Estate Planning
for Financial Planners
Chapter 5:
Gift Tax
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Historical Background
 The gift tax is an excise tax on the right to
transfer assets to another person during
life.
 Developed in 1932 (after the estate tax –
1915).
 Gift rates were lower.
 In 1976, Congress unified the rates.
 In 2003, the systems were again split.
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EGTRRA 2001
 Tax Rate Schedules – Exhibit 5.1,
page 116. In 2014, 40%
 Exemption Amounts – Exhibit 5.2,
page 117. In 2014, $5,340,000,
large increase from previous
exemption of $1 million.
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Parties to a Gift
 Donor (person who makes a gift)
 Must be competent to make the gift.
 Must have intent to make a voluntary
transfer.
 Donee (person who receives a gift)
 Must be competent to receive the gift.
 Must take delivery.
 Must accept the property.
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Definition of Gifts
 Voluntary
 Transfer of Property
 Without full consideration
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Consideration
 Transfer of property or payment in
return for property.
 If there was fair consideration, then it
is not a gift.
 Bad deal: buying Tribune Company?
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Direct Gifts
 A direct payment of cash or transfer
of property from one person to
another.
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Indirect Gifts
 Indirect transfer on behalf of a donor
for the benefit of a donee.
 Makes a payment for someone else.
 Titles property jointly.
 Below-market loans.
• The amount the lender imputes is a gift.
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Below-Market Loan
Loan Amount
Imputed Interest
$0  $10,000
$0
$10,001  $100,000
The lesser of:
 Net investment income, or
 Interest calculated using AFR less interest
calculated using stated rate
If borrower’s unearned income < $1,000 then
$0 imputed interest
> $100,000
Interest calculated using AFR less interest calculated
using stated rate.
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Below-Market Loan Example
Loan Amount
Net Investment
Income
Lender
Imputes
$10,000
N/A
$0
$100,000
$500
$0
$100,000
$1,500
$1,500
$100,000
$9,000
$5,000
$100,001
N/A
$5,000
AFR = 5%
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Complete vs. Incomplete Gifts
 Incomplete are gifts that have not come to fruition.
 They are not taxable gifts for gift tax purposes.
 Joint bank accounts?
 Completed gifts are gifts that have come to fruition.
 The donor has released all control over the asset and
the donee can be identified.
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Reversionary Interests
 Interests
that
have
been
transferred by a transferor and
subsequently revert back to the
transferor.
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Net Gifts
 Normally the donor is responsible
for all gift tax.
 A net gift is a gift made on the
condition that the donee pay any
gift tax due.
 The donor will have taxable income
to the extent that any gift tax paid
by the donee exceeds the the
donor’s adjusted basis in the
property.
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Valuation of a Gift
 FMV at the date of the gift.
 Real estate – need appraisal.
 Publicly traded securities are valued
at the high and low trading price for
the day.
 Bonds – PV of the expected future
payments.
 Discounts may be allowed for lack of
marketability, lack of liquidity, or lack
of control.
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Annual Exclusion
 All individuals may gift up to $14,000
(for 2014) tax free per donee each
year (adjusted for inflation).
 Gift must be a present interest.
 Use it or lose it!
 Non-U.S. citizen spouses
 “Super Annual Exclusion” = $145,000 in
2014
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Split Gifts
 Married spouses can elect to split gifts
effectively doubling the annual exclusion
to $28,000 (for 2014).
 Requires gift tax return (Form 709).
 Must be elected for all gifts for that year.
 Only counts for the time they were
married.
 No gift-splitting for community property
(no returns needed).
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Applicable Exclusion Amount
 Each person also has one lifetime credit
equivalency amount up to $5,340,000 of
cumulative taxable transfers.
 See Gift and Estate Tax Credit chart in text for
past credit amounts.
 Exhibit 5.4, page 129.
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Gifts of a Present Interest
 Unrestricted right to the immediate
use of the property.
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Future Interest Gift
 Interest that is limited in some
way to a future date or time.
 Donee’s right to the property is
contingent upon some future
date or time.
