CHAPTER SEVEN – Gift Strategies

Reasons for and against making lifetime gifts:

Pro:  Tax savings (federal income, gift and estate taxes); possible state income tax savings (in other jurisdictions than Texas)?

Con: Loss of control over the funds or property;  possibly “inadequate” (?) resources to enable the donor to pay expenses in later life, e.g., expenses of one’s “last illness;” concern of behavior of donee.

Choosing the Gift Property

Strategies in picking the potential gift property:

1)  High tax basis property (including cash).

2)  High appreciation potential property

• Discount/reduced valuation possibilities –

   note the Pierre case (2009) where a single member LLC was created and funded and then the LLC interests were transferred to trusts for child/grandchild, with discounted values on the LLC interests for gift tax purposes.

Income Tax Basis Considerations             p.3

Code §1015 specifies a transferred tax basis for gifts, except for loss property (in certain situations).

How choose loss property for making gifts?

What treatment if the property appreciates significantly after the gift transfer?

Note the Code §1015(d)(6) adjustment for gift tax attributable to the appreciation portion.

What order for making gifts? Cash first (if § 1015(d)(6) is applicable)?

Identifying a “Gift” for Gift Tax Purposes

See Reg. §25.2511-1(a) & (c)(1) re gratuitous transfers of wealth & gift tax exposure.

Reg. §25.2511-1(g) re no donative intent necessary to complete a gift. Cf., objective facts.

Cf., “gift” concept for income tax & Duberstein.

Rev. Rul. 77-372, p. 5 – transfer to equalize estate distributions (i.e., “hotchpot”); gift treatment when equalization contribution made.

Identifying a “Gift” for Gift Tax, cont.                 P.7-8

Cancellation of debt

Payment of another’s liability

Interest free loan

Excessive salary to child-employee

Gift by closely-held corporation

Agreement to excessive trustee’s fee to children

Contributions to §501(c)(4) organization.

Gift Completion Considerations             p.9

Non-trust transfers, e.g., a check or negotiable instrument – when is the transfer complete?  See Rev. Rul. 67-396, p. 9;  Rev Rul. 84-25, p.10

Gift of a U.S. Treasury bond?

Joint checking or savings account?

Gift of corporate stock or mutual fund shares?  Is a record transfer necessary to complete gift?

Does gift occur when one spouse pays all the FIT liability for a particular year?  P.11

Gift of promissory note?

Gifts made Under a Power of Attorney                 p.11

Can a gift be made on behalf of a principal by an “attorney in fact” for that principal?

How document the capacity to make a gift?

What federal estate tax effect results if no legal capacity exists to make the gift? Code §2038.

What is the responsibility of the executor?

See Texas Probate Code §865 re possible Texas court authorization for principal to make a gift for federal gift tax purposes.

Transfers into Trust & Gift Completion

Rev. Rul. 77-378, p. 15 – completed gift where the trustee can distribute to the grantor in the trustee’s discretion;  cf., Rev. Rul. 62-13.

See Reg. §25.2511-2(c)  (p.17) -  an incomplete gift results when donor has power to change beneficiary interests in the trust.

Cf., Reg. §25.2511-2(d) where only a right to determine time when a beneficiary receives.

Gift Transfers to a Grantor Trust              p.18

Completion of a gift for gift tax purposes but not for income tax purposes.  Three situations:

1) No reimbursement;  (2)  Required reimbursement;  (3) Discretionary reimbursement.

Rev. Rul. 2004-64  – holding payment of income tax by the grantor is not a gift to the trust.

But, inclusion in the gross estate (under Code §2036(a)) if the grantor is reimbursed by the trust (Situation 2 in ruling).

Notice 2010-19
p.21

IRC §2511(c) provides that a transfer in trust is treated as a gift transfer unless trust is treated as wholly owned by donor under Subpart E.

What does §2511(c) and this IRS Notice accomplish?

Annual Donee Gift Tax Exclusion                    p.23

Code §2503(b) – annual donee exclusion in amount of $13,000 (for 2012, i.e., as $10,000 amount indexed for inflation).

Limited to gifts of a “present interest.”  Must be right to substantial present economic benefit.

What about a gift of a growth stock paying no current dividends?   P. 23.

See Rev. Rul. 76-360, p. 23,  re effect of a “restrictive agreement” after a “statutory merger.”  Note the possibility of an exclusion for the “income interest” component (p.25).

Other Possible “Present Interest” Limitations

1) Gift of limited liability company or LP interests to younger generation donees (where restrictions on transfer of the  ownership interests).

2) Older shareholders forgive debt owing to them from a closely held corporation – enhancing the value of all shares, including the younger minority shareholders.

Rev. Rul. 77-358
p.26

Transfers to irrevocable trusts where the trustee could:

1) Apportion receipts and disbursements;

2) Allocate gains and losses to income;

3) Invest in current income assets.

Gift of income interest only;  reversion to grantor.

Problem with the potential diversion of income to the corpus with the loss allocation power.  The income right was not ascertainable & no “present interest.”

Use of a “Crummey” Power                          p.27

Does a right of withdrawal, even though not exercised, facilitate “present interest” categorization for a property transfer?

How can a donor “leverage” the annual donee exclusion?  Are contingent interests OK?  See the Cristofani case, p. 28.

Note the “reciprocal gift” limitation, p. 28.

What is the appropriate treatment for enabling annual donee exclusions? See the “Options” paper, p. 29, with choices re restricting the Crummey power.

Gift Splitting Between Spouses                     p.32

Code §2513 authorizes gifts made by one spouse to be treated as made ½ by each spouse.

How stagger gifts to other beneficiaries when one spouse has more assets than the other?

Is Code §2513 even relevant in a community property jurisdiction (e.g., Texas)?  Under what circumstances?

Gift Tax Marital Deduction
p.33

Code §2523 provides for an unlimited marital deduction for gifts to a spouse.

Code §2523(b) provides that the deduction is not available when a “terminable interest” is transferred to the spouse.   Why?

See Code §2523(i) re $100,000 limit on marital deduction gift to non-U.S. citizen spouse.  Why this limit?  Why not an unlimited deduction?

Gifts within Three Years of Death                      p.33

Code §2035(a)(2) inclusion in gross estate where termination (within three years of death) of a “retained power” (see §§2036-2038 & 2042).

What about transfers made from a “revocable trust”?  Characterized as withdrawals for this rule?  See §2035(e).

And, inclusion of the gift tax amount in the gross estate – Code §2035(b).   P. 37.