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

2. 12-2 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

3. 12-3 THE GIFT TAX (2 of 2)  Tax computation  Basis of property received  Below-market loans  Tax planning considerations  Compliance and procedural considerations ©2009 Pearson Education, Inc. Publishing as Prentice Hall

4. 12-4 Unified Transfer Tax System  Excise tax on wealth transfer when adequate consideration not received  Purpose of transfer taxes  Unified rate schedule  Components of transfer tax system  Tax on wealth transfers  Cumulative and progressive tax ©2009 Pearson Education, Inc. Publishing as Prentice Hall

5. 12-5 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

6. 12-6 Unified Rate Schedule  Top marginal rate in 2007  45% 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

7. 12-7 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

8. 12-8 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

9. 12-9 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

10. 12-10 Gift Tax Formula (1 of 2) All individual’s gifts for current period - ½ of 3 rd 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

11. 12-11 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

12. 12-12 Transfers Subject to Gift Tax  Transfers for inadequate consideration  Transfers NOT subject to gift tax  Completed transfers  Gift tax consequences of certain transfers ©2009 Pearson Education, Inc. Publishing as Prentice Hall

13. 12-13 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14. 12-14 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15. 12-15 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

16. 12-16 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

17. 12-17 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

18. 12-18 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

19. 12-19 Annual Exclusion (1 of 2)  All gifts valued at FMV  Exclude transfers up to $12,000 per person per donee each year  Indexed for inflation  Husband and wife may each give $12,000 per child w/o tax consequence  Gift must constitute present interest  Future interest gifts not eligible for exclusion ©2009 Pearson Education, Inc. Publishing as Prentice Hall

20. 12-20 Annual Exclusion (2 of 2)  Special rule for trusts for minors  Annual exclusion available for gifts to §2053(c) trusts for minors if  Until beneficiary is 21, trustee may pay income and/or underlying assets to beneficiary AND  Remaining income and underlying assets will pass to beneficiary when beneficiary reaches 21  Gifts to Crummy trusts also eligible for annual exclusion  More flexible than §2053(c) trusts ©2009 Pearson Education, Inc. Publishing as Prentice Hall

21. 12-21 Gift Tax Deductions Marital Deduction (1 of 4)  Unlimited tax-free transfers between husband and wife  Nondeductible terminal interests ineligible for martial deduction  Terminal interest is an interest that ends when some event occurs (or fails to occur) or a specified time passes ©2009 Pearson Education, Inc. Publishing as Prentice Hall

22. 12-22 Gift Tax Deductions 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

23. 12-23 Gift Tax Deductions Marital Deduction (3 of 4)  QTIP is property  Property transferred by donor-spouse in which donee has qualifying income interest for life AND  A special election has been made ©2009 Pearson Education, Inc. Publishing as Prentice Hall

24. 12-24 Gift Tax Deductions Marital Deduction (4 of 4)  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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

25. 12-25 Gift Tax Deductions 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

26. 12-26 Gift Tax Deductions 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

27. 12-27Gift-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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

28. 12-28 Tax Computation (1 of 2)  Large gifts  Tax rates progressive  From 18%  To 45% on tax base over $1.5M ©2009 Pearson Education, Inc. Publishing as Prentice Hall

29. 12-29 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

30. 12-30 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

31. 12-31 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

32. 12-32 Tax Planning Considerations Tax Saving Features of Inter Vivos Gifts (1 of 2)  Use of annual exclusion  Removal of post-gift appreciation from tax base  Removal of gift tax amount from transfer tax base  Income shifting ©2009 Pearson Education, Inc. Publishing as Prentice Hall

33. 12-33 Tax Planning Considerations Tax Saving Features of Inter Vivos Gifts (2 of 2)  Gift in contemplation of donee- spouse’s death  Transfer assets from healthier spouse to dying spouse if dying spouse’s assets are less than amount shielded by unified credit  Lessening state transfer tax costs  Income tax savings from charitable gifts ©2009 Pearson Education, Inc. Publishing as Prentice Hall

34. 12-34 Tax Planning Considerations Negative Aspects of Gifts  Loss of step-up in basis  Important if property subject to depreciation recapture or not taxed at preferential LT capital gains rate  Prepayment of estate tax ©2009 Pearson Education, Inc. Publishing as Prentice Hall

35. 12-35 Compliance and Procedural Considerations  Filing requirements  Form 709  Due date  April 15, extendable to October 15  Gift-splitting election  Each spouse consents on other’s 709  Donor liable for gift tax  Undervaluation penalty 20% or 40% ©2009 Pearson Education, Inc. Publishing as Prentice Hall

36. Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 12-36 ©2009 Pearson Education, Inc. Publishing as Prentice Hall