The Federal Gift Tax Module #4

Blockage Discount

seldom allowed by IRS, applies only to stock listed on a public exchange. Attempts to use the blockage discount for transfers of closely held stock have failed. Theory behind the blockage discount is that a sizable amount of stock cannot be readily sold at one time w/o decreasing the stock's mkt price. The block of stock to be valued must usually exceed the avg daily trading volume in the stock for this discount to be available.

Marital Deduction

that is, an estate can use the estate tax marital deduction to offset or reduce estate tax liability on a transfer to a spouse, and the donor of ta gift also can take advantage of the gift tax marital deduction to offset gift tax liability on a gift to a spouse.

Bypass planning

the GT MD only delays imposition of transfer tax until the done spouse either gives the gifted prop away or dies w/it (estate tax). Therefore, when giving a spouse an interest in property, it is sometimes desirable not to qualify such transfers for the GT MD. There are several purposes to engage in bypass planning during life:

Stepped-up basis

when an asset in the gross estate is received at death from a decedent who dies in 2015, while the value of at he asset is again not reportable as income, the recipient takes a basis in the asset that is equal to its value for estate tax purposes. Since in the usual situation this value is greater than the decedent's basis in the property, the recipient is said to receive a stepped-up basis.

Only one return need be filed by the donor spouse w/ the consent of the other spouse if

-the donor spouse made gifts to 3rd parties of more than one, but less than 2, times the maximum annual exclusion amount -the only gifts made by the consenting spouse were gifts to 3rd pareties other than those to whom the donor spouse made gifts and which do not exceed the max annual exclusion -all gifts by both spouses were of present interests

A bypass trust should be used when the donor spouse:

-wants to leave prop in trust rather than outright -definitely does not want to use the MD -wants to include persons other than his spouse as income bene -wants to ensure that the trust prop will go to the remainder benes named in the trust at the death of the done spouse

Medical exemption

amounts paid on behalf of an indv. to a person or institution that provided medical care for the indv. The payment must be made directly and exclusively to the care provider, and the medical care must meet the requirements of IRC section 213(d).Medical care also includes amounts paid for medical insurance and any LTC on behalf of any indv. Does not include payments that are reimbursed by the benefited individual's insurance, this would be considered a gift.

Charitable deduction

an estate can reduce its estate tax liability by making transfers to a qualified charity. The same opportunity to reduce gift tax liability is available if a donor makes a lifetime gift to a qualified charity.

A remainder interest in a farm or personal residence (code section 25229c)(2)

authorizes a charitable GT ded when a donor gives a qual charity a remainder interest in the donor's farm or personal residence. This allows the donor to receive a deduction for giving such prop to a charity even though the charity gets possession only after the death of some other person who has a life estate in the same prop. The personal residence does not have to constitute the TP principal residence (summer house)

Certain Intrafamily transactions

-Forgiveness of a legally enforceable debt -Intrafamily loans -bargain sales

Section 2702 does not apply to the following:

-Incomplete gifts (such as rev trust) -Personal residence trust (PRT) or a qualified Personal residence trust (QPRT) -Charitable remainder annuity or unitrusts (CRAT & CRUTs) -pooled income fund (PIF) -Charitable lead annuity or unitrusts (CLATs & CLUTs) -certain spousal prop settlements incident to a divorce where the transfer of prop is deemed to be for full and adequate consideration under IRC section 2516 -A transfer or assignment of prop by a noncitizen surviving spouse of prop to a Qualified Domestic Trust (QDOT) under the circumstances described in Reg. 20.2056A-4(b).

The requirements for a qualified disclaimer acre:

-The refusal must be in writing -The refusal must be received by the donor, the legal rep of the donor, the holder of the legal title to the prop. to which the interest relates, or the person in possession of the prop. w/in 9 months after the later of (a) the day on which the transfer creating the interest is made or (b) the day on which the disclaimant reaches age 21. -The disclaimant must not have accepted the interest or any of its benefits. -As a result of the refusal, the interest must pass w/o any direction from the disclaimant to a person other than the disclaimant (there are limited exceptions to this restriction for the spouse of the donor). -The refusal must be irrevocable and unqualified. (cant touch it, use it, give it direction

Member of the family

-for the transfers of interests in corporations and partnerships (section 2701) 1. transferor's spouse 2. any lineal descendant of either the transferor or transferor's spouse 3. the spouse of any such lineal descendant (section 2701)

Benefits by using a QCD

-if QCD is more than the RMD for the year, the excess will reduce the RMD for future years -taxpayers who do not itemize income tax deductions can now get the equivalent of an itemized ded by making a QCD, since the QCD will not be included in income -eligibility for other income tax ded that are limited by a taxpayer's AGI (such as the medical expense ded)will also be easier to achieve b/c of not having to include the dist in income -assets from a qual plan can still be rolled over to a trad IRA and then the QCD can be made.

If a gift is taxable it will have the following tax effects upon future lifetime gifts by the donor.

-if the annual exclusion was applicable, the donor's ability to give subsequent gifts in the same calendar year to the same done using the annual exclusion will be reduced or eliminated. -it will cause the donor to use some of his unused applicable credit amount or to pay GT out of pocket if the donor has nonused credit -it may cause future taxable gifts to be taxed at a higher rate if a rate bracket is in the unified rate table is exceeded.

