Friday March 29, 2024

1.2.3 Gift Exemption

Gift Exemption

Exemption Equivalent:   Prior to 1977, there was a $30,000 exemption for gifts.

Gift Tax Credit and Applicable Exclusion Amount:   The Gift Tax credit and applicable exclusion amounts are as follows.

Gift Tax Calculation:   The gift tax is calculated by determining the total gift amount and subtracting any applicable annual exclusions, marital gifts and charitable gifts to determine the taxable gift.

Incomplete Gifts Due to Sec. 2036(a) Retained Control:   A common strategy for making optimum use of the gift exemption is to create a family limited partnership and then make gifts of limited partnership interests to children.

Exemption Equivalent

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.

From 1977 through 1986, there was a gift tax credit that started at $30,000 and was scaled up to $192,800. Between 1987 and 1997, the gift tax credit remained at $192,800. In 1998, the gift tax credit was again increased. Under EGTRRA 2001, the gift tax credit was fixed at $345,800 and the applicable gift exclusion was fixed at $1,000,000 until 2010. The gift exclusion amount for 2014 was $5,340,000, $5,430,000 for 2015, $5,450,000 for 2016 and is $5,490,000 for 2017. The Tax Cuts and Jobs Act of 2017 doubled the values for the years 2018 to 2025. The Tax Cuts and Jobs Act of 2017 doubled the values for the years 2018 to 2025. Gifts in excess of the applicable exclusion amount may require payment of gift taxes.

Gift Tax Credit and Exemption Schedule


The gift tax credit and gift exemption schedule are as follows:

 YearGift Tax CreditGift Exemption
 2001 $220,550 $ 675,000
 2002 $345,800 $1,000,000
 2003 $345,800 $1,000,000
 2004 $345,800 $1,000,000
 2005 $345,800 $1,000,000
 2006 $345,800 $1,000,000
 2007 $345,800 $1,000,000
 2008 $345,800 $1,000,000
 2009 $345,800 $1,000,000
 2010 $345,800 $1,000,000
 2011 $1,730,800 $5,000,000
 2012 $1,772,800 $5,120,000
 2013 $2,045,800 $5,250,000
 2014 $2,081,800 $5,340,000
 2015 $2,117,800 $5,430,000
 2016 $2,125,800 $5,450,000
 2017 $2,141,800 $5,490,000
 2018 $4,417,800 $11,180,000
 2019 $4,505,800 $11,400,000
 2020 $4,557,800 $11,580,000
 2021 $4,625,800 $11,700,000
 2022 $4,769,800 $12,060,000
 2023 $5,113,800 $12,920,000
 2024 $5,389,800 $13,610,000

Gift Tax Calculation


The gift tax is calculated by determining the total gift amount and subtracting any applicable annual exclusions, marital gifts and charitable gifts to determine the taxable gift. If the taxable gift produces a gift tax less than the gift tax credit, no tax is payable. Cumulative taxable gifts over a lifetime are used to determine the applicable gift tax credit. If the taxable gifts produce tax that exceeds the applicable gift tax credit, the gift tax must be calculated and paid by the following April 15th in accordance with the amount stated on Form 709.

Example 1.2.3A Gift Tax Calculation


John and Mary Jones have three children. They give the children appreciated stock with a value of $1,400,000 and a cost basis of $100,000. Neither John nor Mary has made any prior taxable gifts. They split the gift and thus each person makes a gift of $750,000. Each person uses one annual exclusion for each child (3 x $18,000 = $54,000), leaving John and Mary each with taxable gift in the amount of $696,000. Since that is less than the gift applicable exclusion amount, there is no gift tax payable. However, John and Mary's applicable exclusion amounts available in the estate have been reduced by the exclusion amount used for the gifts.

Incomplete Gifts Due to Sec. 2036(a) Retained Control


A common strategy for making optimum use of the gift exemption is to create a family limited partnership and then make gifts of limited partnership interests to children. Typically, the gifted interests are discounted for both lack of marketability and minority interest. In addition to the discounts, future appreciation of the value of FLP assets will benefit the children.

