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

2. THE GIFT TAX Unified transfer tax system Gift tax formula
Transfers subject to gift tax
Annual exclusion
Gift tax deductions
Gift-splitting
Tax computation

3. 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

4. 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

5. 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

6. Tax on Wealth Transfers
Gifts & inheritances NOT income
Person making gift has PRIMARY obligation to pay any tax due
Tax applies to act of transferring property
Tax applied against FMV of gift

7. 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

8. Unified Rate Schedule Top marginal rate in 2002
50% on amounts exceeding $2.5M
Top marginal rate decreases between 2002 & 2010 to 35% on amounts exceeding $1.5M
Unified credit reduces tax $ for $
See inside back cover for unified transfer tax rates

9. 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

10. 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

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

12. 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

13. 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

14. Completed Transfers 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
Gift valued at FMV upon transfer

15. 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

16. Gift Tax Consequences of Certain Transfers (2 of 2)
Transfer of life insurance policies
Changing beneficiary an incomplete gift
Irrevocable transfer of policy ownership rights is a completed gift
Premiums pmts are a completed gift if policy owned by another

17. Annual Exclusion All gifts valued at FMV
Exclude transfers up to $11,000 (in 2002) 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

18. Gift Tax Deductions (1 of 5)
Martial deduction
Unlimited tax-free transfers between husband and wife
Some terminal interests ineligible for martial deduction
Terminal interest is an interest that ends or is terminated when some event occurs (or fails to occur) or a specified time passes

19. Gift Tax Deductions (2 of 5)
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

20. Gift Tax Deductions (3 of 5)
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

21. Gift Tax Deductions (4 of 5)
Charitable contributions
Contributions in excess of $11,000 NOT reported on gift tax return if income tax deduction available and entire interest is gifted

22. Gift Tax Deductions (5 of 5)
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

23. Gift-Splitting
Election to treat each spouse as giving 1/2 of each gift given
Allows one spouse to give up to $22,000 per donee per year w/o tax consequences

24. Tax Computation (1 of 2) Large gifts
Tax rates progressive, from 18% to 50% (tax base over $2.5M) in 2002
5% phase-out of lower rates repealed for tax years ending after 2001

25. Tax Computation (2 of 2) Unified credit $345,800 in 2002 for gift tax
Completely eliminates tax liability on $1M of taxable gifts
Credit against estate tax increases between 2002 and 2009

26. End of Chapter 12
Comments or questions about PowerPoint Slides? Richard Newmark at