Accounting 815

Taxation of Transfers and Fiduciaries

Week 8: Introduction to Gifts

Control Panel

Week Seven Summary

The valuation process: determining the fair market value of transferred items in hypothetical transactions between imagined willing buyers and sellers. Guidance for particular types of assets is given in the regulations under Sec. 2031. The further from marketable securities the more difficult the process, as with real estate, closely held businesses and art objects. Fractional interests present additional complications, which taxpayers seek to exploit by deliberate fractionalization.

1. Gift Tax: Mechanics of filing and payment

Form 709

due same time as Y tax return (can also extend)

no return if under $10K (or ed or medical) or marital

what if more than $10K to a charity?

Had been required!. Widely ignored. Cleaned up in 1997 tax act, except for split gifts

3 yr statute of limitations

runs from the filing of the return

tho cumulative nature could link into closed years
(ie. measuring the remaining exemption credit )
if no tax was in fact paid

New Sec. 2001(f), eff. 12/97 stops this

Short form 709A

used for the H-W gift split up to $20K

Cumulative calculation of multi-year liability

Using up the low rate brackets

How explain to client, or evaluate, as a planning matter?

2. What is a gift - in the eyes of transfer tax?

Sec. 2501(1) Tax any "transfer of property by gift"

Sec. 2511(a) direct or indirect, in trust or not

whether real or personal, tangible or intangible

What if a NRA gives a resident a check drawn on a US bank?

not NRA's unless property in the US

Sec. 2501(A)(2), (3) : usu. not NRA intangibles

So investors in US prop should go through corporations

Amount: Sec. 2512: if property, value at date of gift

if not for full consideration, difference is gift

Distinguished from State law: giftis "voluntary transfer w/ no consideration"

Contracts concept of "consideration"

need to give up and receive for valid contract

can be promise for $, or promise for promise

this is why oral gift promises not enforceable

Regs.: 25.2511-1(a): forgiveness of debt a gift: is this a property transfer?

Regs. 25.2511-1(g): donative intent not essential

look to objective facts, no intent

tax if transfer not for full, adequate consideration

look to what giver gives up, not what donee receives

Joint purchases: Purchase by A, w/B as joint tenant: gift of 1/2 to B

Note: will be all in A’s estate! Double tax?

No, just a prepayment: 2001(b) "adjusted taxable gifts

Regs. 25.512-8: insufficient consideration

dist ordinary course of business

"bona fide, arms length, w/o donative intent"

when can you do business with your kids?

if consideration not reducible to money, is gift

love, marriage, release of marital rights not consideration

3. The "small gift" exclusion: $10K per recipient per year

Over and above the parental support obligation

Note inflation adjustment in ’97 Act:

Starts 1999 w/ 1997 as base, but rounded down to next $1,000

How realistic is this: How can they tell?

4. The "Present Interest" limit on the small gift exclusion

Sec. 2503(b): $10K exclusion -- for present interests

Regs. fairly strict: if interests limited in use, possession, enjoyment

eg. Regs. 25.2503-3(c) eg. 1

A to Tr for B, Y for life, trustee may instead add Y to corpus
Held: not present interest -- might not get anything

eg. 2: C's life insurance policies to trust for D
When policies collected, pay income to D
Y not til C dies: a future interest

eg 3: Y to A, B or C: trustee to decide.
No one has a definite present interest

Exceptions to future interest rules

First exception: 2503(c)

transfers to minor OK, if minor gets at 21 all not spent on minor in the interim

So CUTMAs get the 10K annual exclusion

Second exception: Crummy powers: Para. 7073

described: Bene's (brief) right to withdraw

Its a legal fiction, and everyone knows it -- almost an embarrassing loophole

Sometimes people get greedy -- no notice to benes, or require waiver from benes

Tp won in Cristofani (para. 7091): contingent beneficiary withdrawal rights (children after parents)

problem w/ Crummy: is the lapse of the right itself a gift?

e.g. to remainder benes

" general power of appointment"
means right to determine who gets, including self/creditors

greater of 5% / $5,000 is not included as gift
Code Sec. 2514(e)

Keep an eye on pending Clinton administration proposals to shut it down

Third exception: Tuition and medical

must be direct from giver to institution, not to recip.
Sec. 2503(e)

Future interests and spousal transfers: terminable interests

A gift to spouse of a terminable interest

eg life estate w/ remainder over
if remainder is valued now, rest would escape tax
W's life estate not in H's estate
And not in W's estate: terminates at death

terminable interest defined: Sec. 2513(b)

if on lapse of time or a contingency
Spouse's interest terminates
And giver keeps, or gifts to anyone else, or has power of appointment over
an interest that will be enjoyed after spouse's interest fails

Effect: a terminable interest doesn’t qualify for marital deduction

Spouse for life w/ spousal general power of appointment not a problem -- inclusion in spouse's estate, or gift if general power released

Elective QTIP ( more re estates): Spouse has all income annually, no one else has right to appoint: elect to include in spouse's estate

Irrevocable election due by due date of gift tax return

5. The tools of tax-alert estate planning

The annual exemption

H and W together can give $20K per recipient

Q: do you gift to the in-laws as well?

Do you put strings on gifts to minors

CUTMA or Crummy powers

Selecting the gift property

Note carryover of basis, rather than the stepup

Real estate is lumpy: the gift-sale (but see Haygood case)

Leveraging the exemption: the irrevocable life insurance trust

Problem of tax on source of liquidity to pay the tax

"incidents of ownership" and the 3-year pullback rule

Leveraging the exemption/present value games: Charitable Trusts

The Split interest issue: Sec. 2055 and Sec. 664.

CRAT and CRUT; CLAT and CLUT; PIF

The nominal cost of a lifetime charitable gift

Diversification and increased income w/o capital gains tax

The Charitable abuses: extreme payout ratios

1997 Tax Act Sec. 1089: max 50% payout; charity PV must be 10%, etc.

Present value games:

GRITs, GRATs and GRUTs

The QPRT for the family residence

The Self-Cancelling installment note

The Grantor Trust boomerang

Deliberate use of grantor trust rules so giver can pay tax on the income earned by the gift

The Intentionally Defective IrrevOcable Trust

Build Date 3/18/98