In the following Federal Gift Tax Outline:
- Transactions subject to Gift Tax
- Annual Exclusions (IRC Section 2518)
- Gift splitting (IRC Section 2513)
- Disclaimers (IRC Section 2518)
- Marital Deduction (IRC Section 2523)
- Charitable Deduction
A. The gift tax is a transfer tax much like the estate tax, but simpler to understand. Whereas the estate tax reaches all residual property that might otherwise escape transfer tax, the gift tax provides for taxation only of specific items that are transferred by gift.
B. The federal taxation of gifts is governed by “Chapter 12”: Internal Revenue Code (“IRC”) Sections 2501-2524 and accompanying Treasury Regulations. (Estate Tax = “Chapter 11” GST Tax = “Chapter 13”).
C. As discussed below, each individual may make $15,000 (indexed for inflation) annual exclusion gifts to as many beneficiaries as he or she desires without gift tax or subsequent estate tax consequences. Also, an individual’s unified credit may be used to shelter gifts exceeding the annual exclusion gifts.
D. Under the Tax Cuts and Jobs Act of 2017 (the “Act”), the federal estate and gift tax exemption amounts remain unified at $10 million, adjusted for inflation from a base year of 2010, effective for decedents dying and gifts made after 2017 and before 2026. In 2018, the exemption amount is $11.18 million. After December 31, 2025, the exemption amount is scheduled to revert back to the pre-Act amount of $5 million, adjusted for inflation. The gift tax rate remains 40 percent and portability of gift tax exemption between spouses is preserved.
E. A key difference between gift and estate taxes is that gift taxes are imposed on a tax exclusive basis (the payment of gift taxes by the donor is not itself subject to gift taxes) while estate taxes are imposed on a tax inclusive basis (the assets of the decedent that are used to pay estate taxes are subject to estate tax).
EXAMPLE. D makes a $1 million gift to her son, S. If D has used her full gift tax exemption amount, she will owe $400,000 in federal gift taxes ($1 million x 40 percent). Because it cost D $1.4 million ($1 million gift + $400,000 in taxes) to transfer $1 million to S, D’s effective tax rate is 28.6 percent (400,000/1.4 million).
EXAMPLE. At D’s death, she leaves a $1 million estate to S. If D has used her full estate tax exemption amount, and assuming D was not domiciled in a state that imposes its own estate tax, D’s estate will owe $400,000 in estate taxes ($1 million x 40 percent) and S will receive $600,000. If D leaves a $1.4 million estate to S, D’s estate will owe $560,000 in taxes ($1.4 million x 40 percent) and S will receive $840,000. Because the property used to pay estate taxes is subject to tax, in both cases the effective tax rate is 40 percent.
F. Gift tax returns for gifts are to be filed, and gift taxes paid, on annual basis. In general, returns are filed by April 15 of the year following the year of the gifts (a six-month extension of the time to file, but not pay gift taxes, is allowed). For the calendar year in which a donor dies, the return for that year must be filed no later than due date of the donor’s estate tax return.
II. TRANSACTIONS SUBJECT TO GIFT TAX
A. The gift tax applies to any direct or indirect transfer of property. This includes outright gifts or gifts in trust, gifts of real property, and gifts of both tangible and intangible personal property.
- Types of transactions that may be considered gifts:
- The transfer of cash or securities;
- The creation of a trust;
- The forgiveness of a debt;
- The assignment of a judgment;
- The assignment of the benefits of an insurance policy;
- The transfer of a painting or other work of art; and
- Permitting a child or friend to use a vacation home without paying rent.
- The amount subject to gift tax is the difference between the fair market value of the property transferred and the value of any consideration received in return.
EXAMPLE. Father transfers $100,000 in cash to Son and receives nothing in return from Son. Father has made a gift of $100,000 to Son.
EXAMPLE. Father transfers $100,000 in cash to Son to purchase from Son a house with a fair market value of $75,000. As a result of this “bargain sale,” Father has made a gift of $25,000 to Son.
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ABOUT THE AUTHORS
VICTORIA (TORI) PAMBIANCO OSE advises high-net-worth individuals and families on all aspects of wealth-transfer planning, including estate, gift and generation-skipping transfer tax planning, estate and trust administration, business succession planning and charitable giving techniques.
Tori has significant experience designing and implementing complex wealth-transfer techniques and customized estate plans, as well as providing counsel to family offices and charitable organizations on a wide variety of issues. She also has experience advising families with international ties and non-U.S. business interests on issues related to domestic and foreign trusts, pre-immigration planning, and U.S. tax compliance obligations.
Tori has substantial experience advising clients on structuring and negotiating large gifts to charitable organizations. Tori has also advised clients on private foundation governance and helped clients develop best practices for their private foundations.
Tori regularly speaks to regional and national audiences on issues related to philanthropy, as well as a variety of issues in estate planning and wealth transfer taxation.
L.TIMOTHY HALLERON focuses his practice on high-net-worth tax and estate planning matters. Tim advises individuals and family offices in planning for the preservation and transfer of wealth within families without the imposition of gift, estate or generation-skipping transfer tax.
Tim’s practice includes: advising on design and drafting of estate planning documents, including wills, revocable and irrevocable trusts (including charitable trusts), family limited partnerships, shareholder agreements, and intra-family sale agreements; pre-liquidity event tax planning, including leveraged sales of interests in private companies to dynasty trusts, transfers to grantor retained annuity trusts, and pre- and post-sale charitable planning; advising on investment diversification, asset protection, and corporate and family governance issues, including the reorganization of private companies to improve the tax efficiency of those organizations; counseling on the formation and administration of a variety of tax-exempt and charitable entities; transfer situs of trusts to more favorable jurisdictions to take advantage of tax efficiencies and modernized trust laws, and advise clients with respect to state fiduciary income tax issues; structuring and implementing judicial and non-judicial modifications of irrevocable trusts; advising on the structuring and formation of private trust companies in various jurisdictions; preparing and reviewing estate and gift tax returns, including complex reporting and valuation issues; negotiating settlements with the IRS on audited estate and gift tax returns; and advising on litigation disputes between trustees and beneficiaries and in contested trust and tax matters, and consult with fiduciaries in probate and trust administration.