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PART
2—COURSE READING
FEDERAL
GIFT TAXATION
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Stephan
R. Leimberg and Ted Kurlowicz*
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If individuals could give away their entire estates during lifetime without the imposition of any tax, rational people would arrange their affairs so that at death nothing would be subject to the federal estate tax. Likewise, if individuals could give income-producing securities or other property to members of their families, freely and without tax cost, the burden of income taxes could be shifted back and forth to lower brackets, and income taxes would be saved.
The federal gift tax was designed to equalize the transfer tax treatment between taxpayers who make inter vivos (lifetime) transfers and those who transfer their assets at death. The unified nature of the federal estate and gift tax system combines both tax systems and a common set of rates is applicable to both inter vivos and after-death transfers.
The gift tax is an excise tax. It is not levied directly on 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 for less than full and adequate consideration. (The tax is imposed only on transfers by individuals, but certain transfers involving corporations are treated as indirect transfers by corporate stockholders.)
The gift tax is based on the value of the property transferred. It is computed on a progressive schedule based on cumulative lifetime gifts. In other words, the tax rates are applied to total lifetime taxable gifts (all gifts less the exclusions and deductions) rather than only to taxable gifts made in the current calendar year.
The Treasury regulations summarize the comprehensive scope of the gift tax law by stating that "all transactions whereby property or interests are gratuitously passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax." Almost any transfer or shifting of property or an interest in property can subject the donor (the person transferring the property or shifting the interest) to potential gift tax liability to the extent that the transfer is not supported by adequate and full consideration in money or money’s worth—that is, to the extent that the transfer is gratuitous. Direct and indirect gifts, gifts made outright, and gifts in trust (of both real and personal property) can be subject to gift tax. The gift tax is imposed on the shifting of property rights, regardless of whether the property is tangible or intangible. It can be applied even if the property transferred (such as a municipal bond) is exempt from federal income or other taxes.
This broad definition of gifts includes transfers of life insurance, partnership interests, royalty rights, and gifts, checks, or notes of third parties. Forgiving a note or cancelling a debt may also constitute a gift.
Almost any party can be the donee (recipient) of a gift subject to tax. The donee can be an individual, partnership, corporation, foundation, trust, or other "person." (A gift to a corporation is typically considered a gift to the other shareholders in proportion to their proprietary interests. Similarly, a gift to a trust is usually considered to be a gift to the beneficiary or beneficiaries in proportion to their interests.)
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.
TABLE 1 Effect of Gift Splitting with Annual Exclusion |
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Donee | Amount of Gift toDonee |
Treated as if Donor Gave |
Exclusion | Subjectto Tax | Treated
as if Nondonor Spouse Gave |
Exclusion | Subject to Tax |
Brother Father Son Totals |
$ 2,000 8,000 16,000 $26,000 |
$ 1,000
4,000 8,000 $13,000 |
$ 1,000 4,000 8,000 $13,000 | 0
0 0 $0 |
$ 1,000 4,000 8,000 $13,000 | $ 1,000 4,000 8,000 $13,000 |
0 0 0 |
Example: A widowed donor creates a trust this year and places income-producing property in the trust. The income is payable annually to the donor’s son for life, and at the son’s death the remainder is payable to the donor’s grandson. The gift to the son of the right to receive income annually for life is a present-interest gift since he has an unrestricted right to its immediate use, possession, or enjoyment. If the son is 30 years old at the time of the gift and $100,000 is placed into the trust, the present value of that gift is $91,617 ($100,000 times .91617, which is the present value of an income stream payable for the life of a 30-year-old based on a principal amount of $100,000. The factor for the life interest (.91617) is based on the current—at the time of this writing—interest rate of 6.6 percent and current mortality. The valuation of life estates, term interests, and remainder interests is based on an interest rate adjusted monthly as mandated in IRC Sec. 7520. . . . Since the annual exclusion is available for the gift of a life income interest, $10,000 of the $91,617 gift is excludible.
