Extract
A comparative proposal to reform the United States gift tax annual exclusion.
TABLE OF CONTENTS
I. INTRODUCTION A. The U.S. Gift Tax B. The Role of the Annual Exclusion in Estate and Gift Tax C. Annual Exclusion Abuse D. Annual Exclusion Reform II. THE FEDERAL GIFT TAX A. Imposition of Gift Tax 1. Incomplete Transfers 2. Business Transactions 3. Support 4. Gratuitous Services B. Advantages and Disadvantages of Gifts C. Net Gifts III. THE ANNUAL EXCLUSION A. History of the Annual Exclusion 1. Split Gifts 2. Timing of Gifts B. Purpose of the Annual Exclusion C. Present and Future Interests 1. Identification of Donees 2. Indirect Gifts 3. Valuation D. Application of the Annual Exclusion to Certain Interests 1. Interests in Income a. Non-Income Producing Property b. Contractual Interests 2. Gifts to Minors a. Outright Gift b. Demand Rights c. Section 2503(c) d. Uniform Gifts to Minors Act IV. THE OTHER GIFT TAX EXCLUSIONS, DEDUCTIONS, AND CREDITS A. Section 2503(e) B. Gift Tax Deductions C. Miscellaneous Exclusions D. The Unified Credit E. Interest-Free Loans F. Generation-Skipping Tax G. Cumulative Effect of Gift Tax Exemptions V. THE NEED FOR ANNUAL EXCLUSION REFORM A. Complexity B. Practical Abuse C. Inequity D. Comparison with International Standards 1. New Zealand 2. The United Kingdom 3. Japan 4. The Netherlands 5. Summary of International Gift Tax Laws VI. ANNUAL EXCLUSION REFORM A. Proposed Legislation B. Impact of the Reform Proposal VII. CONCLUSION [T]here is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor and all do right for nobody owes any public duty to pay more than the law demands . . .(1) Judge Learned Hand (1947) I. INTRODUCTION Uniform transfer tax laws are essential to regional and global commerce. Without consistent tax laws, it is difficult, if not impossible, for and executives to arrange their financial affairs. As a practical matter, the lack of transfer tax consistency has led to the development of a new class of refugees: wealthy executives willing to relinquish their citizenship in exchange for advantageous tax laws.(2) This Article examines the principal exemption to U.S. gift tax laws and proposes legislation designed to harmonize the gift tax laws of the United States with those of other industrialized nations, particularly New Zealand, the United Kingdom, Japan, and the Netherlands. A. The U.S. Gift Tax United States citizens are not required to pay estate and gift taxes! In fact, the only people who should pay such taxes are those wishing to donate money to the U.S. government.(3) Everyone else is spared this burden bemuse transfer taxes am not compulsory. By now many readers must be asking the obvious question: How many years in prison would one receive for claiming this tax free status? The answer, quite surprisingly, is zero, as it is entirely lawful to evade estate and gift taxes in the United States. Transfer tax(4) evasion is, in fact, authorized, nay, encouraged by the Internal Revenue Code (hereinafter I.R.C.) in a provision known as the gift tax "annual exclusion."(5) Briefly stated, the annual exclusion is the single largest loophole in the transfer tax system, and it has, in effect, converted the U.S. comprehensive estate and gift tax scheme into a system of welfare for the wealthy. If Congress is serious about reforming U.S. welfare programs, the annual exclusion should be a key part of Such reform.(6) B. The Role of the Annual Exclusion in Estate and Gift Tax To appreciate the importance of the gift tax annual exclusion, one must understand the role it plays in our estate and gift tax system.(7) Tax experts have maintained for decades that a death tax is an essential component of a progressive and equitable system of taxation,(8) particularly in the absence of an annual tax on accumulated wealth.(9) This conviction is debatable.(10) What is not debatable, however, is that if a tax is assessed on testamentary wealth transfers, either by means of an inheritance or estate tax, a tax must also be levied on inter vivos gratuitous transfers of property.(11) Otherwise, taxpayers can easily evade the death tax Simply by transferring all Wealth before death.(12) The gift tax, in effect operates as an estate tax avoidance device. In order to operate efficiently, a gift tax must exempt from taxation certain customary gifts, such as birthday, holiday, and wedding presents.(13) No one could Imagine paying tax on the "loan" of a cup of sugar to a neighbor or on a meager birthday gift to a child.(14) Not only Would it be unduly burdensome to account for such gifts, but any system taxing Inconsequential transfers among friends and family would be rife with fraud. Not surprisingly, in those countries in which gratuitous transfers of wealth are taxed, such as the United States, the United Kingdom, Japan, and New Zealand, no gift tax is assessed unless the gifts made by a...See the full content of this document
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