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12-2
THE GIFT TAXTHE GIFT TAX(1 of 2)(1 of 2)
Unified transfer tax systemGift tax formulaTransfers subject to gift taxAnnual exclusionGift tax deductionsGift-splitting
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-3
THE GIFT TAXTHE GIFT TAX(2 of 2)(2 of 2)
Tax computation Basis of property receivedBelow-market loansTax planning considerationsCompliance and procedural
considerations
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-4
Unified Transfer Tax Unified Transfer Tax System System
Excise tax on wealth transfer when adequate consideration not received
Purpose of transfer taxesUnified rate scheduleComponents of transfer tax systemTax on wealth transfersCumulative and progressive tax
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-5
Purpose of Transfer Taxes
Raise revenue for federal governmentPrevent evasion of estate taxRecover revenues lost by shifting
assets to taxpayer in lower income tax bracket
Redistributing wealth
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-6
Unified Rate Schedule
Top marginal rate in 200745% 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
12-7
Components of Transfer Tax System
Gift tax: Inter vivos transfersTransfers while alive
Estate tax: Testamentary transfersProperty ownership transfers at death
Generation-skipping transfer taxProperty transferred to a second or
younger generation
©2009 Pearson Education, Inc. Publishing as Prentice Hall
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
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
12-10
Gift Tax FormulaGift Tax Formula(1 of 2)(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 ($12K per donee)- Marital deduction (unlimited)- Charitable contrib deduction (unlimited)= Taxable gifts for current period
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-11
Gift Tax FormulaGift Tax Formula(2 of 2)(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
Transfers Subject to Gift Transfers Subject to Gift TaxTax
Transfers for inadequate consideration
Transfers NOT subject to gift taxCompleted transfersGift tax consequences of certain
transfers
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-13
Transfers for Inadequate Consideration
Transfer of cash, stock, securities, or real estate
Forgiveness of debtAssignment of a life insurance policyTransfer of federal, state, or municipal
bondsTransfer of other assets
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-14
Transfers NOT Subject to Gift Tax
Transfers in normal course of businessQualified transfers for direct payment of
educational tuition or medical careTransfers to political organizationsProperty settlements in divorceTransfers disclaimed by recipientIncomplete transfers
©2009 Pearson Education, Inc. Publishing as Prentice Hall
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
12-16
Completed Transfers(2 of 2)
Gift valued at FMV upon transferGift may be for a partial interest or
only certain rightsE.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
12-17
Gift Tax Consequences ofCertain Transfers (1 of 2)
Creation of joint bank accountsIncomplete transfer until “donee”
withdraws fundsCreation of other joint tenancies
All joint tenants own an equal shareDonee’s ownership portion is a
completed gift
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-18
Gift Tax Consequences ofCertain Transfers (2 of 2)
Transfer of life insurance policiesAbility for donor to change beneficiary
results in an incomplete giftIrrevocable transfer of policy
ownership rights is a completed giftPremiums payments are a completed
gift if policy owned by another
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-19
Annual ExclusionAnnual Exclusion(1 of 2)(1 of 2)
All gifts valued at FMVExclude transfers up to $12,000 per
person per donee each yearIndexed for inflation
Husband and wife may each give $12,000 per child w/o tax consequence
Gift must constitute present interestFuture interest gifts not eligible for exclusion
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-20
Annual ExclusionAnnual Exclusion(2 of 2)(2 of 2)
Special rule for trusts for minorsAnnual exclusion available for gifts to §2053(c)
trusts for minors ifUntil beneficiary is 21, trustee may pay income
and/or underlying assets to beneficiary ANDRemaining income and underlying assets will pass
to beneficiary when beneficiary reaches 21Gifts to Crummy trusts also eligible for annual
exclusionMore flexible than §2053(c) trusts
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-21
Gift Tax DeductionsGift Tax DeductionsMarital Deduction (1 of 4)Marital Deduction (1 of 4)
Unlimited tax-free transfers between husband and wife
Nondeductible terminal interests ineligible for martial deductionTerminal 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
12-22
Gift Tax DeductionsGift Tax Deductions Marital Deduction (2 of 4)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
12-23
Gift Tax DeductionsGift Tax Deductions Marital Deduction (3 of 4)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
12-24
Gift Tax DeductionsGift Tax Deductions Marital Deduction (4 of 4)Marital Deduction (4 of 4)
Qualifying income interest for lifeSpouse entitled to ALL income from
property annually or more often ANDNo 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
12-25
Gift Tax DeductionsGift Tax DeductionsCharitable Contributions (1 of 2)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
12-26
Gift Tax DeductionsGift Tax Deductions Charitable Contributions (2 of 2)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
12-27
Gift-SplittingGift-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
12-28
Tax ComputationTax Computation(1 of 2)(1 of 2)
Large giftsTax rates progressive
From 18% To 45% on tax base over $1.5M
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-29
Tax ComputationTax Computation(2 of 2)(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
12-30
Basis ConsiderationsBasis Considerations
Property received by giftCarryover basis rules applyDonee’s basis may be increased by
some of the related gift taxes paidProperty received at death
Basis equal to FMV on either date of death or alternate valuation date
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-31
Below Market LoansBelow Market Loans
General rulesForegone interest is taxable income to
the lender and a taxable gift to the borrower
De minimus rules Rules do not apply to loans ≤ $10,000For loans ≤ $100,000, income to lender
limited to net investment income of borrower
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-32
Tax Planning Tax Planning ConsiderationsConsiderations
Tax Saving Features of Inter Vivos Gifts (1 Tax Saving Features of Inter Vivos Gifts (1 of 2)of 2)
Use of annual exclusionRemoval of post-gift appreciation
from tax baseRemoval of gift tax amount from
transfer tax baseIncome shifting
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-33
Tax Planning Tax Planning ConsiderationsConsiderations
Tax Saving Features of Inter Vivos Gifts (2 Tax Saving Features of Inter Vivos Gifts (2 of 2)of 2)
Gift in contemplation of donee-spouse’s deathTransfer assets from healthier spouse to
dying spouse if dying spouse’s assets are less than amount shielded by unified credit
Lessening state transfer tax costsIncome tax savings from charitable gifts
©2009 Pearson Education, Inc. Publishing as Prentice Hall
12-34
Tax Planning Tax Planning ConsiderationsConsiderations Negative Aspects of Gifts Negative Aspects of Gifts
Loss of step-up in basisImportant 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
12-35
Compliance and Compliance and Procedural Procedural
ConsiderationsConsiderationsFiling requirements
Form 709Due date
April 15, extendable to October 15Gift-splitting election
Each spouse consents on other’s 709Donor liable for gift taxUndervaluation penalty 20% or 40%
©2009 Pearson Education, Inc. Publishing as Prentice Hall
Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark at University of Northern Colorado’s
Kenneth W. Monfort College of [email protected]
12-36©2009 Pearson Education, Inc. Publishing as Prentice Hall