What Constitutes A Gift?

1. What Constitutes A Gift? • A sale, exchange, or other transfer of property from the donor to the donee without adequate consideration in money or money’s worth

2. What Constitutes A Gift? (cont’d) • Types of gifts: • Outright transfer • Forgiveness of debt • Intra-family interest-free or below market rate loan • Assignment of benefits of an insurance policy • Transfer of property to a trust

3. When Is Gifting Appropriate? • Donor has an asset likely to appreciate in value and would like to save estate taxes on the potential growth • Donor would like to see donee (individual, charity, etc.) benefit by gift during donor’s life • Donor would like to reduce probate costs and estate administration expenses, as well as protect family members from claims of client’s creditors

4. When Is Gifting Appropriate? (cont’d) • Giving away assets other than closely-held business stock (3 or more years prior to death) to qualify for: • IRC Section 303 stock redemption • IRC Section 6166 installment payout of taxes • IRC Section 2032A special use valuation for farm or closely-held business property • Desire to maximize the marital deduction for federal estate and gift tax purposes • Desire to shift future income from an income-producing asset to a donee in a lower income tax bracket

5. When Is Gifting Appropriate? (cont’d) • Beware of “kiddie tax” rules when shifting income producing assets to children • First $950 (in 2011) of unearned income is offset by the child’s standard deduction  No tax • The next $950 (in 2011) of unearned income is taxed to the child at child’s tax rate

6. When Is Gifting Appropriate? (cont’d) • Beware of “kiddie tax” rules when shifting income producing assets to children • Treatment of child’s unearned income over $1,900 (in 2011) depends on the child’s age Taxed at parent’s marginal tax rate if child is • under 18 at end of year • 18 at year end but earned income does not exceed ½ of child’s support • over 18 but under 24 at end of year, is a full-time student during the year Taxed at child’s marginal tax rate if child is age 24 or older

7. Requirements For A Completed Gift • There must be a gratuitous transfer or delivery of property • Property that is the subject of the gift must be accepted by the donee • The gratuitous transfer must divest the donor of control, dominion, and title over the subject matter of the gift

8. Gift Examples • Goal to shift income taxation to lower bracket: in 2011, Caroline O’Gara, age 55, married, 28% income tax bracket, owns $20,000 of interest paying bonds which yield $1,000 annually Gift technique: • Give $20,000 of bonds to 24 year old son, James, a full time student who is in a 10% income tax bracket • Have spouse consent to gift splitting • File gift tax return and elect gift splitting • Result: If no other gifts are made, each spouse will have their $13,000 annual exclusion to offset their ½ of the gift  no gift tax due Tax savings: • From the $1,000 in dividends: • Caroline would have netted [$1,000 – (28% x $1000)] = $720 • James has $950 personal exemption, so $50 is taxable, he will net $995 = [$1000 – (10% x $50)] • Result: Tax savings of $995 - $720 = $275

9. Gift Examples (cont’d) • Goal to shift future appreciation of asset and reduce potential estate tax liability: In 2011, Gerald Carter owns an asset worth $100,000 that is anticipated to appreciate at a rate of 10% annually, so that in ten years the asset will be worth approximately $260,000 • Give asset away today Gift = $100,000 - $13,000 annual exclusion Removes future appreciation from estate • Hold onto asset for 10 years and pass on as part of estate $260,000 will be included in Gerald’s gross estate

10. Tax Implications of Lifetime Gifts • Gift will remove future appreciation in the property’s value from individual’s estate • Gift tax may have to be paid if value of gift exceeds annual exclusion ($13,000 in 2011) and unified credit exemption equivalent • Remember state gift tax where applicable

11. Tax Implications Of Lifetime Gifts (cont’d) • Adjusted taxable gifts are added back into the estate tax calculation to calculate the taxable estate, and then a credit is applied against the tentative tax due for gift taxes payable • Income generated by the donated property will be taxed to the donee

12. Issues In Community Property States • Most community property states by statute grant equal management and control powers over property to each spouse • Many states do not allow one spouse to make a gift of community property without the other spouse’s prior written consent • A gift of community property can be voided only at the request of the nondonor spouse (if no prior written consent was given)

13. Issues In Community Property States (cont’d) • Since each spouse actually owns their ½ interest, gifts of community property to third parties do not need to be split • Beware of “accidental gifts” where a spouse may have separate property prior to marriage or from a common law state, and then commingles the property or places that property in a joint or community property account with their spouse • Result: There has been a gift of ½ of the property to the other spouse, which is covered by the marital deduction, if donee spouse is a U.S. citizen

14. Best Type Of Property To Give Away • It depends on the client’s goals and circumstances • Income producing property can be good to give away where the donee is in a lower income tax bracket than the donor • Property that is likely to grow substantially in value • Property with low gift tax value and high estate tax value, such as life insurance • Property that has already appreciated, that the donor would like to sell, and the donee is in a lower income tax bracket than the donor

15. Best Type Of Property To Give Away (cont’d) • Stock in a closely-held corporation (but keep in mind effect on qualification for special tax treatments, such as Section 303 redemptions and Section 6166 deferral of estate tax) • Property owned in another state that would go through ancillary probate • Do not give “loss property” – Better to sell, take the loss, and give the cash proceeds, since donee cannot use the donor’s loss

16. When Outright Gifts May Not Be Appropriate Consider a trust or custodial account when: • Beneficiary is unable or unwilling to invest, manage, or handle the responsibility of the gift • Beneficiaries are minors or adults who lack the emotional or intellectual maturity, physical capacity, or technical training to handle large sums of money or securities • Property does not lend itself to fragmentation but donor desires to spread beneficial ownership to multiple beneficiaries • Prevent donee from transferring property outside the family and limit the class of beneficiaries • Donor wants to treat children or other relatives equally • Donee may be subject to future creditors or divorce

17. Gift Techniques To Shift Wealth & Income To Children To Save Taxes • Series EE U.S. savings bonds that will not mature until after the donee-child is age 18 • Growth stocks that pay little or no dividend • Deep discount tax-free municipal bonds that don’t mature until after the donee-child is age 24 • Employ your children • Pay a reasonable salary • Start funding an IRA

18. Gift Techniques To Shift Wealth & Income To Children To Save Taxes (cont’d) • Establish a CRT for a set term for child over age 24 • Use a UGMA, UTMA, 2503(c) Trust, or Support Trust • Use a grantor retained annuity trust (GRAT) to shift future appreciation to children • Consider purchasing a variable, universal, VUL, or whole life policy on the parent’s life for tax free growth and the ability to take a loan if cash is needed for college costs • Make use of annual exclusion gifts

19. What Is A “Qualified Transfer”? • A qualified transfer is any amount paid directly to a service provider on behalf of an individual: • For tuition at an educational institution • For medical expenses • A qualified transfer is not considered a gift and is exempt for gift tax purposes