Chapter 6 - § 6.1 • REASONS FOR MAKING GIFTS
| Jurisdiction | Colorado |
§ 6.1.1—Tax Considerations
Recent Legislative Action
The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, is the latest chapter in the political tug-of-war over transfer and income taxes that started well over a decade ago. Prior legislation, the American Taxpayer Relief Act of 2012, made supposedly permanent changes to the transfer tax system, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 restored the unified federal estate, gift, and generation-skipping transfer tax system (with basis step-up).
The 2017 Act most notably doubled the base upon which transfer taxes are calculated from $5 million to $10 million, which when adjusted for inflation yields an individual unified credit amount of $11,400,000 for 2019, Rev. Proc. 2018-57, and $11,580,000 for 2020, Rev. Proc. 2019-44. It is also important to note that most of the provisions of the 2017 federal tax legislation dealing with individuals, including the large increase in the unified credit amount, are temporary and to sunset after 2025. However, because Washington's 2012 promise of transfer tax "permanence" only lasted about five years and the 2017 tax legislation dealing with individuals is temporary, some feel that aspects of the 2017 Act will last only until political winds shift and Washington next changes its mind, perhaps in a search for revenue to reduce the federal deficit. Given the lack of tax predictability, attorneys and clients should bear in mind that it is the law in place when one dies that is most important.
Nevertheless, a period of relative planning certainty now exists, with a comparatively generous transfer tax credit and the ability for clients to achieve leverage with large inter vivos gifts of cash, property, or life insurance. Will there be a "claw back" if a client makes large gifts but dies after the 2025 sunset of the current temporary legislation? Nobody can be sure, but the IRS seemed to say "no" in proposed regulations announced in IR-2018-229.
General — Federal Gift and Estate Taxes
In 1976, federal gift and estate taxes were "unified," and a single credit and rate schedule was used for both taxes. The 2010 Act created marital deduction "portability." A full discussion is beyond the scope of this chapter. However, note that for a married couple to benefit from portability, the irrevocable portability election must be made on a timely filed Form 706 federal estate tax return after the first spouse's death. I.R.C. § 2010(c)(4) through (6).
Federal gift and estate taxes are computed under the same unified rate schedule. I.R.C. §§ 2010 and 2505. Starting in 2012, the unified applicable credit amount for decedents dying and gifts made is adjusted for inflation. As modified in 2017, the unified credit "basic exclusion amount" in 2019 is $11,400,000 and $11,580,000 in 2020.
Subject to the three-year rule of I.R.C. § 2035 (see § 6.2.2 of this chapter), inter vivos giving avoids tax on appreciation after the date of the gift. If the donor lives more than three years after making a gift, federal estate tax will be avoided on the amount of the gift taxes paid as well. I.R.C. § 2035(c). It may also be possible, by making gifts that will qualify for the gift tax marital deduction (I.R.C. § 2523), to ensure that a non-affluent spouse's transfer tax...
To continue reading
Request your trial