 Example
 Remainder beneficiary of a trust
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Crummey Provision
(1 of 3)
 Allows the trust beneficiary to withdraw some or all
of any contribution to a trust for a limited period to
create a present interest.
 5/5 Lapse Rule
 Taxable gift occurs when the power to withdraw
in excess of $5,000 or 5% of the trust assets is
lapsed by the powerholder.
 Only comes into play when >1 beneficiary
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Qualified Transfers
 A qualified transfer is a payment for
someone else paid directly to a:
 Qualified educational institution for tuition.
 Medical care provider for qualifying medical
expenses.
 Key here is that it must be paid directly
to the institution.
 Does not count against the annual
exclusion
or
applicable
exclusion
amounts.
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Payments for Support
 Payments for legal support are
not gifts.
 Legal support does not necessarily
stop at age 18.
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Payments to Divorcing Spouses
 Payments pursuant to divorce decree
are nontaxable property settlements
and not gifts.
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Transfers in a Business Setting
 Transfers in a business setting are
presumed to be compensation, not a
gift.
 De minimis gifts are exceptions.
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Gifts to Spouses
 Unlimited marital deduction allows for
unlimited transfers between married
people without gift tax.
 Spouse must be a U.S. citizen.
 Different rules for non-U.S. citizens –
will be discussed later.
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Charitable Gifts
 Unlimited gift tax deduction for gifts
to qualified charities.
 Will be covered later in Chapter 9.
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Form 709
 Must be filed – April 15 of the
following year.
 Can be extended by extending
income tax return.
 The donor is primarily liable for gift
tax but the donee can become
responsible if the donor does not pay.
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Who Must File
 Everyone who gifts unless gifts are:




Under the annual exclusion.
Qualified transfers.
Transfers to spouses (generally) .
Transfers to charities.
 Remember – if split gifts there must
be a tax return even if less than
annual exclusion (does not apply to
community property).
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Income Tax Issues
Related to Gifts (1 of 2)
 In general the donee will take the adjusted
basis and holding period of the donor.
 Exception – Asset is in a loss position
 Dual basis and holding period
 AB for gains – carry over holding period
 FMV for losses – holding period starts at
date of gift
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Income Tax Issues
Related to Gifts (2 of 2)
 Exception – Gift tax paid on appreciated
property
 If gift tax is paid, then the basis will
increase by the gift tax paid attributable to
the appreciation.




Cost: $100,000
FMV: $300,000
Gift Tax: $90,000
Basis: $160,000
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Gifting Strategies
(1 of 4)
 Achieving client goals with direct gifts
 Effective and efficient
 Gifts of appreciating property
 Reduces future gross estate
 Gifts to spouses
 Often used to equalize the estates
 Gifts to minors
 May need trusts or custodial accounts
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Gifting Strategies
(2 of 4)
 Single party strategies
 Rarely wise to gift cash.
 The donor should prepare a current balance sheet
with a forecast of what is likely to appreciate the
most.
 Transfer the asset likely to appreciate the most.
 This will remove highly appreciating assets from
the donor’s gross estate and the appreciation will
occur in the hands of the donee.
 Unless the donor is very close to death, such a
strategy should generally be superior to receiving
a step up in basis for transfers at death.
 See Example 5.37, page 149.
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Gifting Strategies
(3 of 4)
 Multi-party strategies
 Never gift property in a loss position…sell it
instead.
 Gift property with the greatest appreciation
potential to the youngest donee.
 Gift appreciated property to charities to avoid
the capital gain taxes.
 Gift income-producing property to the donee in
the lowest marginal income tax bracket so that
the income is subject to the lowest possible
income tax.
 See Example 5.38, page 150.
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Gifting Strategies
(4 of 4)
 Optimize qualified educational transfers.
 Optimize annual gift exclusion.
 Utilize the marital deduction to equalize
estates.
 Utilize the lifetime applicable gift tax credit
equivalency amount ($5,340,000 in 2014).
 Any gift tax paid on gifts prior to three years
of death will also reduce the estate of the
transferor.
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Updated on 12/12/06