Chapter 6 - § 6.5 • INCOME TAX IMPLICATIONS

• Jurisdiction: Colorado

§ 6.5 • INCOME TAX IMPLICATIONS

§ 6.5.1—In General

Gifts in trust often are motivated in whole or in part by a desire to shift income to low-bracket taxpayers. Where a grantor retains "strings" on the gift in trust, however, the grantor may defeat the purpose. Not only may the gift not be "completed," but a deceased grantor's gross estate will usually include the value of property conveyed with "strings attached" — that is, subject to rights retained by the transferor. These strings consist of property transferred with a retained life estate, governed by I.R.C. § 2036; transfers taking effect after the transferor's death, governed by I.R.C. § 2037; and transfers of property under which the grantor, usually via a trust provision, retains a right to alter, amend, revoke or terminate the conveyance, governed by I.R.C. § 2038.

The federal gift tax and federal income tax define a gift differently. For gift tax purposes, a gift includes "any transaction in which an interest in property is gratuitously passed or conferred upon another." Treas. Reg. § 25.2511-1(c)(1). Donative intent is not required. Treas. Reg. § 25.2511-1(g)(1).

However, note that for purposes of the I.R.C. § 102 income tax exclusion, the characterization of a conveyance as a gift does primarily depend on the intent of the donor. Comm'r v. Duberstein, 363 U.S. 278 (1960). In Duberstein, the U.S. Supreme Court wrote that to constitute a gift, a conveyance must proceed from the donor's "detached and disinterested generosity . . . out of affection, respect, admiration, charity or like impulses." Id. at 285.

Considerations for Year-End Gifts by Check

Year-end gifts within the gift tax annual exclusion are a popular, simple, and effective method to reduce the value of a client's estate as well as shift income to lower-bracket taxpayers. Sometimes clients wait too long to write their checks. Gifts by check to individuals or charities must generally clear before the end of the year.

However, a gift by check that does not clear before December 31 will still qualify for the gift tax annual exclusion if (1) the check was paid by the drawee bank when first presented for payment, (2) the donor was alive when the check was paid by the drawee bank, (3) the donor intended a gift, (4) delivery of the check was unconditional, and (5) the check was cashed, deposited, or presented in the year for which gift treatment is sought, and within a reasonable time after issuance. Estate of Newman, 111 T.C. 81 (1998); Rev. Rul. 96-56, 1996-50 I.R.B. 7; Metzger, 100 T.C. 204, aff'd, 94-2 USTCP 60179 (CA-4 1994).

"New Age" Income Tax Planning

The reduction of the effects of federal estate and gift taxes by federal legislation culminating in the Tax Cuts and Jobs Act of 2017 may result in both a renaissance of state estate, gift, and even inheritance taxes by states looking to replace the revenue,⁶ and increased emphasis on income tax planning.

New tax-planning techniques may — or have — become appropriate, such as income shifting (Westfall and Mair, Estate Planning Law and Taxation, ¶ 10.02 (Warren, Gorman & Lamont)), rigorous documentation of basis, capitalizing on income tax losses,⁷ inter vivos charitable giving, tax-motivated forum shopping (Schoenblum, 2006 Multistate Guide to Estate Planning, Table 12 (CCH 2006)), and different uses for trusts.⁸ In fact, instead of lowering the value of assets to reduce transfer taxes, lawyers might today advise clients to...