Several purposes to engage in bypass planning during life:

-the donor desires to take adv. of the increased tax efficiency of transferring assets b-4 they appreciate, rather than paying estate tax on the assets after they appreciate -if amounts in excess of the GT applicable exclusion amount are transferred, the tax exclusive nature of the GT results in even more tax efficiency than does payment of the tax inclusive estate tax (absent application of the gross up rule to the donor's gross estate) -the donor does not want to create an estate tax problem for his spouse by giving the spouse assets that will have to be included in the spouse's gross estate -bypass planning helps achieve the cardinal rule of estate planning, which is use of every person's applicable credit amount to the fullest extent possible or necessary. This last goal is achieved by transferring property in a manner that will result in taxable gifts, which will not result if the GT MD applies.

There are only 3 types of qualified retained interests for a transaction subject to section 2702 whose value can be deducted from the transferor's interest in the transferred assets prior to the transfer when computing the transferor's gift tax liability under the subtraction method.

1. Qualified annuity Interest 2. Qualified unitrust interest 3. Qualified Remainder Interest

The holder can do 3 things w/ the power

1. Release it-this happens when the holder renounces his right to ever exercise the power again. 2. Exercise it-this happens when the holder names an appointee of the property 3. Let it lapse-this happens when the holder does not exercise the power b/4 a deadline for exercising the power-usually a calendar ear expires.

Code section 2702-also applies only to lifetime transfers and therefore has an effect only upon valuation for gift tax purposes.

1. There must be a transfer in trust or transfer of a term interest, such as in a remainder trust (RIT) or a split interest transaction (SPLIT), to (or FBO )a family member. 2. The transferor or an applicable family member must retain an interest in the trust.

Common Unintentional Gifts

1. Titling Property in Joint Names 2. Certain Gifts of Life Insurance 3. Certain Intrafamily Transactions 4. Adding a name to a Bank Account

However, even a gift to one indv that is equal to or less than the max annual exclusion amount will require the filing of a gift tax return in the following:

1. Where the gift is of a future interest (for which no annual exclusion is permitted) a gift tax return must be filed. 2. Gift splitting w/ spouse, a gift tax return must be filed to record the spouse's consent to the split, even if no part of the gift remains taxable after application of appropriate annual exclusions. IE: present interest gift of $28k is to be split between spouses, leaving each w/ a gift of $14k and a taxable gift of 0, a gift tax return is required to record the consent of the non donor spouse to split. 3. If gift to the donor's spouse exceeds the max annual exclusion amount, even though there is an unlimited marital deduction, a gift tax return may be required in two situations. In the first, the spouse is given an asset that does not qualify for the marital deduction. Where the donor's spouse is not a US citizen, the rules are different from those discussed here. 4. Any charitable gift exceeding the max annual exclusion requires the filing of a gift tax return only when the gift does not qualify for a charitable deduction or, even if the transfer does qualify for the charitable deduction, when the donor has given less than his or her entire interest in the property (eg. contributions to a charitable lead or remainder trust, a pooled income fund or a remainder interest in a farm or personal residence)

For transfers of interests in trust ( and term interests)and certain lapsing rights and restrictions (section 2702 & 2704) a member of the family means:

1. an individual's spouse 2. any ancestor or lineal descendant of either the individual or the individual's spouse 3. any brother or sister of the individual 4. the spouse of any ancestor lineal descendant or brother or sister (section 2702)

Value of the taxable transfer for fed gift tax purposes is the total value of the property involved

1. minus the amount rec'd by the recipient spouse for the transfer is any 2. the amount of the life income interest retained, if any by the recipient spouse after the transfer. To t he extent the recipient spouse makes a gift of the life income interest, he may claim an annual exclusion.

Four most common types of charitable gifts

1. outright charitable gift-simplest of all as the donor merely gives fee simple title to the cash or prop to the charity and receives a CD for the FMV of the cash or prop as of the date of completion of the gift, less the annual exclusion (since this is a present interest gift). 2. Charitable bargain sale-donor sells an asset to the charity, but for less than its FMV on the date of the sale. The donor is entitled to a charitable GT ded for the difference between the sale price sand the asste's FMV, less the annual exclusion (since a present interest gift) 3. Charitable stock bailout-the donor owns closely held stock (usually high appreciated)that he contributies to the charity. the donor receives a Charitable gift tax deduction for the FMV of the stock, less the annual exclusion (since present interest gift) 4. Charitable gift annuity-the donor transfers cash or other prop to the charity in exchange for a commitment by the charity to pay the donor , or some other person designated by the donor, a specified amount each year during the donor's or other person's lifetime. If the donor names himself as the bene, of annuity payments, there is no GT. If he names his spouse as asole bene of annuity payments (w/ a general power of appointment over any payments that will be made after his death) or as a joint survivor annuitant w/ the donor then the interest given to the spouse will qualify for the MD. if name someone other than spouse as bene, the PV of such an interest is subj. to GT.

2703 does not apply to any option, agreement, right or restriction which meets stated conditions:

1. the arrangement must be a bonafide business arrangement 2. the arrangement can't be merely an attempt to transfer prop to family members for less than full and adequate consideration in money or money's worth 3. the terms of the arrangement must be comparable to those of similar arrangements entered into by persons in an arms-length transaction. By regulation, these conditions are deemed to be met if more than 50% of the value of the transferred prop is owned directly or indirectly by indv. who are not members of the transferor's family

Regardless of whether section 2703 applies for a buy-sell agreement to fix the value of the decedent's interest in a closely held business for estate tax purposes, it must also meet the following 4 requirements:

1. the purchase price was fixed and determinable under the agreement 2. the decedent's estate must be obligated to sell at death at the fixed price 3. the transfer restrictions must apply and be respected during the decedent's lifetime 4. the agreement must be a bona fide business arrangement and not a device to pass the interest to the natural objects of the deceased owner's bounty w/o full and adequate consideration in money or money's worth

Transfers that are exempt from the gift tax

1. transfers to political organizations 2. payments that qualify for the educational exemption 3. payments that qualify for the medical exemption The medical and edu. exemptions are unlimited in amount, do not count toward the annual exclusion amt. and are available w/o regard to the relationship between the donor and done.