TABLE 8-2 Gifts to Minors |
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Trust | UGMA or UTMA | UGMA or UTMA |
Type of property Dispositiveprovisions Investmentpowers Time of distribution of assets |
Donor can make gifts
ofalmost any type of property. Donor can provide for disposition of trust assets if donee dies without having made disposition. Trustee may be given broad, virtually unlimited investment powers. Trust can continue automatically even after beneficiary reaches age 21. Trustee can make distribution between state law age of majority and age 21. |
Type of property
must be permitted by appropriate statute. Gift of real estate
may not be permitted. Disposition must follow statutory guidelines. Custodian limited to investment powers specified by statute. Custodial assets must be paid to beneficiary upon reaching majority. |
Example: This year a single client makes total gifts of $45,000: $20,000 to his daughter and $25,000 to The American College. After taking annual exclusions, the client’s gross gifts are $10,000 (the gift of $20,000 to the daughter, less a $10,000 exclusion) and $15,000 (the $25,000 gift to The American College, less the $10,000 annual exclusion). Therefore the client’s charitable deduction is limited to $15,000.The reason for the rule that the annual exclusion is taken first is obviously to prevent the allowance of a charitable deduction equal to the total amount of the gift, which, in turn, when added to the allowable annual exclusion, would result in an extra $10,000 exclusion. In certain cases, a donor transfers a remainder interest to a qualified charity. A noncharitable beneficiary is given all or part of the income interest in the transferred property, and the charity receives the remainder at the termination of the income interest. When 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 four conditions is satisfied:
Computing Taxable Gifts | |||
Step 1 | List total gifts for year | $71,500 | |
Step 2 | Subtract one-half of gift deemed to be made by donor’s spouse (split gifts) |
$______0
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Gifts deemed to be made by donor | $71,500 | ||
Step 3 | Subtract annual exclusion(s) ($21,500) | ||
Gifts after subtracting exclusion(s) | $50,000 | ||
Step 4 | Subtract marital deduction | $______0 | |
Step 5 | Subtract charitable deduction | $______0 | |
Taxable gifts | $50,000 |
Computing Taxable Gifts | |||
Step 1 | List total gifts for year | $71,500 | |
Step 2 | Subtract one-half of gift deemed to be made by donor’s spouse (split gifts) | ($35,750) | |
Gifts deemed to be made by donor | $35,750 | ||
Step 3 | Subtract annual exclusion(s) ($15,750) | ||
Gifts after subtracting exclusion(s) | $20,000 | ||
Step 4 | Subtract marital deduction | $______0 | |
Step 5 | Subtract charitable deducted $_____ 0 | ||
Taxable gifts | $20,000 |
gift to son | $10,000 |
gift to daughter | 1,250 |
gift to grandson | 2,000 |
gift to The American College | 2,500 |
$15,750 |
Computing Taxable Gifts | |||
Step 1 | List total gifts for year | $191,500 | |
Step 2 | Subtract one-half of gift deemed to be made by donor’s spouse (split gifts) | ($ 35,750) | |
Gifts deemed to be made by donor | $155,750 | ||
Step 3 | Subtract annual exclusion(s) ($ 25,750) | ||
Gifts after subtracting exclusion(s) | $130,000 | ||
Step 4 | Subtract marital deduction | ($110,000) | |
Step 5 | Subtract charitable deduction | $______0 | |
Taxable gifts | $ 20,000 |
Computing Gift Tax Payable | ||
Step 1 | Compute gift tax on all taxable gifts regardless of when made (use unified rate schedule) | $_______ |
Step 2 | Compute gift tax on all taxable gifts made prior to the present gift(s) (use unified rate schedule) | $_______ |
Step 3 | Subtract step 2 result from step 1 result | $_______ |
Step 4 | Enter gift tax credit remaining | $_______ |
Step 5 | Subtract step 4 result from step 3 result to obtain gift tax payable | $_______ |
Computing Taxable Gifts | |||
Step 1 | List total gifts for year | $225,000 | |
Step 2 | Subtract one-half of gift deemed to be made by donor’s spouse (split gifts) | $_______0 | |
Gifts deemed to be made by donor | $225,000 | ||
Step 3 | Subtract annual exclusion(s) ($20,000) | ||
Gifts after subtracting exclusion(s) | |||
Step 4 | Subtract marital deduction | $_______0 | |
Step 5 | Subtract charitable deduction | $15,000 | |
Taxable gifts | $190,000 |
Computing Gift Tax Payable | |||
Step 1 | Compute gift tax on all taxable gifts regardless of when made | $ 51,600 | |
Step 2 | Compute gift tax on all taxable gifts made prior to the present gift(s) | $_______0 | |
Step 3 | Subtract step 2 result from step 1 result | $ 51,600 | |
Step 4 | Enter gift tax (unified) credit remaining | $192,800 | |
Step 5 | Subtract step 4 result from step 3 result to obtain gift tax payable | $_______0 |
Computing Gift Tax Payable | |||
Step 1 | Compute gift tax on all taxable gifts regardless of when made | $ 84,400 | |
Step 2 | Compute gift tax on all taxable gifts made prior to the present gift(s) | $ 23,800 | |
Step 3 | Subtract step 2 result from step 1 result | $ 60,600 | |
Step 4 | Enter gift tax credit remaining ($192,800 – $23,800) | $169,000 | |
Step 5 | Subtract step 4 result from step 3 result to obtain gift tax payable | $_______0 |
Net appreciation in ___value of gift___x |
Gift tax paid |
Amount of gift |
Donor’s basis | $40,000 |
plus |
$ 60,000 |
x $18,000 = $10,800 | |
$100,000 | ||
equals | ||
Daughter’s basis $50,800 |
Example: the gift of a building that cost the donor $10,000, appreciated to $100,000, and was mortgaged to $70,000 results in an income tax gain to the donor on the difference between the debt outstanding at the time of the transfer and the donor’s basis (assume $70,000 and the donor’s basis of $10,000). In this example, the gain is $60,000. It is realized at the time the gift becomes complete.
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