3.6 Special Situations

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

3.6 Special Situations

3.61 Net Gifts

A net gift is a gift in which the donor requires the donee to pay the gift tax attributable to the gift. Such a gift often is made when the donor lacks liquidity with which to pay the tax or wants to shift the tax burden to the donee. The taxable amount is not the gross amount of the gift; it is the gross amount of the gift reduced by the amount of gift tax the donee must pay. The formula for determining the amount of the gift tax is "tentative" tax divided by (1.00 + donor's gift tax bracket).

Example: A donor who has made sufficient lifetime gifts to use his entire unified credit desires to give a donee property that has a fair market value of $100,000 but wants the donee to pay the gift tax. The donor is in the 40% gift tax bracket. Therefore, the gift tax is determined as follows: tentative tax $40,000 / (1.0 + 0.40) = $28,571.⁵⁰

Caution: A net gift may have possible income tax consequences to the donor.⁵¹ Such a gift is treated as a part-sale, part-gift transaction due to the donor's being relieved from paying the gift tax liability. The income to the donor is the amount of gift tax paid by the donee less the donor's basis in the property. Thus, the greater income tax problem is created when low-basis property is given. In the preceding example, if the property given had an income tax basis of $10,000, then the income to be reported by the donor is $18,571; however, no income is reported if the basis equals or exceeds the gift tax.

Planning Pointer 5

In 1968, the Ninth Circuit Court of Appeals decided the case of Crummey v. Commissioner.⁵² This case offers the opportunity for the annual gift tax exclusion to be allowed for transfers into trust. Normally, a gift to a trust is a gift of a future interest for which no annual exclusion is permitted. In Crummey, however, the beneficiary of the trust was given the absolute right to withdraw the amount of the annual gift to the trust up to and through December 31 of each year. If the right was not exercised, it lapsed. The mere fact that the right of withdrawal existed created a present interest for the beneficiary in the property that was transferred into the trust; thus, the gift qualified for the annual exclusion.

Under the Crummey ruling, it is not necessary for the beneficiary to exercise the right. However, the beneficiary must receive notice from the trustee that the property has been placed in trust and that the beneficiary has the right to withdraw the gift...