.
To which of the following transactions would the gift tax not be applicable?
A. Assignment of the right to next year’s rent from a building to a son
B. A property bequeathed and disclaimed by son
C. Transfer of property as per divorce settlement enforcement
D. Tuition fees paid for undergraduate course of a daughter paid directly to the school
E. Medical care payment for a parent paid directly to the health professional
Correct Answers: B., C., D. and E.
Explanation: 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
Reason to use Cancellation of Notes
It provides a simple means of giving gifts to a number of 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 $15,000 annual exclusion, as well as the unified credit.
Blockage Rule
Another principle, which applies to lifetime gifts as well as 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.