Exceptions to the terminable interest rule

4 exceptions 1. Qualified Joint interests in property-push asset 2.Life Estate with power of appointment 3. Qualified Terminable interest property 4. income interest in a charitable remainder trust

When is a lifetime transfer complete?

A completed transfer may be either direct or indirect and may involve either present or future interests. Characteristics of a completed transfer is that the donor relinquishes all dominion and control over the transferred property. Therefore, it should be apparent that retaining the right to revoke the transfer, such as funding a revocable trust, will be considered an incomplete transfer.

Market Absorption Discount

A discount that has gained more acceptance in recent years, particularly in the area of commercial real estate properties. this discount reflets the reality that the market can handle only a certain quantity of a certain type of property at a given price. When more of that type of prop is placed on the market than the mkt can handle, the mkt is flooded, causing lowering of the price per unit than would be set for a smaller quantity of the same prop. IE: when a city has more apartments for rent than the population of the locality can support.

Defective Disclaimers

A done my choose not to accept a gift. If they meet the section 2518 requirements, the asset shall not be deemed to have been transferred to the person disclaiming (the disclaimant)

Other Exempt transfers

A donor is allowed to transfer prop, whether or not equal value is rec'd in return, w/o being subject to the GT if the prop. is transferred pursuant to a divorce to settle marital and prop. rights, or to provide a reasonable allowance for the support of issue of the marriage during minority. Such transfers must be made pursuant to a written prop settlement agreement, and divorce must occur w/in 3 year period beginning on a date one year before such agreement is entered into provides that the waiver of any survivorship benefit in a pension plan as provided in code 401(a) and sectin 417 will not constitute a transfer of prop that is subj.to the GT.

Partial Interests

A donor may retain an ownership interest while making a completed gift of a partial interest in property IE: he could retain the right to income while making a completed gift of the remainder interest. The donor could also retain a life estate in property while giving title to the property to someone else.

What is a gift?

A gift can be defined as an intentional & voluntary transfer of property from one person to another w/o any return compensation flowing from the done to the donor. The federal gift tax applies to any completed direct or indirect lifetime transfer of property by a competent donor for less than full or adequate consideration in money or money's worth.

Minority Discount

A minority ownership interest in a closely held business sometimes is given a discount for gift tax purposes. This minority discount is premised upon the inability of the minority interest owner to influence business policy, compel income distributions or force business liquidation, merger, consolidation, or sale. This inability of influence policy or exert control causes the minority interest of lose some of its value to all but the controlling owners

Release, exercise or lapse of GPOA (code section 2514)

A power of appointment is a right given by one party to another party to appoint or name the recipients of a designated portion of the donor's property-usually a trust. A general power of appt. allows the holder to include himself, his creditors, his estate or the creditors of his estate among the permissible appointees w/0 the exercise of the power being subj. to an ascertainable standard or subject to the prior consent of the donor or of a party w/an interest in the trust assets adverse to that of the holder.

Educational Exemption

A qualifying educational org. is one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where it its edu. activities are regularly carried on. The payment must be made directly and exclusively to the qual. edu. org. and it must be for tuition. No exemption is allowed for amounts pd. for books, supplies, dormitory fees, board or other similar.

Avoiding the GT MD can be achieved in several different ways.

A trust that gives the done spouse a terminable interest (and one that is not eligible for the QTIP election) is called a bypass trust b/c the trust assets will bypass the recipient spouse's gross estate. This bypass is possible b/c these assets received no MD and consequently, the estate of the donor spouse paid estate tax on these assets.

Filing Requirements and Liability-What to File

IRS Form 709 is the form for reporting transfers subject to the fed gift tax. (no such thing as a joint gift tax return) Each spouse must file a separate form 709.

Gifts in Trust

IRS has stated that the done spouse will not be deemed to have a terminable interest in a trust if he has what is tantamount to "outright control" of the trust .Outright control is defined as control over both the income and the corpus of the trust.

Commercial Annuities

An annuity is simply a contract for the payment of money over a period of time by one person or entity (the insurer) to another person or entity (the annuitant) b/c of some prior consideration received by the insurer.

Partial election

An election to qualify less than all of the assets for the marital deduction.

Outright gifts

An outright transfer of sole title to property to a done spouse clearly is not a terminable interest and therefore will entitle the donor to a marital deduction. An outright gift will allow taxation of an asset when the done spouse gives the asset away ordies w/ it (unless given in a qualifying manner to a spouse or qualified charity)

Certain gifts of Life Insurance

An unintended gift can result when the owner & insured of a life ins. policy transfers all incidents of ownership in the policy to another person (often spouse) and designated beneficiaries of the policy are persons other than the donor or done. This creates the situation referred to as the "unholy trinity." If the insured dies before the new owner (the done) changes the beneficiary to be himself, the new owner will be deemed to have made a gift of the policy proceeds to the benes. This can be avoided by making sure that the positions of policy owner, the insured and the bene. are never held by more than two persons or entities.

Code section 2703

requires that any agreement, option or other right to acquire prop at less than FMV or any restriction on the right to sell or use prop be ignored in determining the FMV of the transferred prop. This section applies only to such rights or restrictions created or substantially modified after October, 8 1990. Applies for Estate and GT valuation purposes.

