3.1 Background

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

3.1 Background

3.11 Gift Tax Overview

The gift tax is an excise tax imposed on the transfer of property by a donor during his or her lifetime to a recipient-donee. The donee of a gift may be an individual or other entity, such as a trust, partnership, corporation, or charity. However, recipients of gifts to a trust, partnership, or corporation are deemed to be the individual beneficiaries, partners, or stockholders, to the extent of their proportionate interest.¹ The gift tax is obviously a necessary complement to the estate tax. Otherwise, avoidance of the estate tax could be easily accomplished if individuals could give property away during their lifetime without any tax consequence.

Prior to 1977, the gift tax rate was 75% of the estate tax rate. Now, the tax rate is the same whether for gifts or estates. Prior to 2012, in the case of gifts during lifetime, any gifts in excess of the $1,000,000 amount were subject to gift tax even though the estate tax exclusion amount was higher.²

However, since 2013 the estate exclusion amount ($11,200,000 in 2018) may be used in whole or in part for lifetime gifts. Thus, in 2018 an individual could give $11,200,000 in lifetime gifts and owe no gift tax, or make no lifetime gifts and pass the same amount at death free of any estate tax. This change simplifies planning, as an individual may make large lifetime gifts or wait and pass the property at death. All that one must consider is that one has a total estate and gift tax exclusion that can be used as one chooses for lifetime or death giving.

Additionally, any present-interest gift in 2018 is entitled to an annual gift tax exclusion of $15,000 per donee. This annual gift tax exclusion is indexed for inflation and will increase in future years. Further, by both spouses joining in the gift, even if the source of the funds is only from one spouse, the annual gift tax exclusion in 2018 can be doubled to $30,000.

3.12 Advantages of Gift Giving

Although the advantages of gift giving are not as great as in prior years, there are still several significant tax advantages. There also are several nontax reasons for making gifts. The advantages of gift giving merit brief review.

1. Gift giving may accomplish the donor's purpose of assisting the donee with some special needs, such as educational, medical, or charitable needs.
2. Gift giving reduces the size of the donor's estate, which may, in turn, reduce the amount of probate expenses such as executor's and legal fees when these fees are calculated as a percentage of the estate.
3. An individual in 2018 may give $15,000 per year (indexed for inflation) to as many different donees as he or she chooses without any gift tax being owed on such gifts.³ Over a number of years, this may enable a donor to reduce his or her estate significantly, thus reducing the estate tax owed at death.
4. The $15,000 annual gift tax exclusion in 2018 can be doubled to $30,000 per year per donee when the donor's spouse joins in the gift.⁴ Again, these amounts are indexed for inflation. This technique, known as gift-splitting, is permitted even though the gift has been made from the assets of only one of the spouses. Obviously, gift-splitting permits more rapid gift giving.
5. When the donee is in a lower income tax bracket than the donor, there is an overall income tax savings when gifts are made. This advantage is not as great for lower-bracket taxpayers, but is an advantage for higher-bracket tax-payers.⁵ This savings is not available when the donee is under 19 years of age, or a student under 24 years of age and has a certain level of investment income, owing to the so-called kiddie tax, which is discussed further in Section 3.5.⁶
6. When the donated property has increased in value from the time of the gift until the death of the donor, the appreciation is not taxed in the donor's estate when he or she dies. This is obviously a tax savings, compared with the tax that would be owed if the property had been held until death and was subject to the estate tax. However, the appreciation is subject to income tax if a subsequent sale of the property by the donee takes place.
7. In estates that consist largely of stock in a closely held business, farmland, or other business property, a stock redemption pursuant to Section 303 of the Internal Revenue Code to pay death taxes, funeral expenses, and administrative costs is a possible estate tax savings to the estate. The special-use valuation permitted under IRC Section 2032A and the installment payment election under IRC Section 6166 are other estate tax benefits. Each of these code sections requires certain percentage tests to be met to qualify for the tax benefit. A gift of property reduces the size of the estate, which may then enable these percentage limitations to be met, although any such transfer must not be made within three years before the decedent's death.

3.13 General Requirements

A gift tax is not owed until a complete gift has been made. A gift has three basic elements: (1) the intent of the donor to...