12-1 ©2009 Pearson Education, Inc. Publishing as Prentice Hall.

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THE GIFT TAXTHE GIFT TAX(1 of 2)(1 of 2)

Unified transfer tax systemGift tax formulaTransfers subject to gift taxAnnual exclusionGift tax deductionsGift-splitting

©2009 Pearson Education, Inc. Publishing as Prentice Hall

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THE GIFT TAXTHE GIFT TAX(2 of 2)(2 of 2)

Tax computation Basis of property receivedBelow-market loansTax planning considerationsCompliance and procedural

considerations


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Unified Transfer Tax Unified Transfer Tax System System

Excise tax on wealth transfer when adequate consideration not received

Purpose of transfer taxesUnified rate scheduleComponents of transfer tax systemTax on wealth transfersCumulative and progressive tax


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Purpose of Transfer Taxes

Raise revenue for federal governmentPrevent evasion of estate taxRecover revenues lost by shifting

assets to taxpayer in lower income tax bracket

Redistributing wealth


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Unified Rate Schedule

Top marginal rate in 200745% on amounts >$1.5M

Top marginal rate after 2009 is 35% on amounts exceeding $500K

Unified credit reduces tax $ for $ See unified transfer tax rates on

inside back cover of book


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Components of Transfer Tax System

Gift tax: Inter vivos transfersTransfers while alive

Estate tax: Testamentary transfersProperty ownership transfers at death

Generation-skipping transfer taxProperty transferred to a second or

younger generation


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Tax on Wealth Transfers

Gifts & inheritances NOT income to recipient

Person making gift has PRIMARY obligation to pay any tax due

Tax applies to act of transferring property

Tax applied against FMV of gift


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Cumulative & Progressive Tax

All taxable gifts made after 1976 accumulated for each donor

Cumulative total determines tax rate applied to current gift

Prior gift taxes paid and/or unified credit may negate or reduce amount of current tax due


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Gift Tax FormulaGift Tax Formula(1 of 2)(1 of 2)

All individual’s gifts for current period- ½ of 3rd party gifts w/gift-split election+ ½ of spouse’s gifts w/gift-split election- Annual exclusion ($12K per donee)- Marital deduction (unlimited)- Charitable contrib deduction (unlimited)= Taxable gifts for current period


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Gift Tax FormulaGift Tax Formula(2 of 2)(2 of 2)

Taxable gifts for current period+ All prior taxable gifts= Cumulative taxable gifts (CTG) Compute tax on CTG w/current rates- Tax on prior gifts w/current rates= Tax on current gifts- Net Unified credit= Tax payable for current period


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Transfers Subject to Gift Transfers Subject to Gift TaxTax

Transfers for inadequate consideration

Transfers NOT subject to gift taxCompleted transfersGift tax consequences of certain

transfers


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Transfers for Inadequate Consideration

Transfer of cash, stock, securities, or real estate

Forgiveness of debtAssignment of a life insurance policyTransfer of federal, state, or municipal

bondsTransfer of other assets


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Transfers NOT Subject to Gift Tax

Transfers in normal course of businessQualified transfers for direct payment of

educational tuition or medical careTransfers to political organizationsProperty settlements in divorceTransfers disclaimed by recipientIncomplete transfers


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Completed Transfers(1 of 2)

Gift does not occur until transfer is complete

Transfer complete when donor has given up “dominion & control”Leaves donor no power to change gift’s

disposition, whether for own benefit or for benefit of another


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Completed Transfers(2 of 2)

Gift valued at FMV upon transferGift may be for a partial interest or

only certain rightsE.g., life estates, remainder interests

FMV of partial interests determined by using actuarial tables and present value calculations


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Gift Tax Consequences ofCertain Transfers (1 of 2)

Creation of joint bank accountsIncomplete transfer until “donee”

withdraws fundsCreation of other joint tenancies

All joint tenants own an equal shareDonee’s ownership portion is a

completed gift


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Gift Tax Consequences ofCertain Transfers (2 of 2)

Transfer of life insurance policiesAbility for donor to change beneficiary

results in an incomplete giftIrrevocable transfer of policy

ownership rights is a completed giftPremiums payments are a completed

gift if policy owned by another


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Annual ExclusionAnnual Exclusion(1 of 2)(1 of 2)

All gifts valued at FMVExclude transfers up to $12,000 per

person per donee each yearIndexed for inflation

Husband and wife may each give $12,000 per child w/o tax consequence

Gift must constitute present interestFuture interest gifts not eligible for exclusion


