Gift Tax ( Estate Planning Chapter 5)

List advantages of making lifetime gifts as compared to transfers at death.

1. Any appreciation on a gifted asset occurring after the date of the gift is excluded from the donor's gross estate. 2. Any gift tax paid on a taxable gift is excluded from the donor's gross estate if the gift was made more than three years prior to the donor's death. 3. Gifts, unlike bequests, can utilize the annual exclusion which transfers at most $14,000 free of transfer taxes. 4. Any gift on income producing property transfers the income from the donor to the donee after the date of the gift and reduces the donor's gross estate. 5. Donors can transfer property during life that is taking up needed space or that they no longer wish to maintain. 6. Finally, payments of support and the expenses that would be considered qualified transfers during life are excluded from the calculation of gift tax. The estate tax calculation included the transfers for future support and for reasons that would otherwise be a qualified transfer.

List the steps in calculating the gift tax.

1. Sum the "total gifts" for the calendar year 2. Deduct the total exclusions and deductions (annual exclusion, marital deduction, charitable deductions) 3. Add the donor's taxable gifts for the calendar year (Sum of 1 &2) to the donor's previous taxable gifts for all prior calendar years. 4. Calculate the gift tax from the unified estate and gift tax rate schedule. 5. Reduce the gift tax by the gift tax deemed paid and the lesser of the applicable gift tax credit ($2,081,800 in 2014) or the calculated gift tax.

A donee's adjusted basis of gifted property is generally the donor's basis. List the two circumstances when this is not true.

1. When a donor gifts property with a fair market value at the date of the gift less than his adjusted basis, the donee must follow the double-basis rule. In such a case, the donee uses the fair market value at the date of the gift as the loss basis, the donor's adjusted basis as the gain basis, and if the property sells for a value between the fair market value and the adjusted basis, the donee uses that value as his adjusted basis. 2. When a donor gifts property and pays gift tax on the transfer, the portion of the gift tax paid attributed to the appreciation in the fair market value of the gift is included in the donee's basis.

Explain the use of the Crummey provision.

A Crummy provision is included in a trust document to create a present interest gift, eligible for the annual exclusion, out of that otherwise would be a gift of a future interest value. The Crummey provision usually gives the beneficiary of a trust the right to withdraw the lesser of the annual contribution to the trust or the annual exclusion.

Direct Gift

A direct payment of cash or transfer to property to a donee

Net Gift

A gift of property that requires the donee to pay the gift tax.

Complete Gift

A gift of property where the donor has not retained any interest and the donee can be identified at the date of the gift.

Qualified transfers allow certain indirect gifts to be excluded from gift taxation. Explain these gifts and the requirements to exclude them from gift taxation.

A qualified transfer is a payment directly to a qualified educational institution for tuition, excluding room and board, or a payment made directly to a medical institution for the qualified medical expenses of someone else. To be a qualified transfer, exempt from gift tax, the payment must be paid directly to the educational or medical institution.

Indirect Gift

An indirect transfer on behalf of a donor for the benefit of the donee. Example: Troy pays his girlfriend's credit card.

Revesionary Interest

An interest that has transferred and subsequently will revert back to the transferor

Who must file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return?

Any donor in a calendar year who makes a gift must file a gift tax return, unless all of the gifts are less than or equal to the annual exclusion, or are not subject to gift tax. If a split gift election is made, a gift tax return must be filed by the spouse who makes the gift, or both spouses if both make a gift, even if, after the split, the gift is under the annual exclusion.

Incomplete Gift

Any transfer that included a revocable beneficiary designation or a transfer to a revocable trust. Incomplete transfers are not considered gifts for gift tax purposes

How are gifts to spouses treated for gift tax purposes?

As long as the spouse is a United States citizen, a gift to a spouse is not taxable because of the marital deduction. If the spouse is not a United States citizen, then a special annual exclusion is available ($145,000 for 2014)

Various types of gifts:

Direct, Indirect, Complete, Incomplete, Reversionary Interest, Net Gift

Explain the advantage of using the election to split gifts.

If an individual gifts separate property, utilizing his annual exclusion, only $14,000 per year per donee will be excluded from gift tax. The gift splitting election allows the donor's spouse to consent to split the gift and, in essence, treat one-half of the gifted property as her property, and eligible for her annual exclusion. After the gift splitting election, $28,000 for 2014 (both spouse's annual exclusion) of the donor's separate property gift will avoid gift tax.

Explain the gift and estate tax reforms created by ATRA 2012.

The American Taxpayer Relief Act (ATRA 2012) established permanent rules for the estate and gift tax for 2013 going forward. The estate tax is imposed on bequests at death as well as inter-vivos (during life) gifts. With indexation, the exemption is $5,340,000 in 2014. The taxable estate is taxed at 40%. The exemption applies to total bequests and gifts (separate from the annual inter-vivos gift exemption of $14,000 per donee). Transfers between spouses are exempted, and any unused exemption can be inherited by a surviving spouse. The permanent provisions retain most of the rules adopted for 2011 and 2012, but with a higher rate.

Discuss the requirements and limitations of the annual exclusion.

The annual exclusion allows each individual to transfer up to $14,000 (for 2014) per year per donee gift tax free. To be eligible fort the annual exclusion the gift must be of present interest. The annual exclusion perishes each year and does not carryover to successive years.

How is the creation of a joint bank account where one party contributes the entire amount treated for gift tax purposes?

The creation of a joint bank account is different than most types of gifts because the gift is not complete, and therefore not taxable, until the noncontributing party withdraws money for their own benefit.

List the elements of a gift.

The donor must: have the intent to make a voluntary transfer be competent to make the gift The donee must: be capable of receiving the gift take delivery accept the property

What is the due date to file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return?

The original filing deadline is April 15 of the year after the gift is made. The original deadline can extend as late as October 15 of the year after the gift is made. The payment for gift tax, however, is due at the original filing deadline. If the donor died in the year of the gift, the gift tax return must be filed before or at the same time as the estate tax return (Form 706).