Release or exercise

w/o a 5 & 5 limitation-GT due if exercised or released to transfer value to someone other than holder, spouse, or qual. charity, and annual exclusion is exceeded if applicable w/ a 5 & 5 limitation-GT due if exercised or released to transfer value to someone other than holder, spouse, or qual. charity, and annual exclusion is exceeded if applicable

Cumulative

Computation of both the gift and estate tax is cumulative.(IE: prior taxable transfers, as well as the current taxable transfer, must be taken into account in any calculation.)

Federal Gift tax

Congress passed legislation in 1932 imposing a gift tax on the gratuitious transfer of wealth during lifetime. w/o the gift tax, people could avoid the estate tax simply by giving all of their prop away prior to death.

Property in co-ownership w/ others

when a transfer of prop is made in which the transferor owns only a partial interest, the value of that partial interest depends initially upon the form of ownership. Common forms of prop co-ownership are tenants in common JTWROS, TBE and COM PROP.

The Power of Appointment trust (A Trust)

In this marital trust, the done spouse is given a qualifying income interest for life and a general power of appt. over the corpus exercisable during life or at death. Trust income to the done spouse becomes subject to inclusion in the done spouse's gross estate if not consumed or given away prior to death. If the done spouse appoints someone else as an appointee of the trust corpus, then the done spouse will be deemed to have made a gift to the appointee and will be subject to GT.

FMV-Real Estate:

Factors that are recognized as relevant in determining the value of real estate- 1. nature & condition of the property 2. size & location of prop 3. actual & potential use of prop (based on consideration of trends) 4. how suitable the prop is for its actual or intended use 5. applicable zoning restrictions 6. the size, age and condition of any buildings 7. the MV of comparable prop w/in the area 8. the value of net income rec'd from the prop 9. the probate court valuation 10. comparable sales of prop w/in the area 11. the replacement cost of any improvements 12. unusual facts/uniqueness of prop

Closely held stock

Factors to be considered in valuing closely held stock: 1. the nature and history of the business 2. the outlook for the economy and the specific industry 3. the book value of the stock 4. the earning capacity of the company 5. the dividend-paying capacity 6. the existence of goodwill 7. the stock sales of subject stock 8. the FMV of comparable publicly held stock

Code section 2701-applies only to lifetime transfers only effects valuation for gift tax purposes (this section applies most prominently to recapitalization transactions of closely held businesses. These transactions are often used to bring in new owners w/ less valuable rights than existing owners.)

Four prerequisites for this section- 1. there must be a transfer of an equity interest in a closely held corp. or partnership. 2. the transfer must be made to a member of the transferor's family as that term is defined in section 270. 3. the transferor or an applicable member of the transferor's family must retain an applicable retained interest in the corp. or partnership. An applicable retained interest is: A. A distribution right, but only if immediately before the transfer, the transferor and applicable family members hold control of the entity: or B. A liquidation, put, call or conversion right 4. there are senior and junior equity interests in the entity

CLAT

GT -Income interest not taxable b/c of charitable deduction -remainder interest taxable unless given to spouse or retained by grantor Payment -income interest: fixed amount of net FMV of initial contribution to qualified charity at least annually -corpus: to one or more no charitable beneficiaries at end of trust term Other -no additions permitted -invasion of corpus mandatory to meet income pay out -term; lifetime of persons in being or term certain< state laws against perpetuities, if any

CRAT

GT -income Interest taxable unless given to spouse and spouse is only income beneficiary other than donor -remainder interest not taxable Payment -income interest: fixed amount >5% of initial net FMV of contributed assets to noncharitable beneficiary; paid at least annually -corpus: to a qualified charity at end of trust term Other _MRI and MAP apply -no additions permitted -invasion of corpus mandatory to meet income payout -term: lifetime or term certain < 20 years

FARM or Personal residence

GT -income interest taxable unless QII is given to spouse and QTIP election is made -remainder interest not taxable b/c of charitable ded (or MD if QTIP election is made) Payment -life estate: non charitable beneficiary gets use of and income from asset -remainder: to qualified charity at death of non charitable beneficiary Other -does not require a trust -term: for life or lives of non charitable beneficiaries

CLUT

GT -income interest not taxable b/c of charitable deduction -remainder interest taxable unless given to spouse or retained by grantor Payment -income interest: bariable amount of net FMV of contributed assets, valued annually, to qualified charity at least annually -corpus: to one or more noncharitable beneficiaries at end of trust term Other -additions can be permitted by trust instrument -invasion of corpus mandatory to meet income payout -term: lifetime of persons in being or term certain <state laws against perpetuities, if any

PIF

GT -income interest taxable unless QII is given to spouse and QTIP election is made -remainder interest not taxable Payment -income interest: to non charitable beneficiary annually; variable amount depending on investment success and % of total fund contributed -corpus: to a qualified charity at end of trust term Other -MRI & MAP don't apply -additions permitted -invasion of corpus not permitted since no amt of income pay out is promised -term: lifetime of income beneficiary

CRUT

GT -income interest taxable unless given to spouse and spouse is only income beneficiary other than donor -remainder interest not taxable Payment -income interest: variable amount > 5% of initial net FMV of trust assets, revalued annually, to no charitable beneficiary; paid at least annually -corpus: to a qualified charity at end of trust term Other -MRI and MA{ a[[;u -additions can be permitted by trust instrument -invasion of corpus permitted but not mandatory to meet income payout -term: lifetime or term certain <20 years

When a gift tax return is required

Gift tax return need not be filed if each of the gifts made during the year qualifies for and is equal to or less than the max annual exclusion applicable in the year of the gift. Thus, cash gifts of $14k each to 20 different individuals in 2015 will not require the filing of a gift tax return. On the other hand a single gift in excess of the max annual exclusion applicable in the year of the gift will require the filing of a gift tax return.

