106-4 The Federal Gift Tax

Question 1

Gift

Answer 1

A completed transfer of an interest in property by an individual in exchange for less than full and adequate consideration in money or money’s worth [the FMV of other property that may have been exchanged] during the transferor’s lifetime (inter vivos)

Question 2

For a gift to be complete under state law vs. federal law

Answer 2

State law:

1. Donor must be legally competent
2. Must be donative intent on behalf of donor
3. Must be actual, or constructive, delivery of the gifted property to the donee
4. Must be valid acceptance of the gift by the donee

For federal gift tax purposes, there does not have to be any donative intent on the part of the donor; the only requirement is that an unequal exchange be made

Question 3

Incomplete Transfers

Answer 3

The federal gift tax does not apply to incomplete transfers

Example: those made where the donor retains the right to reclaim the property given (e.g. a revocable trust) or where a jt bank account (JTWROS) is created w/ another person

Question 4

Value of a gift for federal gift tax purposes

Answer 4

The FMV of the property transferred on the date of the gift reduced by any consideration paid for the property by the donee
The donor is liable for any gift taxes that are due on the gift; however, if the donor fails to pay any gift tax due, the donee may become liable

Question 5

Net Gift

Answer 5

When the donee agrees with the donor to assume the gift tax obligation accruing the on the gift

Question 6

Qualified Transfers

Answer 6

Certain transfers to others or on behalf of others are not considered gifts for gift tax purposes

1. Transfer made directly to a qualified educational institution for the payment of tuition, fees
2. Transfer of any amount made directly to a provider of qualified medical care for the payment of medical expenses
3. Property settlement transfers that are part of any written divorce agreement or decree between divorcing spouses

Question 7

Annual Exclusion

Answer 7

In 2019, a donor may exclude from total gifts the first $15k of gifts for the year to each donee
This applies to as many donees as the donor chooses

The gifts must be present interest

The gift tax annual exclusion may be doubled to $30k (in 2019) per donee if the donor elects to enter into a split gift w/ his spouse and the spouse consents to the election

Question 8

Present Interest

Answer 8

The donee has the immediate right to the use and enjoyment of the transferred property

Question 9

Gift tax law applicable credit amount and lifetime exemption amount (aka applicable exclusion amount)

Answer 9

Applicable credit amount = $4,505,800

Lifetime exemption amount = $11,400,000

If a donor made lifetime gifts of $11,400,000, the gift tax on those gifts would be $4,505,800, and the applicable credit amount of $4,505,800 would reduce the tax due to zero (2019)

Question 10

Portability

Answer 10

The lifetime exemption amount (applicable exclusion amount) is portable between spouses

Portability means a surviving spouse may use any portion of a predeceased spouse’s exemption amount that remained unused when the predeceased spouse died

Question 11

2 types of custodial accounts

Answer 11

1. Uniform Gift to Minors Act (UGMA)
2. Uniform Transfers to Minors Act (UTMA)

The type of account that may be established by the donor depends on the state (most states provide for UTMA accounts)

Question 12

3 Types of Privately Drafted Trust Arrangements Used in Gifting On Behalf of Minors

Answer 12

1. Section 2503(b) trust (or mandatory income trust)
2. Section 2503(c) trust (or minor’s trust)
3. Crumney trust

Most flexible of these is the Crumney trust, which allows the grantor to combine flexible income distributions w/ a trust-specified date of principal distribution

Question 13

Section 529 Plans

Answer 13

Section 529 ownership remains in the name of the donor

A donor can make a large one-time contribution of money to the plan ($75,000 in 2019) without making a taxable gift

Question 14

Maximum Annual Gift to Spouse

U.S. Citizen vs. Non U.S. Citizen

Answer 14

Marital deduction for gifts between spouses who are U.S. citizens is unlimited in amount

The max annual gift that can be made to a noncitizen spouse free of gift tax consequences is $155,000 (2019)

Question 15

IRS Form 709 (U.S. Gift and Generation-Skipping Transfer Tax Return)

Answer 15

Must be filed for each calendar year during which any of the following occur:

1. The gifts to any 1 donee for any 1 calendar year exceed the gift tax annual exclusion ($15k for 2019)
2. A gift of a future interest in any amount has been given
3. Gift splitting has occurred amount spouses in a common-law state
4. A total present interest gift exceeding $155k for 2019 has been made to a noncitizen spouse

Filing due date for IRS Form 709 is April 15 of the year following the year in which the taxable gift was made

Question 16

Gift Tax System Lifetime Gifts

Answer 16

In the gift tax system, all lifetime transfers are taxed cumulatively

In 2019, the max gift tax rate is 40%

Question 17

3 Important Transfer Tax Reasons to make a lifetime gift

Answer 17

1. To exclude the post-gift appreciation in the transferred property from the donor-decedent’s gross estate
2. To use the shelter of the gift tax annual exclusion to reduce the donor-decedent’s gross estate
3. To remove the cash used to pay the gift tax from the donor-decedent’s gross estate

Question 18

Ways of minimizing the amount of gift tax due:

Answer 18

1. Make use of the gift tax annual exclusion
2. Make use of tax-free qualified transfers to pay education and medical expenses directly to the provider
3. Combine the use of the annual exclusion and qualified transfers (e.g. grandparent uses a qualified transfers to pay a grandchild’s annual college tuition directly to the college and use the annual exclusion to make an additional $15k tax-free gift to the grandchild in the same year

Question 19

3 of the most popular outright gifting strategies

Answer 19

1. Systematic Annual Gifting Program
2. Net Gifting
3. Reverse Gifting

Question 20

Systematic Annual Gifting Program

Answer 20

A strategy that takes advantage of the gift tax annual exclusion amount on a regular, or systematic, basis

Question 21

Net Gifting

Answer 21

A net gift occurs when the donor and donee agree in advance that the donee is responsible for paying any gift tax due

*Must meet requirements

A net gift is treated as a part sale-part gift transaction

This means that the donor must realize taxable income to the extent that the gift tax paid by the donee exceeds the donor’s adjusted basis in the property transferred

Question 22

Reverse Gift

Answer 22

Occurs when appreciated property is transferred to a donee that is expected to die shortly, and the same property is then transferred back to the donor via the donee-decedent’s will

If this happens and the donee dies within one year, the basis is not stepped up
If the donee dies after one year, the basis is stepped up

Question 23

Income tax consequences of lifetime gifts

Answer 23

A lifetime gift generally has no income tax consequences to either the donor or the donee at the time of the gift

The donor realizes no gain or loss as a result of making the gift and the gift is not included in the donee’s gross income

Question 24

Life Insurance and Gift Taxation

Answer 24

A person who transfers ownership of a cash value premium paying policy to someone else during her life makes a completed gift if she relinquishes all incidents of ownership

A person who purchases a policy and designates someone else as the owner also makes a completed gift

A person who pays the premiums on a policy owned by someone else makes an indirect gift to the policyowner

An outright gift of the entire ownership in a life insurance policy from 1 spouse to another qualifies for the unlimited gift tax marital deduction