Chapter 7
Lifetime Transfers by Gift
an Overview
• The Gift Tax is an excise tax …. It is a
fee for the priviledge of transferring
property.
• Based on the value of the property
transferred.
• There are progressive tax rates based
on cumulative lifetime gifts.
• Gifts can be in the form of cash, property, life insurance, or even the
cancellation of debt.
• Almost anyone can be a donee …. person,
corporation, p’ship, trust, foundation
Tax Advantages of Lifetime Gifts
1.
2.
3.
4.
5.
6.
An individual can give up to $12,000 gift tax free
per year to each donee ……..
($24K if we gift
split)
Obviously, gifts would not then be included in your
estate …. “Gifts in Contemplation of Death” …. the
3 year rule.
After a gift is made, future appreciation is excluded
from the donor’s estate (give early).
Annual income moves to the donee once the gift is
made
Gifts may allow the donor’s estate to qualify for
installment payment of taxes or stock redemption.
No tax is paid on transfers until the $1MM lifetime
exclusion is reached
Gift Splitting
• A married donor – with the consent of the
nondonor – can elect to a gift to a 3rd party
as made ½ by each (i.e. “split” between
the two). Election must be made on the
gift tax return of the donor.
• What if donor makes a $24,000 gift to an individual
and elects gift splitting?
• What if donor makes a $124,000 gift to an
individual and elects gift splitting?
• What if there is a divorce …. How does it affect the
ability to gift split?
• What if there is a divorce …. How does it
affect the ability to gift split?
Annual Exclusion
• The annual exclusion allows the Donor to
make a gift up to $12,000 to any person
during a calendar year without triggering the
gift transfer tax. With gift splitting, that
amount becomes $24,000 annually.
• Cash gift
• Gifts of stock ….. how do we value??
• Future interest ….. I give my mountain house ten
years from now
• The $12K gift is considered “de minimis”.
Present Interest & Future Interest
• Annual Exclusion ($12,000) can only be
used for a present interest gift and not
a future interest.
• Qualified Personal Residence Interest Trust
• A single gift can be split into a present
interest and a future interest.
• See example on page 169
Present Interest & Future Interest
Consider the example on page 169:
• If income is required to be distributed
(simple trust) we have a “present
interest” based on the lifetime income
stream to the income beneficiary
• If we have a complex trust (income is
not required to be distributed), then we
cannot calculate a present interest.
Why do we care if this can be valued as a
present interest (or not)??
Gift of Life Insurance
• Does the gift of a life insurance policy
qualify as a present gift subject to the
annual exclusion??
• Does the gift of a life insurance policy
into a life insurance trust qualify as a
present gift subject to the annual
exclusion??
Trust for Minors
Section 2503(b) Trust (Mandatory Income Trust)
• Trust set up for the benefit of a minor
child ……. Income must be distributed at
least annually. Qualifies for the annual
exclusion.
• Principal not required to be distributed at
age 21 ….. but does require annual
income.
Trust for Minors
Section 2503(c) Trust
• Trust set up for the benefit of a minor
child ……. Income and principal must be
distributed at when the child reaches
majority (age 21 or 18).
• Income and principal can be spent on the
minor along the way (prior to age 21).
• Can the beneficiary elect to leave the trust
in place past age 21??
Trust for Minors
Uniform Transfer to Minors Account (UTMA)
• Custodian holds the property for the
minor
• Income and principal can be spent on the
minor along the way (prior to age 21).
• Beneficiary entitled to property at age of
majority.
• All income is taxed to the minor child along the way
• Account is for the benefit of one person (not multiple)
• If donor is custodian, property pulled in custodian’s
estate
• No spendthrift provision
Trust for Minors
Crummey Trusts
• Crummey (demand) powers allow the transfer to
be treated as a “present” interest ….. why do we care
about the current interest??
• The beneficiary must be allowed to “demand”
the annual addition to the trust or the greater of
$5,000 or 5% of trust assets (5 and 5 power)
• Why would the beneficiaries not demand the money?
• Income and principal can be spent on the minor
along the way
• Vesting of the trust assets can be delayed past
the age of majority ….. say, age 25 or 30 or 35.