3.12 Transfer Tax Considerations

• Library: Estate Planning in Virginia (Virginia CLE) (2018 Ed.)

3.12 TRANSFER TAX CONSIDERATIONS

3.1201 Overview of the Federal Gift Tax. A federal gift tax is imposed on the gratuitous transfer of property, subject to certain exclusions and deductions. The amount of a gift is equal to the difference between the value of the property transferred and the value of the consideration, if any, received by the transferor. Generally speaking, the transfer must be complete before it is treated as a gift for federal transfer tax purposes. A gift is not complete if the transferor has the right to take back the transferred property or to change the beneficiaries entitled to receive the transferred property.

A gift of a present interest is taxable only to the extent it exceeds the annual gift tax exclusion, which is $15,000 per year per donee in 2018. ⁹⁰ This amount is indexed for inflation, rounded down to the next lowest $1,000. Consequently, an individual may transfer $15,000 gifts of present interests to as many individuals as he or she wishes without incurring any gift tax liability. In addition, a spouse may consent to have a gift made by the donor spouse as made one-half by the consenting spouse, so that a married individual can transfer gifts of present interests valued at $30,000 per year to any of these

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donees if the consenting spouse makes no annual exclusion gifts to the donee in the same calendar year. The annual exclusion applies only if the gift is a gift of a present interest, enabling the donee to immediately enjoy the property. Consequently, a gift of a remainder interest in a trust or a gift to a trust in which the trustee has complete discretion as to distribution of income or principal is treated as a gift of a future interest not eligible for the annual exclusion. ⁹¹

The marital deduction defers gift and estate taxation on certain transfers to or in trust for a surviving spouse who is a United States citizen. Generally, gifts of terminable interests do not qualify for the marital deduction. Terminable interests are interests that will terminate due to the lapse of time or the occurrence of an event, such as the death of the other spouse, and will pass upon such lapse of time or occurrence to someone other than the surviving spouse for less than full and adequate consideration. An example of a terminable interest is a life estate, which terminates at the death of the donee spouse. There are exceptions to the terminable interest rule, however, that permit certain terminable interests to qualify for the marital deduction, including the so-called qualified terminable interest property (QTIP) trust discussed in paragraph 3.903(B) of this book.

There is also a charitable deduction for qualifying gifts to charitable organizations.

If the gift exceeds the annual gift tax exclusion and is not eligible for the marital or charitable deduction, it is subject to a gift tax. The gift tax rate begins at 18 percent on the first $10,000 of taxable gifts, and the marginal rate reaches 40 percent once the total taxable gifts exceed a value of $11,180,000 ($10 million adjusted for inflation as of 2018). The 2001 Tax Act provided that the highest marginal gift tax rate would be gradually reduced: from 55 percent in 2001 to 35 percent in 2010 through 2012, but it has been raised to 40 percent for 2013 and later years by the American Taxpayer Relief Act of 2012. ⁹² The gift tax for a particular calendar year is the excess of the gift tax computed on the individual's aggregate taxable gifts for all calendar years after 1976 over the gift tax computed on the individual's taxable gifts for all calendar years after 1976 and before the current calendar year.

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Each individual is entitled to reduce his or her gift tax by the lifetime exemption amount. An individual may make taxable gifts throughout his or her lifetime of up to the lifetime exemption amount without actually having to pay any gift tax, subject to the limitation on the amount that may be transferred annually tax free to an individual donee. The federal gift and estate tax is a unified transfer tax in the sense that when an individual dies, the amount of taxable gifts is added to the individual's federal gross estate for purposes of determining the tentative federal estate tax. The gift tax payable with respect to taxable gifts made during the individual's lifetime is then subtracted from the tentative federal estate tax in arriving at the federal estate tax due before subtracting the applicable credit amount and other credits. There has been no Virginia gift tax since 1980.

3.1202 Overview of the Federal and Virginia Estate Tax.

A. The Federal Estate Tax. With the enactment of the 2001 Tax Act, Congress phased in higher exemptions and lower rates for the federal estate and generation-skipping transfer taxes from 2002 through 2009 and then repealed those taxes for 2010. After 2010, the 2001 Act provided that the transfer tax laws would return to pre-2001 law (referred to as the "sunset"). From January 1, 2010 until December 17, 2010 (the enactment of the 2010 Tax Act), the federal estate tax was repealed and the status of the transfer tax was uncertain. The 2010 Tax Act provided the following changes:

1.	A postponement of the 2001 Tax Act sunset for two years, until December 31, 2012;
2.	A reunification of the estate and gift taxes with an estate and gift tax exemption of $5 million and a top tax rate of 35 percent, beginning January 1, 2010;
3.	An opportunity for executors of 2010 estates to elect out of the estate tax and into the 2010 carryover basis rules;
4.	A generation-skipping transfer tax exemption of $5 million beginning January 1, 2010;
5.	A GST tax rate of zero in 2010 and 35 percent beginning January 1, 2011;

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6.	Indexing of the $5 million estate, gift, and GST tax exemptions for inflation, beginning in 2012; and
7.	Portability of

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