With the very large discounts claimed, Treasury has a clear incentive to contest the gift values. The contests may be during life, but also can be after the demise of the FLP interest donor. In several cases, Treasury has successfully claimed that the gift was incomplete.

In Estate of Concetta H. Rector et al. v. Commissioner; T.C. Memo. 2007-367; No. 20860-05 (13 Dec. 2007), decedent created a 1991 irrevocable trust and transferred all of the marital trust assets to that trust. In 1998, when she was age 92, the decedent became a resident of a convalescent hospital and she and her son John Rector created the Rector Limited Partnership (RLP). RLP was funded with virtually all of her assets and held over $8.8 million in liquid investments. RLP had no business plan, no investment strategy, no investment management, no balance sheets, no income statements, no other financial statements and no formal meetings. Distributions from RLP for its first three years were over 90% to the decedent.

The court noted that Mrs. Rector depended on RLP for support. The court stated that this also was not "a bona fide sale for an adequate and full consideration in money or money's worth." In view of the court there was no significant nontax business purpose for the trust, the gift was incomplete and the assets were included in her estate.

Austin and Edna Korby created a living trust and the Korby Properties Limited Partnership (KPLP) in 1994. They both passed away four years later in 1998. KPLP received contributions of assets valued at $1,888,704. The Korby's gifted a 98% limited partnership interest in 1995 to four irrevocable trusts for their sons. A discount of 43.61% of value was claimed based on the minority discount and lack of marketability of the limited partnership interests.

The tax court determined that there was "an implied agreement" between the Korby's and their sons that all the income and assets of KPLP would be available to them for their lifetime. In Estate of Edna Korby et al. v. Commissioner; Nos. 06-1201, 06-1203 (8 Dec 2006), the Eighth Circuit affirmed the tax court. It noted that the tax court "did not clearly err in finding a retained right of control." The appellate court cited Strangi v. Comm'r, 417 F.3d 468 (5th Cir. 2005), Abraham v. Comm'r, 408 F.3d 26(1st Cir. 2005) and Thompson v. Comm'r, 382 F.3d 367 (3d Cir. 2004). The rationale of these cases is that a gift of family limited partnership interests is not effective if there is an implied agreement for access to the income and assets by the parents. Therefore, the majority of KPLP assets were included in the Korby estate under Sec. 2036(a).

In Mark W. Senda et ux. v. Commr.; No. 05-1118 (6 Jan 2006), the 8th Circuit affirmed a Tax Court decision denying any FLP discounts. The transfers of $2 million of WorldCom stock in 1998 and $1.5 million dollars of WorldCom stock in 1999 were treated as indirect gifts to the Senda minor children. Gift taxes were assessed using the full value of the WorldCom stock on the date of transfer.

The Sendas created Senda I FLP in the spring of 1998. On December 28, 1998 they transferred $2 million in WorldCom stock to the partnership. The three minor children had previously owned 0.01% of the trusts and the Sendas gifted their approximately 90% limited partnership interests to these children. On December 17, 1999, Senda II FLP was created. The children initially also owned 0.01% interest. On that date, Mark and Michele Senda transferred $1.5 million in WorldCom stock to Senda II FLP and gave approximately 98% limited interests to the three minor children. The Sendas filed gift tax returns and claimed FLP gift discounts for lack-of-marketability and minority-status.

The Tax Court found that the Sendas "presented no reliable evidence they contributed the stock to the partnerships before they transferred the partnership interests to the children." Since the transfers were either simultaneous or the stock was given after the partnership gifts, the court determined that the full stock value was a taxable gift.

The 8th Circuit determined that the factual records showed the transactions "were integrated and simultaneous." In response to the claim by the Sendas that the Tax Court had disregarded the FLP, the 8th Circuit noted the FLP was not ignored. Rather, the Tax Court recognized the existence of the FLP and then applied the federal law on indirect gifts and step transactions to decide the case. As a result of the simultaneous nature of the transactions and the unreliable record, the discounts were denied and the WorldCom stock transfers were taxed at full fair market value.

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