gifts chapter 22 tools & techniques of estate planning copyright 2011, the national underwriter...

Gifts Chapter 22Tools & Techniques of

Estate Planning

Copyright 2011, The National Underwriter Company 1

• A sale, exchange, or other transfer of property from the donor to the donee without adequate consideration in money or money’s worth

What Constitutes A Gift?


Estate Planning


• 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

What Constitutes A Gift? (cont’d)


Estate Planning


• 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

When Is Gifting Appropriate?


Estate Planning


• 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

When Is Gifting Appropriate? (cont’d)


Estate Planning


• 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



Estate Planning


• 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



Estate Planning


• 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

Requirements For A Completed Gift


Estate Planning


• 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

Gift Examples


Estate Planning


• 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

Gift Examples (cont’d)


Estate Planning


• 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

Tax Implications of Lifetime Gifts


Estate Planning


• 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

Tax Implications Of Lifetime Gifts (cont’d)


Estate Planning


• 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)

Issues In Community Property States


Estate Planning


• 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

Issues In Community Property States (cont’d)


Estate Planning


• 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

Best Type Of Property To Give Away


Estate Planning


• 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

Best Type Of Property To Give Away (cont’d)


Estate Planning


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

When Outright Gifts May Not Be Appropriate


Estate Planning


• 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

Gift Techniques To Shift Wealth & Income To Children To Save Taxes


Estate Planning


• 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

Gift Techniques To Shift Wealth & Income To Children To Save Taxes (cont’d)


Estate Planning


• 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

What Is A “Qualified Transfer”?

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