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Federal Taxation of Wealth Transfers
Charlotte School of Law
Arsenault, Steven J.

Federal Taxation of Wealth Transfers


Spring 2014

1) Definition

· 2501: imposes a tax on “the transfers of property by gift”

· 2512: Valuation of Gifts

o where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift.

· IRS takes into account Donative Intent

o Gift Tax deemphasizes this.

· Gift Tax = Measured by loss of donor

o It is an excise tax, imposed on the transfer of property

2) Business Transactions

· a gift occurs when the transferor receives less than adequate and full consideration in money or money’s worth (2512b)

o look at value of property and value of consideration

· business transactions: “a transaction that is bona fide, at arm’s length, and free from donative intent.” (2512-8).

o Not subject to Gift Tax.

o Estate of Anderson: stock sold for less than FMV still conducted in the ordinary course of biz = BT= Not a gift.

3) Adequate and Full Consideration

· if not capable of being determined in a dollar amnt= “wholly disregarded” 2512b

· Wemyss:

o Money consideration must benefit the donor to relieve a transfer by him from being a gift.

o Detriment to the donee is inadequate.

o Look to objective.

· Fahs:

o Marital rights are not treated as consideration.2043 b 1

o Decided before marital deduction

· A gift is not taxed until the transaction becomes completed (until the donor has given up dominion and control over the property).2511-2b.

· A gift for income and gift tax is not the same, so could be considered a gift for one but not the other.

4) Discharge of Support Obligations

· Parent has legal obligation to support child, so basic “gifts” are not subject to the tax

o Support of a child is not a gift

· GT (gift tax) does not explicitly exclude transfers qualifying as support

· ET (estate ) provides that claims founded only on a promise or agreement must be supported by adequate and full consideration in money or money’s worth. 2053 c 1 A.

· 2516 – excludes from the GT transfers made:

o in settlement of marital or property rights or

o to provide a reasonable allowance for child support

o to qualify:

§ must be a written agreement b/t the parties and divorce must occur within the year before the agreement is signed or two years afterwards.

o Does not remove all divorce issues from GT

§ If don’t’ get a final divorce decree or fail to meet the time

· Spruance:

o Preston and Margaret get divorced. Before the divorce was final they signed a written agreement in which Preston would transfer $1 million of marketable securities to a trust from which Margaret would receive the income for life, with the remainder interest passing at her death to their children from the marriage.

o Unless the children’s remainder interest was bargained for by Margaret in exchange for her marital rights, it will be treated as a gift from Preston to the children.

o The income interest, however, will be treated as being transferred for full consideration under IRC § 2516, meaning Preston makes no gift to Margaret.

· Legal obligation of support governed by state law

o Most gifts exceeding the legal obligation fall w/in the GT annual exclusion 2503 b

o $5 mill lifetime exemption 2505

o transfers to spouses are excluded by 2523.

o Excludes payments made to Education or Medical from GT 2503 e

5) taxable transfers

· lack of consideration alone is not a Gift

· must still be a transfer of property 2501

· Dickman:

o Interest free use of money can be a transfer of property

§ = a gift of unpaid interest

· 7872 governs both IT (Income Tax) and GT of interest-free or below-market loans

o creates two imputed transferred for Gift Loans and Loans Payable on Demand

§ 1) a transfer from the Lender to the borrower equal to hte amnt of forgone interest and

§ 2) another transfer from the borrower to the lender of the same amnt

o occur on the last day of the calendar year of which the loan is outstanding.

o For term loans, 7872 (b) imputes a transfer on the date of the loan from the lender to the borrower equal to the difference b/t the amnt loaned and the Pres. Val. of all required payments (ie: the PV of the amnt of forgone interest).

· Shifting Eco benefits

o IRS has ruled the failure to redeem preferred stock, to convert preferred to common stock, and the failure to require distribution of preferred dividends shifts significant economic benefits= gifts.

o 2701 & 2702: retained interests in the biz or irrevocable trusts pay a fixed rate of return on a periodic basis; if not the interest is valued at zero and the donor is deemed to have made a gift.

· Hogle: “services” are not taxed since no transfer of property

o Rationale:

§ Difficult to value services

§ Services do not directly deplete the estate of the service provider (as a “gift” would)

6) Disclaimers – 2518

· allows to avoid transfer tax consequences from successive transfers of property

· occurs when the recipient of property refuses to accept it or relinquishes her right to it. State law says the disclaimed property passes as if the recipient had predeceased the donor.

· Requirements:

o Irrevocable and unqualified

o Written

o Writing must be received by the transferor, the t’feror’s legal rep, or the holder of the legal title to the property no later than 9 mos after the creation of the interest or the date on which the disclaimant turns 21.

o Person disclaiming cannot have accepted the property interest or benefits

o Must pass w/out any direction by the person disclaiming either to the decedent’s spouse or to a person other than the one disclaiming

· Can D’ entire, partial or survivorship interest


A) General Principles

· A transfer of property w/out adequate and full consideration in money or money’s worth will not be subject to the gift tax until the transfer is complete.

· A gift is complete when the donor has “so parted w/ dominion and c

ains the power to distribute income or corpus, the gift is incomplete bcs the donor has retained the power to determine the beneficial enjoyment of the trust prop [2511-2b]

o But if donor’s power to restrict is limited by an Ascertainable Standard, the gift is complete

§ Beneficiaries now control, they can force distribution

· There must be a completed gift at some point in time, either when the trust was created originally or when the power to revoke was released.

· Guggenheim:

o Tax is not concerned with refinements of title but more with command over the prop taxed.

· Sanford: tax imposed at the time grantor relinquished the power to designate new / different beneficiaries.

o A grantor is deemed to have power over the trust even if she can only exercise the power in conjunction w/ another person.

o If the other person has an interest in the trust that is both substantial and adverse then the grantor will not be considered as having retained a power 2511-2 e.

§ Ie: if there is a substantial and adverse interest in the instrument then it is complete.

General Powers of Appointment Held at Death

· (a) The General Rule Formally, IRC § 2041(a)(1) requires inclusion of property subject to a “general power of appointment” held by the decedent at death.

o A general power of appointment is any power of appointment over property that is exercisable in favor of the decedent, the decedent’s estate, or the creditor’s of the decedent’s estate.

· (b) Exceptions to Treatment as a General Powers of Appointment There are three situations where holding a general power of appointment at death will not cause inclusion in the gross estate.

o i) Power Limited to an Ascertainable Standard

§ The first situation is where the decedent’s discretion in appointing the trust property is limited by an “ascertainable standard” related to the maintenance, education, support, or health of a permissible appointee. 2511-2 g

§ Objective, external standard that a beneficiary can force the trustee to exercise.

§ n/a to Comfort and happiness

o ii) Power Must be Exercised in Conjunction with Creator of Power

§ The second situation is where the power can only be exercised jointly by the decedent and the person who created the power.

o iii) Substantial Adverse Interests

§ The third situation is where the power can only be exercised jointly by the decedent and a third party with a “substantial adverse interest” in the exercise of the power in the decedent’s favor.