1. Chapter 12:
The Gift Tax
Chapter 12: The Gift Tax

2. THE GIFT TAX (1 of 2) Unified transfer tax system Gift tax formula
Transfers subject to gift tax
Annual exclusion
Gift tax deductions
Gift-splitting

3. THE GIFT TAX (2 of 2) Tax computation Basis of property received
Below market loans

4. Unified Transfer Tax System
Excise tax on wealth transfer when adequate consideration not received
Components of transfer tax system
Purpose of transfer taxes
Tax on wealth transfers
Cumulative and progressive tax
Unified rate schedule

5. Components of Transfer Tax System
Gift tax: Inter vivos transfers
Transfers while alive
Estate tax: Testamentary transfers
Property ownership transfers at death
Generation-skipping transfer tax
Property transferred to a second or younger generation

6. Purpose of Transfer Taxes
Raise revenue for federal government
Prevent evasion of estate tax
Recover revenues lost by shifting assets to taxpayer in lower income tax bracket
Redistributing wealth

7. 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

8. 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

9. Unified Rate Schedule Top marginal rate in 2004
48% on amounts exceeding $2M
Top marginal rate decreases between 2002 & 2009.
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

10. Gift Tax Formula (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 ($11K per donee)
- Marital deduction (unlimited)
- Charitable contrib deduction (unlimited)
= Taxable gifts for current period

11. Gift Tax Formula (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

12. Transfers Subject to Gift Tax
Transfers for inadequate consideration
Transfers NOT subject to gift tax
Completed transfers
Gift tax consequences of certain transfers

13. Transfers for Inadequate Consideration
Transfer of cash, stock, securities or real estate
Forgiveness of debt
Assignment of a life insurance policy
Transfer of federal, state, or municipal bonds
Transfer of other assets

14. Transfers NOT Subject to Gift Tax
Transfers in normal course of business
Qualified transfers for direct payment of educational tuition or medical care
Transfers to political organizations
Property settlements in divorce
Transfers disclaimed by recipient
Incomplete transfers

15. 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

16. Completed Transfers (2 of 2)
Gift valued at FMV upon transfer
Gift may be for a partial interest or only certain rights
E.g., life estates, remainder interests
FMV of partial interests determined by using actuarial tables and present value calculations

17. Gift Tax Consequences of Certain Transfers (1 of 2)
Creation of joint bank accounts
Incomplete transfer until “donee” withdraws funds
Creation of other joint tenancies
All joint tenants own an equal share
Donee’s ownership portion is a completed gift

18. Gift Tax Consequences of Certain Transfers (2 of 2)
Transfer of life insurance policies
Ability for donor to change beneficiary results in an incomplete gift
Irrevocable transfer of policy ownership rights is a completed gift
Premiums payments are a completed gift if policy owned by another

19. Annual Exclusion All gifts valued at FMV
Exclude transfers up to $11,000 (in 2004) per person per donee each year
Indexed for inflation after 1998
Husband and wife may each give $11,000 per child w/o tax consequence
Gift must constitute present interest
Future interest giftsnot eligible for exclusion

20. Gift Tax Deductions (1 of 6)
Martial deduction
Unlimited tax-free transfers between husband and wife

21. Gift Tax Deductions (2 of 6)
Marital deduction (continued)
Nondeductible terminal interests ineligible for martial deduction
Terminal interest is an interest that ends or when some event occurs (or fails to occur) or a specified time passes
Nondeductible if interest (or power of appointment) reverts back to donor or passes to a third party w/o adequate consideration

22. Gift Tax Deductions (3 of 6)
Marital deduction (continued)
Transfers of qualified terminal interest property (QTIP) eligible for marital deduction
QTIP is property
Property transferred by donor-spouse in which donee has qualifying income interest for life AND
A special election has been made

23. Gift Tax Deductions (4 of 6)
Marital deduction (continued)
Qualifying income interest for life
Spouse entitled to ALL income from property annually or more often AND
No 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

24. Gift Tax Deductions (5 of 6)
Charitable contributions
Contributions in excess of $11,000 NOT reported on gift tax return if income tax deduction available and entire interest is gifted

25. Gift Tax Deductions (6 of 6)
Charitable contributions (continued)
If charity is a qualified organization, amount of gift above $11,000 allowed as a deduction
No gift tax due since taxable amount zero

26. Gift-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 $22,000 per donee per year w/o gift tax consequences

27. Tax Computation (1 of 2) Large gifts
Tax rates progressive, from 18% to 48% (tax base over $2M) in 2003

28. Tax Computation (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

29. Basis Considerations Property received by gift
Carryover basis rules apply
Donee’s basis may be increased by some of the related gift taxes paid
Property received at death
Basis equal to FMV on either date of death or alternate valuation date

30. Below Market Loans General rules
Foregone interest is taxable income to the lender and a taxable gift to the borrower
De minimus rules
Rules do not apply to loans ≤ $10,000
For loans ≤ $100,000, income to lender limited to net investment income of borrower

31. End of Chapter 12
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