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Annual ExclusionAnnual Exclusion(2 of 2)(2 of 2)

Special rule for trusts for minorsAnnual exclusion available for gifts to §2053(c)

trusts for minors ifUntil beneficiary is 21, trustee may pay income

and/or underlying assets to beneficiary ANDRemaining income and underlying assets will pass

to beneficiary when beneficiary reaches 21Gifts to Crummy trusts also eligible for annual

exclusionMore flexible than §2053(c) trusts


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Gift Tax DeductionsGift Tax DeductionsMarital Deduction (1 of 4)Marital Deduction (1 of 4)

Unlimited tax-free transfers between husband and wife

Nondeductible terminal interests ineligible for martial deductionTerminal interest is an interest that

ends when some event occurs (or fails to occur) or a specified time passes


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Gift Tax DeductionsGift Tax Deductions Marital Deduction (2 of 4)Marital Deduction (2 of 4)

Terminal interests (continued)Nondeductible if interest (or power

of appointment) reverts back to donor or passes to a third party upon termination of interest

Transfers of qualified terminal interest property (QTIP) eligible for marital deduction


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QTIP is property Property transferred by donor-

spouse in which donee has qualifying income interest for life AND

A special election has been made


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Qualifying income interest for lifeSpouse entitled to ALL income from

property annually or more often ANDNo person has power to appoint any

part of property to any person other than donee-spouse unless power cannot be exercised while spouse is alive


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Gift Tax DeductionsGift Tax DeductionsCharitable Contributions (1 of 2)Charitable Contributions (1 of 2)

Contributions in excess of $12,000 NOT reported on gift tax return if income tax deduction available and entire interest is gifted


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Gift Tax DeductionsGift Tax Deductions Charitable Contributions (2 of 2)Charitable Contributions (2 of 2)

If charity is a qualified organization, amount of gift above $12,000 allowed as a deduction

No gift tax due since taxable amount zero


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Gift-SplittingGift-Splitting

Spouses may elect to treat gifts to third parties as coming ½ from each spouse regardless of who actually made the gift

Allows the couple to give up to $24,000 per donee per year w/o gift tax consequences


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Tax ComputationTax Computation(1 of 2)(1 of 2)

Large giftsTax rates progressive

From 18% To 45% on tax base over $1.5M


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Tax ComputationTax Computation(2 of 2)(2 of 2)

Unified credit$345,800 against gift tax

Shelters $1M of taxable gifts from taxation

The unified credit for ESTATE tax purposes increases above $345,800 between 2002 and 2009


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Basis ConsiderationsBasis Considerations

Property received by giftCarryover basis rules applyDonee’s basis may be increased by

some of the related gift taxes paidProperty received at death

Basis equal to FMV on either date of death or alternate valuation date


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Below Market LoansBelow Market Loans

General rulesForegone interest is taxable income to

the lender and a taxable gift to the borrower

De minimus rules Rules do not apply to loans ≤ $10,000For loans ≤ $100,000, income to lender

limited to net investment income of borrower


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Tax Planning Tax Planning ConsiderationsConsiderations

Tax Saving Features of Inter Vivos Gifts (1 Tax Saving Features of Inter Vivos Gifts (1 of 2)of 2)

Use of annual exclusionRemoval of post-gift appreciation

from tax baseRemoval of gift tax amount from

transfer tax baseIncome shifting


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Tax Planning Tax Planning ConsiderationsConsiderations

Tax Saving Features of Inter Vivos Gifts (2 Tax Saving Features of Inter Vivos Gifts (2 of 2)of 2)

Gift in contemplation of donee-spouse’s deathTransfer assets from healthier spouse to

dying spouse if dying spouse’s assets are less than amount shielded by unified credit

Lessening state transfer tax costsIncome tax savings from charitable gifts


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Tax Planning Tax Planning ConsiderationsConsiderations Negative Aspects of Gifts Negative Aspects of Gifts

Loss of step-up in basisImportant if property subject to

depreciation recapture or not taxed at preferential LT capital gains rate

Prepayment of estate tax


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Compliance and Compliance and Procedural Procedural

ConsiderationsConsiderationsFiling requirements

Form 709Due date

April 15, extendable to October 15Gift-splitting election

Each spouse consents on other’s 709Donor liable for gift taxUndervaluation penalty 20% or 40%


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12-36©2009 Pearson Education, Inc. Publishing as Prentice Hall

12-1 ©2009 Pearson Education, Inc. Publishing as Prentice Hall.

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Transcript of 12-1 ©2009 Pearson Education, Inc. Publishing as Prentice Hall.