Gift tax rate chart is progressive

IE: subsequent taxable amounts may be taxed at rates higher than the rates that were applied to the initial taxable dollar due to the cumulative nature of the tax.

Incomplete Transfers into Complete Transfers

Incomplete transfers may later become complete. IE: although a current transfer of prop to a rev tru that will become irrevocable n 5 years is incomplete today, it will become a completed gift in 5 years. Similarly, if distributions are made from the trust while still revocable to anyone other than the grantor, a completed gift will have been made of the distributed amount, since the grantor will no longer have a right to revoke regarding that distribution amount.

Effect Upon Future Lifetime Gifts

If a gift is taxable, it will have the following tax effects upon future lifetime gifts by the donor -If the annual exclusion was applicable, the donor's ability to give subsequent gifts in the same calendar year to the same done using the annual exclusion will be reduced or eliminated. -It will cause the donor to use some of his unused applicable credit amount or pay GT out of pocket if the donor has no unused credit -it may cause future taxable gifts to be taxed at a higher rate if a rate bracket in the unified rate table is exceeded.

Trnsfers of ceretain life estates (IRC Section 2519)

If the recipient spouse of qualifying terminable interest Prop (QTIP) for which a marital ded was elected on the transferring spouse's estate or gift tax return, disposes (by gift or sale) of all or part of his qualifying income interest, he will be deemed to have conveyed the entire property, not just the qualifying income interest. Since the transferring spouse rec'd a marital ded, the recipient spouse is deemed to be the owner of the e3ntire asset, and not just the income interest

Date and Place of filing

It is premature to file a gift tax return for a calendar year that has not yet expired. A large gift in August, for example, does not require the filing of a gift tax return until the following April 15. Gift tax return is filed, w/the IRS service center specified in the instructions for form 709.

Qualifying income interest (QII)

LAME: Lifetime, Annual, Mandatory and Exclusive right to the trust income. If trust is funded w/ non-income producing property, such as a personal residence, the done spouse must have the exclusive right to use the trust assets for life.

Titling Property in Joint Names

Many elderly people will place their children's names on the title to assets such as a residence as JTWROS. Even though the parent did not intend to make a gift subject to gift tax, he has done so. Whether or not such a transfer is taxable and thus causes the donor to pay a gift tax or use up their GT credit amount depends on the following factors: -value of the asset -Whether the transfer is made by one parent or two -the number of children who are added to the title -the max. amount of the annual exclusion in the year of the gift

It is usually necessary to file other supporting documents w/ the return.

May include- -copies of transfer documents (deeds, trusts etc.) -statements by insurance companies on form 712-Life Insurance Statement, for each insurance policy listed on the return -numerous financial documents if a closely held business interest was gifted -professional appraisals of assets, especially real estate

Mandatory income trust Section 2053(b) (bad boy needs income)

Only a portion of each transfer to this type of trust will qualify for the annual exclusion. The amount that qualifies for the annual exclusion is the lesser of the number of income beneficiaries times the max annual exclusion or the PV of the income interest. Value calculations are made using gov. tables.

Qualified Charitable Distributions

Owners of IRAs or Roth IRA who are 70.5 can make a ttee to ttee transfer from their IRAs to a qualified charity of up to $100k each year w/o having to recognize the amt contributed as OI. The amts contributred can be used to satisfy the owner's RMD, but the owner is NOT entitled to take an income tax deduction , as is normally allowed for lifetime gifts to charity The contribution is eligible for the GT annual exclusion and the GT charitable deduction.

Lack of Marketability Discount

Since there is no ready market for the sale and purchase of closely held business interests, they are inherently difficult to sell and value, and therefore risky to own. This lack of market and the difficulty in making a sale is the basis for claiming a lack of marketability discount from what would be the value of a similar business interest w/o these problems

Qualified unitrust interest

This interest is a right to receive a periodic payment at least annually of a fixed % of fmv of the trust assets determined annually, but only to the extent the fraction or %does not exceed 120% of the fixed fraction or % payable in the preceding year.

Ascertainable Standard

Special power (HEMS) health, edu, maintenance support.

Qualified Remainder Interest. (a Qualified remainder interest exists oly if the governing instrument does not permit payment of income in excess of the annuity or unitrust amount to the holder of the qualified annuity or unitrust interest.)

This interest must meet all of the following: -it is a qualified remainder interest in every respect -it meets the definition of and functions exclusively as a qualified interest from the creation of the interest. -it is noncontingent b/c it is payable to the beneficiary or the beneficiary's estate in all events; and -all other interests in the trust, other than the noncontingent remainder interest, are qualified annuity interests or qualified unitrust interests.

A common situation in which Section 2703 may apply is to buy-sell agreements among closely held business owners or between the business entity and each indv. owner

Such agreements give the other owners or business entity the right to purchase the business interest of a deceased, retiring, or incapacitated owner, and establish a formula for determining the purchase price. They also prevent each owner from disposing of his interest to outsiders.

Fractional Interest discount

Taxpayers owing a minority interest in real estate have tried to claim a discount based ont he premise that a minority owner has no control over what happens to the prop

Charitable deduction (code section 2522) Major adv of inter vivos charitable gifts is that the donor will usually receive a charitable income tax ded (if qualified)equal to the pPV of the interest given to the charity.

