Estate Planning for Financial PlannersHistorical BackgroundEGTRRA 2001Parties to a GiftDefinition of GiftsConsiderationDirect GiftsIndirect GiftsBelow-Market LoanBelow-Market Loan ExampleComplete vs. Incomplete GiftsReversionary InterestsNet GiftsValuation of a GiftAnnual ExclusionSplit GiftsApplicable Exclusion AmountGifts of a Present InterestFuture Interest GiftCrummey Provision (1 of 3)Qualified TransfersPayments for SupportPayments to Divorcing SpousesTransfers in a Business SettingGifts to SpousesCharitable GiftsForm 709Who Must FileIncome Tax Issues Related to Gifts (1 of 2)Income Tax Issues Related to Gifts (2 of 2)Gifting Strategies (1 of 4)Gifting Strategies (2 of 4)Gifting Strategies (3 of 4)Gifting Strategies (4 of 4)© 2007 ME™ (Your Money Education Resource™)Estate Planningfor Financial PlannersChapter 5:Gift Tax2© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Historical BackgroundThe gift tax is an excise tax on the right to transfer assets to another person during life.Developed in 1932 (after the estate tax – 1915). Gift rates were lower.In 1976, Congress unified the rates.In 2003, the systems were again split.3© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06EGTRRA 2001Tax Rate Schedules – Exhibit 5.1, page 116. In 2014, 40%Exemption Amounts – Exhibit 5.2, page 117. In 2014, $5,340,000, large increase from previous exemption of $1 million.4© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Parties to a GiftDonor (person who makes a gift)Must be competent to make the gift.Must have intent to make a voluntary transfer.Donee (person who receives a gift)Must be competent to receive the gift.Must take delivery.Must accept the property.5© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Definition of GiftsVoluntaryTransfer of PropertyWithout full consideration6© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06ConsiderationTransfer of property or payment in return for property.If there was fair consideration, then it is not a gift.Bad deal: buying Tribune Company?7© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Direct GiftsA direct payment of cash or transfer of property from one person to another.8© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Indirect GiftsIndirect transfer on behalf of a donor for the benefit of a donee.Makes a payment for someone else.Titles property jointly.Below-market loans.•The amount the lender imputes is a gift.9© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Below-Market LoanLoan Amount Imputed Interest$0  $10,000 $0$10,001  $100,000The lesser of: Net investment income, or Interest calculated using AFR less interest calculated using stated rateIf borrower’s unearned income < $1,000 then $0 imputed interest> $100,000Interest calculated using AFR less interest calculated using stated rate.10© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Below-Market Loan ExampleLoan Amount Net Investment IncomeLender Imputes$10,000 N/A $0$100,000 $500 $0$100,000 $1,500 $1,500$100,000 $9,000 $5,000$100,001 N/A $5,000AFR = 5%11© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Complete vs. Incomplete GiftsIncomplete are gifts that have not come to fruition.They are not taxable gifts for gift tax purposes.Joint bank accounts?Completed gifts are gifts that have come to fruition.The donor has released all control over the asset and the donee can be identified.12© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Reversionary InterestsInterests that have been transferred by a transferor and subsequently revert back to the transferor.13© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Net GiftsNormally the donor is responsible for all gift tax.A net gift is a gift made on the condition that the donee pay any gift tax due.The donor will have taxable income to the extent that any gift tax paid by the donee exceeds the the donor’s adjusted basis in the property.14© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Valuation of a GiftFMV at the date of the gift.Real estate – need appraisal.Publicly traded securities are valued at the high and low trading price for the day.Bonds – PV of the expected future payments.Discounts may be allowed for lack of marketability, lack of liquidity, or lack of control.15© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Annual ExclusionAll individuals may gift up to $14,000 (for 2014) tax free per donee each year (adjusted for inflation).Gift must be a present interest.Use it or lose it!Non-U.S. citizen spouses“Super Annual Exclusion” = $145,000 in 201416© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Split GiftsMarried spouses can elect to split gifts effectively doubling the annual exclusion to $28,000 (for 2014).Requires gift tax return (Form 709).Must be elected for all gifts for that year.Only counts for the time they were married.No gift-splitting for community property (no returns needed).17© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Applicable Exclusion AmountEach person also has one lifetime credit equivalency amount up to $5,340,000 of cumulative taxable transfers.See Gift and Estate Tax Credit chart in text for past credit amounts.Exhibit 5.4, page 129.18© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Gifts of a Present InterestUnrestricted right to the immediate use of the property.19© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Future Interest GiftInterest that is limited in some way to a future date or time.Donee’s right to the property is contingent upon some future date or time.ExampleRemainder beneficiary of a trust20© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06Crummey Provision (1 of 3)Allows the trust beneficiary to withdraw some or all of any contribution to a trust for a limited period to create a present interest.5/5 Lapse RuleTaxable gift occurs when the power to withdraw in excess of $5,000 or 5% of the trust assets is lapsed by