Wednesday April 24, 2024

1.2.1 Gift Tax Overview

Gift Tax Overview

Gifts of Property:   A gift tax or a gift tax return may be required when there is a transfer of property.

Unlimited Gift Deductions:  There are two types of unlimited gift deductions.

Gifts to Children, Other Family Members or Friends:   Normally, the annual gift exclusion covers gifts to children, other family members or friends.

Valuation Considerations:   There are multiple methods for structuring transactions to minimize gift taxation.

Gifts of Property

A gift tax or a gift tax return may be required when there is a transfer of property. The transfer of stock, land, tangible personal property, family limited partnership units or other assets without full consideration constitutes a gift.

Gifts in excess of the annual exclusion amount will require a Form 709 gift tax return. If the gift exceeds both the annual exclusion and the available gift exemption equivalent, gift tax may be payable.

Unlimited Gift Deductions

There are two types of unlimited gift deductions. Gifts to qualified exempt charities and gifts to spouses who are citizens are both covered by unlimited exemptions. The gift to a charity or a spouse may be outright or in qualified charitable or marital trusts. However, a gift tax return may still need to be filed even though no gift tax is required.

Gifts to Children, Other Family Members or Friends

Normally, the annual gift exclusion covers gifts to children, other family members or friends. Gifts in excess of this amount may require use of part of or the entire exemption equivalent available. If the gift exceeds both the annual exclusion and the exemption equivalent, gift tax may be payable. Using the gift exemption to reduce gift tax will also affect the eventual estate tax return.

Valuation Considerations

In general, the fair market value of the item will be considered the gift value. If consideration is offered in exchange for the gift, the value of the gift will be reduced by the amount of consideration. There are multiple methods for structuring transactions to minimize gift taxation. The methods are frequently employed to achieve a valuation discount for lack of marketability, minority interest, lack of control or other reasons. Most gift tax audits now focus on valuation issues. Donors are structuring family limited partnerships (FLPs), limited liability companies (LLCs), grantor retained annuity trusts (GRATs) and other methods to reduce valuations. Discounting the valuate of gifts may increase the likelihood of review by the IRS.

Private Letter Rulings

TAM 200212006 Transfer of Bonds into Partnership is Indirect Gift Not Permitting a Valuation Discount:   Taxpayer and her two children created a limited partnership (LP) funded with cash and marketable securities. The partnership agreement provided that each partner owned a share of the total partnership capital in proportion to his or her partnership interest.

PLR 200226012 Contribution to Foreign Private Foundation Qualifies for Gift Tax Deduction:   Taxpayer, a citizen of a foreign country and a permanent resident of the United States, established a private foundation in his foreign homeland. Taxpayer's private foundation was created to promote charitable purposes.

PLR 200308046 Gift to Children of Remainder Interest in Home Declared Incomplete Gift:   Concerned with his health and his current estate plan, Father deeded his personal residence to his two sons but retained a life estate in the residence. Before the execution of the deed, Father requested and received an oral promise from his two sons to reconvey the residence back to him upon request.

PLR 200637025 No Tax on Trust Creation:   A created Trust on Date 1 with terms that require Trust to pay the net income and principal as the distribution committee shall unanimously decide, or how A and one other committee member shall appoint to one or more members of the Class of beneficiaries (Class).

PLR 200647001 No Gift Tax Upon Contribution to Trust or Appointment of Trust Property:   A executed Trust. Trust provides that during A's lifetime, trustee shall pay net income and principal as (a) the Distribution Committee (Committee) by unanimous agreement shall appoint, or (b) A and one member of the Committee shall appoint to or for the benefit of one or more members of the Class.

Related Topics on Gift Tax Overview

1.2.2  Annual Exclusion:    In order to minimize the paperwork that would be required if people had to report all gifts, such as birthday gifts to their children, Congress determined that a certain value of gifts should be excluded. The annual exclusion amount is adjusted for inflation each year and applies per donor per donee per year.

1.2.3  Gift Exemption:    Prior to 1977, there was a $30,000 exemption for gifts. Gifts in excess of this amount required payment of gift taxes under the then existing tables.

1.2.6  Gift Tax Calculation and Form 709:    Calculation of gift tax is a cumulative process. All prior gifts and prior gift taxes payable under current schedules are considered when calculating the current gift tax payable.

Freedman:    In Estate of Frances Elaine Freedman et al. v. Commissioner; T.C. Memo. 2007-61; No. 6416-04 (19 Mar 2007), the court held that a joint tenancy between a mother and son did not constitute a completed gift. Sale of stock from the account was taxed in full in the return of the mother who contributed the assets to the account.

Dickerson:    In Tonda Lynn Dickerson v. Commissioner; T.C. Memo. 2012-60; No. 20029-08 (6 Mar 2012), the Tax Court determined that a lottery ticket given to a waitress and subsequently transferred to a family-owned Subchapter S Corporation created a taxable gift of 51% of the winnings.

MacIntyre:    In United States v. Robert S. MacIntyre et al.; No. 4:10-cv-02812 (28 Mar 2012), a District Court held that the income beneficiary of a grantor retained income trust (GRIT) was subject to gift tax on a transfer created by a below-fair-market-value sale of stock by her former husband.


Schott:    Mr. and Mrs. Schott both created two-life GRATs in 1994. The GRATs were each funded with over $5 million of stock in a family company. Both of the GRATs were 15-year GRATs and were designed to last for the lesser of two lives or the term of 15 years.

Cavallaro:    In William Cavallaro et ux. v. Commissioner; T.C. Memo. 2014-189; Nos. 3300-11, 3354-11 (17 Sep 2014), the Tax Court determined that stock allocations in a merger of two family businesses resulted in a taxable gift of $29.6 million.

Wells Fargo:    Decedent Mary Kate Nielsen funded several gifts during her lifetime. These gifts exceeded her available annual gift exclusions and required the use of part of her lifetime gift exemption. Mrs. Nielsen also funded a QTIP trust for her spouse John T. Nielsen with an amount of $550,000.

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