The CD, like the MD is unlimited. The charity must qualify for federal GT purposes. -the ded is allowed for contributions of cash or property only. Tume and talendt donated to charitable causes are not ded. -the deductible portion of any charitable gift is only that part of the contribution that is in excess of any value rec'd from the charity. IE: if donor gives $1mm to a hospital upon the condition that the hospital conveys property to the donor worth $300k, the donor would be able to claim only $700k CD -transfer can't be one of a partial interest unless it is of a type authorized by the code -the ded can only be claimed for the calendar yr in which the gift is completed. -the check was pd when first presented -the donor was alive when the check was paid -the donor intended to make the transfer delivery of the check was unconditional -check was deposited, cashed, or presented in the year fo which deduction is sought and w/in a reasonable time after issuance -the prop for which the ded is taken must be included in the donor's total calendar year gifts.

Corporate Stocks and bonds assume the valuatin is 6/15, no sales of stk on this date. there were sales of stock two trading days b-4 the valuation date at a mean of $10. and sales three days after the valuation date at a mean of $15.. The FMV of the stock as of the valuation date is $12. (3x10)+(2x15)/5=12

The FMV of stock or bond is deemed to be the mean between the high/low sales price on the valuation date. if the stock or bond was not sold on the valuation date, the FMV is the weighted avg of the means between the high/low selling prices on the nearest trading dates both b-4 and after the valuation date. IE: on 12/4 the high was 116.72/ low was 113.38 the mean =115.o5

Special Valuation for Certain Intrafamily Transfers- Valuation (Before implementation of the Chapter 14 rules in 1990, a valuation problem was caused by taxpayers playing games w/ fmv.)

The IRC has special rules governing the valuation of certain transfers. These rules are contained in jIRC Sections 2701-2704, collectively known as the Chapter14 rules. These sections apply to prevent such transfers from being under valued

Unified credit

The applicable =credit amount under the IRC. The applicable credit amount is equal to the tax on an amount of taxable transfers that Congress has decreed taxpayers should not have to pay out-of-pocket. In the case of a surviving spouse, the applicable credit

US Gov savings bonds

Through the bureau of Public debt, has issued 5 types of savings bonds: Series E & H bonds. Series I bonds and Series EE and HH bonds. Series E and H bonds are no longer being issued, but many of these issued bonds have not yet reached maturity. and continue to be held. Series EE and HH bonds have been issued since January 1, 1980, but the gov stopped issuing Series HH Bonds after August 2004. Series IBonds have only been available in the last few years and pay interest at a variable rate. When a lifetime transfer is made of any of these bonds, the value of the transfer is measured by the redemption value of the bond as of the transfer or valuation date , as det. from tables published periodically by the Bureau of Public Debt and the treasury dep.

Responsible party for filing and payment.

The donor/Personal Rep. is responsible for filing the gift tax return and paying the tax, if any is due after the application of the donor's unused gift tax applicable credit amount. If taxes are due,it must be paid when the gift tax return is first due w/o extensions, unless a separate request is made to delay payment.

Valuation of gifted Assets- there are penalties for a valuation understatement, which occurs when the reported value of property entered on the gift tax return is 65% or less of the actual value of the property.

The general valuation principle used for the federal gift tax is the FMV of the gifted asset as of the time of completion of the transfer 9minus any consideration received w/ a value that can be determined in money or money's worth rec'd by the donor, if any) IE: if a donor gives her adult son title to a new auto worth $30k and takes title to the son's used car worth $5k she has made a gift of $25k. The donor cannot further reduce the value of the gift by claiming that she also rec'd $10k of extra "love & attn." from her son b/c the value of that love and attention cannot be determined in money's worth.

Gift Splitting

The gift tax allows a gift of property owned by one spouse to a 3rd party to be treated on the gift tax return as if one-half of it were given by each spouse, thereby doubling the allowable annual exclusions, if applicable.

Lock in discount

The inability of partners to w/d from a jpartnership b/c of provisions in the partnership agreement and/or state law has been used to claim a valuation discount known as a lock in discount.

Code provision 5 & 5 power. Establishes a safe harbor from gift taxation

To take adv. of the safe harbor from taxation created by this code, the donor of a general power will often limit the amount that the holder can take during any calendar year by stating that the holder can take no more than the greater of $5,000 or 5% of the value of the assets out of which or the proceeds of which, the exer4cise of the lapsed power could be satisfied.

Unified transfer tax system

The purpose of the federal transfer tax system is to tax the gratuitious transfer of wealth at least once at each generation. First became effective for tax transfers occurring after 1976.

Marital trusts

Trusts that qualify for the marital deduction.

Minor's trust-Section 2053(c) (children/minor)

allows transfers to be considered present interests qualifying for the annual exclusion if the following are met -both the prop and its income may be expended by or FBO, the bene. b/4 the bene. reaches age 21 -the bene. must be given the right to access all trust prop. on the minor's 21st b-day -if the bene. dies b/4 age 21, the prop. and its income will be payable either to the minor's estate or to whomever the minor may appoint under a general power of appointment

Present interest requirement for gifts in trust.

There are 2 basic types of trust beneficiaries: -Income beneficiaries -Remainder beneficiaries (corpus, principal, residual) The interests of remainder benes. in a trust are always future interest. they don not get to use, benefit from or take title to the trust prop. until after the interests of the income beneficiaries terminate.

