Chapter 5 gift tax

Characteristics of a Gifto Two parties involved, donor giver and donee recipient o Voluntary transfer o Less than full consideration • Donor sells donee $1,000,000 worth of land to donee

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Gift Tax

 Why are gifts taxed?

general welfare of the state (country)

 Who pays the gift tax?

Tax Rates on Gifts

o Exhibit 5.1 (page 135)

• Lowest rate 18% from $0 to $10,000 gift

• Marginal rate increases to 40% over $1,000,000

o Tax exclusions

• Annual exclusion now $14,000 per year per individual

• Lifetime exclusion currently $5,430,000 (federal)

• No gift tax on charity gifts or to spouse (U.S citizen)

o Rates now the same for estate, gift, and generation skipping taxes but…Congress can always change rates…

Characteristics of a Gift

o Two parties involved, donor (giver) and donee (recipient)

o Voluntary transfer

o Less than full consideration

• Donor sells donee $1,000,000 worth of land to donee for $100,000

• Gift is the difference in FMV and consideration paid, $900,000

o Donor must be competent to make gift

o Donor must part with property (surrender all rights to property or income from property)

o Donee must be capable of taking gift

o Donee must take delivery

o Donative intent present, donee must have conscious desire to make the gift

o Consideration

• Value transferred to Donor from Donor for the “gift”

• Consideration must be less than value of gift, otherwise just a sale

o Types of Gifts

• Direct gifts (direct payment of cash or property to donee)

• Indirect gift (payment of donee’s debt by donor, pay to third party)

• Indirect gift (property titled in donee’s name but purchased by donor)

o Complete or Incomplete Transfers

• Complete when donor releases all control

• Incomplete when donor has future recourse

• Gift to revocable trust

• Gift to revocable beneficiary

Interest Free Loan or Reduced Interest Loan

o Less than $10,000 – no gift tax

o Between $10,000 and $100,000 – no gift tax if “interest” would be less than $1,000 per month

o Over $100,000 – gift is annual interest at difference between Annual Federal Rate (AFR) and loan rate

 Calculate the annual gift for the following loan:

o $250,000 principal

o AFR is currently 6%

o Loan rate is 2%

o Calculate annual payments under both, find annual interest, take the difference and see if the loan is a partial gift…

o Example of incomplete gift

• Donor sets up joint banking account

• Retains the rights to make withdrawals

• Gift becomes complete when donee withdraws funds

o Revisionary Interests

• Gift originally transferred to donee but reverts to donor in future

• Value of gift is present value of right to use property

• Revision interests determined by Treasury regulations

Characteristics of a Gift (continued)

o Net Gifts

• Normally the donor pays the gift tax but here the donee agrees to pay the gift tax

• Donor must report taxable income for the gift tax that exceeds the adjusted basis in the gift

• Example 5.11 page 141

• Kenny pays gift tax on receipt

• Value of gift to Kenny is $250,000 – gift tax

• Net Gift = $250,000 / (1 + 0.40) = $178,571

• Issues for Financial Planner?

o Annual Exemption $14,000 from one individual to another

o Lifetime Exemption $5,430,000 Federal Exemption in 2015

o Non Citizen Spouses $145,000

o Split Gift (with spouse) $28,000 annual exemption

• Donor uses their $14,000 annual gift exemption and

• Spouse consents to use their annual gift exemption for same donee

• Form 709 is required of all split gifts and both spouses must sign

o For gifts from “community property” both spouses are deemed to have donated the gift as they are 50/50 owners of the property

(DSUEA)

o A spouse can use the deceased’s exemption if transferred at death

o Present Gifts are ones that transfer immediately and qualify at that time for

annual exclusion

• Usually gifts into revocable trusts are future gifts

• But if trust has mandatory income interests then…

trusts for up to 30 days following contribution

o Qualifies gift as present interest

o Creates general power of appointment for estate tax purposes

o Typically only the annual exemption amount can be withdrawn from trust

percent of trust assets ) within 30 days

beneficiaries (assumes other beneficiaries withdrew maximum amount of

available funds at contribution)

o To Political Organizations

• Exempt purpose to select, nominate, elect, or appoint individual to federal state or local public office or in political organization

• Qualified Transfers

• Payments directly to educational institutions for tuition

• Payments directly to medical care provider

• Not part of annual exclusion or lifetime exclusion

• Payments for Support (i.e child support, graduate school or professional education, divorce payments)

• Business Settings

• Spouse (U.S Citizen) unlimited, Non citizen spouse only $145,000

• Charities – Federal, State or Local and 501(c)(3) and 501(c)

Gift Tax Calculations – Over the years

o Lifetime exclusion now $5,430,000 (Federal Tax Only)

o Annual tax exclusion at $14,000 per individual donee

 Example 5.33 – Pages 160 – 162

o Gift of $611,000 in 2005 (annual exclusion for 2006, $11,000)

o Gift of $712,000 in 2006 (annual exclusion for 2007, $12,000)

o Gift of $4,054,000 in 2014 (annual exclusion for 2014, $14,000)

 Tax calculation for 2005 yields no gift tax

 Tax calculation for 2006 yields gift tax of

$124,000

 Tax calculation for 2014 yield gift tax credit of

$124,000

 Overall gift tax for 2005 to 2014, $0

o Filed Annually if over annual exemption or lifetime exemption

• If donor cannot pay taxes, IRS may seek taxes from donee

o Adjusted Basis

period

donor to the donee

o Example of Adjusted Basis

o Double Basis for Holding Period

occurs

period

Gift Strategies (Client Goals)

o Gifts to Spouse – no taxed but

• Can provide additional tax breaks when spouse gifts the assets

• A-B By Pass Trust…

o Appreciated Gifts

• To Charities so that tax is avoided on the appreciated asset

• Charities do not pay taxes so it increases total cash flow

o Gifts to Minors

• Through a trust to minimize “bad” spending

• But administrator of trust can spend “badly” so appointment of administrator also important

o Example 5.41 on Page 172 - 173

o Timing of gift? During life or as bequest?

o What property best for gifting?

o Tax law changes and planning for future gifting?

o Future gifting (to trusts)

o Changing beneficiaries of gifts over time

o Changing amount of gifts over time

o Other issues?