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Estate Planning
University of Kansas School of Law
Dickinson, Martin B.

GIFT TAX – § 2501(a)(1)

Gift Tax Returns

Under § 6019(a), pay only when the amount given to the same donee exceeds the APD exclusion

i. Further, will not pay until reaches $1,000,000 applicable exclusion amount in addition to APD exclusion

Under § 6075(b)(1), must be filed annually before or on 04/15

Gift Tax computation

Taxable gift under § 2503(a)
FIRST APPLY APD Exclusion amount
Tax before credits under § 2502(a) & 2001(c)

i. Under § 2502(a)(1), Tax on aggregate of TG made this year and previous years (minus) under § 2502(a)(2), Tax on TG made previous years
ii. Then, take into account the applicable credit amount under § 2505(a) and pg. 8 of Code and Regs Book
1. MAKE SURE take out credit used in previous years before applying this year’s credit under § 2505(a)(2)

Gift tax imposed under § 2501(a)(1)
Under § 2502(c), donor pays the gift tax à THIS GIFT TAX LIABILITY will be deducted when computing ESTATE TAX under § 2053(a)(3)!!
ALSO, was a gift made within 3-year period before death? à THEN this will trigger § 2035!!!

Applicable Exclusion Amount [Compare with Applicable Exclusion Amount for Estate tax under § 2010]

Under § 2505(a) and pg. 8 and (handout pg. 23), the applicable exclusion amount for Yr. 2009 is $1,000,000. [that is, the applicable credit amount of $345,800] Under § 2505(c), the amount of credit allowed under § 2505(a) cannot exceed the gift tax imposed.

Annual Per Donee Exclusion

NOTE: Although it must be PRESENT INTEREST to allow exclusion, it is important to remember the present interest question is secondary to, and entirely apart from, the question whether a gift is COMPLETE.

Taxable gift defined under § 2503(a)
Under § 2503(b) and pg.11 of Code and Regs Book, a donor can make a non-taxable gift to any person, up to $13,000 per donee in Yr. 2009

i. Renews every year.
ii. No family connection is necessary.
iii. Two requirements must be met
1. MUST BE PRESENT INTEREST GIFT.
2. MUST have an “ascertainable value”

Other exceptions (e.g., sham transfer)
Gift splitting

i. Under § 2513, gift splitting b/w spouses is allowed
ii. This will reduce the gift by 50%
iii. Very useful tax planning option

Present Interest Requirement and Examples

i. Under Reg. § 25.2503-3(a), exclusion will NOT be allowed for the gift of future interests in property
1. Under this reg., future interest is defined as which “includes reversions, remainders …..”
ii. Under Reg. § 25.2503-3(b), an exclusion WILL be allowed for the gift of present interests in property
1. Under this reg., present interest is defined as “an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property”
2. (e.g.) For gift of an income interest in a trust, exclusion will be allowed to the extent of the actuarial value of the income interest
iii. Examples under Reg. § 25.2503-3(c)
1. example(1) – Right to income from trust is subject to trustee’s discretion à Future interest
2. example (2) – Right to proceeds of life insurance after someone’s death à Future interest
3. example (3) – Income will be distributed for sure to three children but the amount to each is in trustee’s discretion à Future interest
4. example (4) –
5. example (5) – Right to income after mortgage is paid in full à Future interest
6. example (6) – Payment of premiums with incidents of ownership vested in someone else à Present interest
iv. Other examples
1. Gift to a corporation is an indirect gift to shareholders à Not Present interest b/c no immediate right to the gift benefits
2. Gift to a general partnership à Present interest under the Uniform Partnership Act

“Ascertainable Value”

i. Stark v. United States
1. For gifts of closely held corporation’s stock in trust, it is not likely that they will be income-producing. Therefore, there is no ascertainable value.
2. Income-producing rule applies only to gifts in trust.

CRUMMEY TRUST

i. Ensures APD

5. Under § 529(c)(1), earnings of the plan also is not subject to income tax
6. For more, [¶ 7136]

Exclusion not subject to APD amount

i. Exclusion for Direct payment of certain educational and medical expenses under § 2503(e)
1. No limit; available over the APD exclusion
2. Only for tuition in case of educational expenses
3. Under Reg. § 25.2503-6(b)(2), the unlimited exclusion is permitted if “paid directly” to the qualifying educational organization
4. Under Reg. § 25.2503-6(b)(3), needs be paid directly and no reimbursement made by insurance company

What constitutes a gift

Under § 2511(a), most transfers fall under the category of gift, less than consideration under § 2512(b), therefore subject to § 2501(a)(1) gift tax imposition.

i. Direct or indirect transfer
1. Example of indirect gift transfer
a. Mother provides all the capital for a company, takes only part of the company stock and gives the remaining portion to her daughter. à transaction treated as if stock all been issued to Mother and her gratuitous transfer to daughter, therefore, TG
b. Reg. 25.2511-1(h)(1): when corp. is involved in a gift, the gift is treated as if made by or to the shareholders. Therefore, future interest.
c. However, if made to a charitable organization, then the entity is treated as the donee. Therefore, present interest.
ii. Through trust or other devices
iii. Real or personal property
iv. Tangible or intangible property

Valuation of gifts under § 2512 à More on valuation below!

i. Value of the property (minus) consideration the donor received

IN context of (consideration)