Fair Market Value-

Treasury Reg indicates that the FMV is "the price at which prop would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy/sell and both having reasonable knowledge of relevant facts. Thus FMV commonly is regarded as the price agreed upo9n by a willing seller and willing buyer. IRS looks upon itrafamily and employer & EE transfers with some skepticism.

tax inclusive/exclusive nature

When a gift tax is paid out of pocket, the money used to pay the tax is not itself taxed. When an estate tax is paid out of pocket the money used to pay the estate tax is part of the gross estate that generated the tax. Thus, the gift tax said to be exclusive, while the estate tax is inclusive.

Income tax basis

When property is received by gift, although the value of the gift is not reportable as income, for capital gain purposes the done assumes the donor's income tax basis (adjusted) in the gifted property in the usual situation in which the date of the gift value of the property equals or exceeds the donor's basis.

Valuation of Life Insurance

When the owner of a Life Insurance policy makes a gift of all incidents of ownership in the policy or makes an irrevocable beneficiary designation, a completed gift has been made.

Charitable lead trust (CLT)

a person may want to give the benefit of assets to a charity during his lifetime, but he may also want those benefits to be transferred back to himself or other benes after a period of time. In this type of trust, the charity is in the lead since it has the income interest in the trust. the trust is irrevocable and can last either for a specified term of years or for the life/lives of a per/persons who must be living at the time the trust is established. A larger GTD will be allowed for a trust w/ a longer term since the charity will benefit from the trust income longer.

Donation of an irrevocable real property easement code sec 2522(d)

allows a charitable GT ded for the transfer of a qualified real prop easement as defined in code sec 1709h). A qual real prop easement is a restriction (granted in perpetuity) on the use that may be made of real prop to a qual org.

Reserved Powers

certain other powers reserved by a donor will cause an otherwise completed transfer to be treated as an incomplete transfer for gift tax purposes. retained rights that will cause an otherwise complete transfer to be incomplete are -the retention by a donor of a power to change beneficiaries or to alter the proportionate shares of the beneficiaries. However, certain powers reserved by a donor will not cause an otherwise completed transfer to be treated as an incomplete transfer. -if the transfer is otherwise comlete, retaining only the right to change the time & manner of a donee's enjoyment of property is a retention of dominion and control that is insufficient to create an incomplete transfer. -as long as the fiduciary power is limited by an ascertainable standard it will not cause an incomplete transfer. (HEMS)

Code Section 2704

deals w/ valuation of certain lapsing rights and restrictions in closely held business entities. If there is a lapse of any voting or liquidation right in a closely held business entity, and the individual holding the right and members of the individual's family control the entity both b-4 and after the lapse, the lapse is treated as a gift from (or as a transfer includible in the gross estate of ) the individual holding the right. In determining the value of a transferred interest, restrictions on liquidation are ignored unless they are the result of federal or state law or any commercially reasonable restriction that arises as part of any financing. This section is applied for both gift and estate tax valuation purposes and does not require that the parties be related.

Bypass trusts (B trusts)

do not qualify for marital deduction

Life estate w/ power of appointment

even if donor spouse names conditional remaindermen of the prop or does not name remaindermen at all, the donor spouse will not be deemed to have transferred an interest to someone else or retained an interest if the done spouse -is entitled for life to all the income from (or if the prop is not income producing, to the use of) the entire interest. -receives the income annually or at more frequent intervals -has the power, exercisable in his favor of for his estate, to appoint the entire interest -is able to exercise the power alone and in all events -has the only power to appoint any part of the interest in the property to another person.

TBE & COM PROP

forms of prop ownership reserved solely for two people, each person is deemed to own half of the asset regardless of contributions. Therefore, for gift tax purposes, each person's share is = to 50% FMV of the asset.

Income interest in a charitable remainder trust

if the donor spouse establishes and funds an irrevocable trust that names his or her spouse (or the grantor & the spouse) as the only income benes and a qualified charity as the remainder bene, the donor spouse will be entitled to a marital ded for the interest given to the spouse-section 25239g) and a charitable ded for the remainder interest given to the charity -section 2522. The done spouse is not req to include any portion of the trust estate in his gross estate. that trust can last for either the done spouse's lifetime or for a term certain not to exceed 20 years, and must also meet all the req for a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT)

Qualified joint interests in prop

if the donor spouse owns prop in his sole name and transfers title to the property into both spouses names as JTWROS or as TBE, the donor spouse will not be deemed to have retained an interest in the same prop even though the donor spouse may get the prop back by surviving the done spouse.

Terminable interest rule

is an interest that will end or fail after a period of time or when some contingency occurs or faild to occur. IE: life estate and an interest in property that lasts for a term certain. The IRS by regulation has stated that even if a terminable interest has been given, the marital ded will be denied only when the donor has also -transferred an interest in the same prop for less than adequate consideration to someone other than his spouse -retained an interest in the same prop -retained a power to appoint an interest in the same prop -b/c of this transfer or retention, the other done, the donor spouse, or the person to whom an interest may be appointed may possess or use any part of the prop after the done spouse's interest ends or fails; the spouse cannot override this possession

Primary characteristic of Unified transfer tax system

is that it imposes an identical amount of tax liability on lifetime transfers (taxable gifts) or transfers at death (taxable estate) that are of equal value.

Qualified Annuity Interest

is the right to receive a fixed amount that must be payable to (or FBO) the holder of the annuity interest at least annually. A fixed amt. means: -a stated dollar amt, but only to the extent thte amount does not exceed 120% of the stated dollar amt payable in the preceding year; or -a fixed fraction or % of theinitial fmv of the prop transferred to the trust, as finally determined for fed tax purposes, but only to the extent that the fraction or %does not exceed 120% of the fixed fraction or % payable in the preceding year.

Applicable Family Member (section 2701 and section 2702)

means- 1. the transferor's spouse 2. any ancestor of either the transferor or the transferor's spouse 3. the spouse of any such ancestor

Bypass trusts take on many forms

most common ways to ensure that a trust will not qualify for the GT MD is to make the done spouse one for several (vs. the exclusive) income beneficiaries and /or to make distribution of the trust income discretionary (vs. mandatory)w/ the ttee. In this latter instance, the surviving cannot be the sole ttee. An absolute req. for any bypass trust is that the done spouse not be given a general power of appt. over trust prop. Such a power would require inclusion of the trust prop in the done spouse's gross estate under code 2401

Marital and Charitable Deductions

once total calendar-year gifts have been reduced by any appropriate gift splitting and annual exclusions, the fed GT allows 2 deductions in appropriate circumstances to arrive at the donor's taxable gifts for the year-the marital deduction and the charitable deduction.

Annual Exclusion

only the gift tax allows a deduction annually for a limited amount of gifts of a present interest by any donor to each done in a calendar year. The annual exclusion amount is indexed annually for inflation to the next lowest multiple of $1,000. The maximum annual exclusion amount for 2015 is $14,000

Crummey Trust

power gives a bene. a reasonable length of time to w/d a specific portion f the contribution made by a donor to the trust in that calendar year. A Crummey power is a general power of appt. over the gifted prop. Since 1968 court case that gave Crummey trusts their name, transfers to such trusts have been considered present interests that qualify for the annual exclusion, regardless of whether or not the bene. actually exercises the power and w/d funds from the trust.

Estate trusts (seldom used)

property placed in an estate trust qualifies for the MD b/c the done spouse is the sole beneficiary of the trust and any trust income or corpus not actually distributed to the done spouse during his lifetime is paid to that spouses 'estate upon his death. The done spouse is given non terminable interest b/c no one other than the spouse is given an interest in the trust property.

The applicable credit amount (code section 2505)

regarding the applicable credit amount, so long as the donor's total (cumulative )taxable gifts do not exceed the GT applicable exclusion amount for the current year, the donor will not have to actually pay any GT out of pocket. (example 4-31) once the total cumulative tentative tax exceeds the GT applicable credit amount available in the current year, the excess will have to be paid out of pocket.

QTIP Trust (C trust) (newcomer to the list of possible marital trusts)

requires an election to qualify for the marital deduction. Interest given to the done spouse is a terminable interest.It is also one of the stated deductible terminable interest exceptions. This trust gives the done spouse control over trust income by giving him a qualifying income interest. If the assets are income producing, distribution of trust income must meet all of the LAME requirements. However the done spouse has absolutely no control over the trust corpus. The remaindermen entitled to the trust corpus are named solely by the donor spouse.

Qualified terminable interest property

the donor spouse will not be deemed to have retained an interest in property or to have transferred an interest in prop to someone else if the done spouse is given a qualifying income interest for life in the property and the donor spouse makes an irrevocable election on his GT return to qualify the property for the marital deduction. The done spouse is given a qualifying income interest for life if -the done spouse alone is entitled to all the income from the prop for life or has the right to use the prop for life the income is payable on a mandatory basis annually, or at more frequent intervals -no person has the power to appoint any part of the prop to any person other than the done spouse.

JTWROS

the donor tenant's share is the total FMV of the prop divided by the total number of owners in states in which JT are deemed to won such prop equally. IE: 3 JT Tenants and the entire prop is gifted, each is deemed to own 1/3 of the prop and is responsible for 1/3 of the gift tax. In states where JTWROS can own unequal shares, the value of the transfer would be the same as for tenants in common.

Partial Interest Charitable gifts

the gen purpose of this req is to ensure that the charity will actually get some part of the prop for which the deduction is allowed. The most popular vehicles for gifts of a partial interest to charities are Charitable lead and remainder trusts, charitable real prop easement a pooled income fund and a gift of a remainder interest in farm or personal residence.

Gift Tax Credits

the only credits available to reduce the current tentative tax are the applicable credit amount and credit for GT paid to a foreign jurisdiction for transfer of the same prop.

Key Person discount

traditionally used for estate tax valuation. Key person allows for an adjustment for FMV for the loss of services of an EE who is key to the success of a closely held business. Until taxpayers have further success in claiming this discount for gift tax purposes, seeking this discount is likely to invite a protracted dispute w/ IRS

Tenants in Common

value of gift prop owned as tenants in common is dimply the FMV of the donor's % share at the date of transfer.

Lapse

w/o a 5 & 5 limitation-GT assessed only on excess of that amount that holder could have taken by exercise of that amount that holder could have taken by exercise of the power over the greater of $5,000 or 5% of the value of the assets subject to the power at tht time of lapse w/a 5 & 5 Limitation-No GT due b/c amount that holder could have taken by exercise of the power cannot exceed the greater of %5,000 or 5% of the value of the assets out of which, or the proceeds of which, the exercise of the lapsed power could be satisfied.

Marital deduction code section 2523

when applicable, the GT marital ded allows gifts to a donor's spouse to be ded in an unlimited amount. Must meet the following -spouses must be married at the time of the gift becomes complete, because section 3 efense of marriage act, passed in 1996, was declared unconstitutional by the US supreme court in 2013 (same sex couples married under the laws of any state or foreign jurisdiction are considered as legally married for fed tax purposes) -the done spouse must be a US citizen -the gift must be included in the donor spouse's total calendar-year gifts -the done spouse must not be given a terminable interest in the property or he must receive a deductible terminable interest.