Chapter 6 - § 6.2 • FEDERAL GIFT AND ESTATE TAX IMPLICATIONS

• Jurisdiction: Colorado

§ 6.2 • FEDERAL GIFT AND ESTATE TAX IMPLICATIONS

§ 6.2.1—Transfers to Which Gift Tax Is Applicable

Donative intent is not essential to cause a transfer of property (whether real or personal, tangible or intangible) outright or in trust to be subject to gift tax if the other elements of a completed gift are present. Treas. Reg. §§ 25.2511-1(a) and 25.2511-1(g)(1). Clients will make nebulous conveyances, often to adult children, under the subjective pretext of a "loan." See above, "Avoid IRS Recharacterization of Intra-Family Loan or IRS Allegation of Imputed Income." But without full, arm's-length documentation, that undefined, gratuitous transfer remains simply a gift. Gratuitous transfers of title should thus be avoided unless a gift is intended. However, where the transfer is not complete or not beyond the recall and control of the donor, no gift has been made for gift tax purposes. To constitute a gift, the donor must part with "dominion and control." Treas. Reg. § 25.2511-2(b).

The most common example of an incomplete gift is a joint bank account where the donor retains the right to withdraw all funds without the consent of the donee. Treas. Reg. § 25.2511-1(h)(4). The creation of a joint tenancy in other assets, such as real estate or stock, however, can result in a completed gift. See § 6.2.9 of this chapter.

Gift tax is said to be applied based on the objective facts and circumstances of the conveyance rather than upon the donor's subjective intent, but many tax issues arise concerning whether a gift is actually complete for purposes of the federal gift tax. Even though the donor is unable to reclaim the gifted property, the gift may still be incomplete. For example, if the donor retains the right to shift the benefits of the gift from one donee to another, the gift may not be recognized as complete for gift tax purposes. Treas. Reg. § 25.2511-2(c). Events that trigger the gift tax are the release of a power to revoke a gift or to designate beneficiaries of a gift. Treas. Reg. § 25.2511-1(c)(1); Burnet v. Guggenheim, 288 U.S. 280 (1933); Estate of Sanford v. Comm'r, 308 U.S. 39 (1939). See § 6.2.4 in this chapter for more information on present and future interest gifts.

Due to the size of the unified credit, most smaller transfers will not result in a tax liability whether or not the gift is complete. See § 6.2.3 of this chapter. An incomplete gift, however, is ineffective to transfer future appreciation to the donee for transfer tax purposes. Note also that a completed gift in joint tenancy can result in the full appreciated value of the gifted asset being taxed in the donor's estate if the donee is not a spouse. See generally Chapter 5 of this Handbook.

Transfer taxes are normally paid by the donor and not the donee. But under Proposed Regulation REG-112997 of 2015, the donee may be responsible for transfer taxes on gifts and devises from a "covered expatriate" from the United States to a current U.S. citizen or domestic trust.

§ 6.2.2—Transfers Within Three Years Prior to Death

The full appreciated value (current fair market value) at the date of death of the donor of many assets given away within three years of the date of death (along with any gift tax paid) is included in the donor's estate for estate tax purposes. Congress's goal is to discourage certain death-bed conveyances.

This three-year rule applies to transfers of life insurance on the decedent's life, transfers with a retained life estate, revocable transfers, certain powers of appointment, transfers affected by I.R.C. §§ 303(b) and 2032A, and many transfers taking effect at death. I.R.C. § 2035(c). Even if the full value of the gift is not brought back into the donor's estate, any gift taxes paid on gifts made within three years of death are included in the taxable estate. I.R.C. § 2035(b). In addition, due to the interrelated rate structure, the value of a gift enters into the estate tax computation. See § 6.2.7 of this chapter.

Unless the property given away is subject to the three-year rule, any gift qualifying for the annual exclusion is not taxed in the donor's estate, and does not enter into the estate tax computation, even if made as a death-bed transfer.

§ 6.2.3—Unified Credit

There is a unified transfer tax credit against federal gift and estate taxes, which has been renamed the "applicable credit amount." See generally IRS Publication 950, Introduction to Estate and Gift Taxes.

The amount of transfer tax depends on the total cumulative value of property transferred, and is imposed at progressive rates. For gifts under the lifetime cumulative amount of $12.06 million (in 2022), the transfer tax burden will generally be the same regardless of whether property is conveyed during life or at death. But bear in mind that if conveyance of an asset is delayed until death, the donor will have the use and income of the asset in the interim and the beneficiaries will generally enjoy a stepped-up basis for their own income tax purposes.

The rates of tax under the gift tax rate schedule begin at 18 percent for the first $10,000 in taxable conveyances, i.e., after the first $16,000 sheltered by the annual exclusion.

Calculation of the amount of gift tax payable is begun by first applying the gift tax rate schedule of I.R.C. § 2001(c) to the cumulative inter vivos taxable conveyances, then subtracting the gift tax payable on such conveyances for past taxable periods.

Under current legislation, the amount of the I.R.C. § 2505 unified credit is $4,769,800, which yields, during 2022, the equivalent of a $12.06 million cumulative individual transfer tax "exclusion." Since 2012, the unified credit has been indexed for inflation, on a base of $10 million for tax years 2018 through 2025. (Note, however, that use of the $10 million base may be eliminated prior to 2025.)

Use of the credit against gift tax liabilities has the effect of reducing the amount of the credit available to be applied against estate taxes. Use of the credit is not elective. It must be used to offset gift taxes due on lifetime gifts and may not be saved for use against later estate taxes due. Note that making use of the gift tax credit to benefit inter vivos donees at the expense of estate beneficiaries could create unintended inequities if the beneficiaries are different individuals.

A Form 709 federal gift tax return is required for any conveyance by gift other than gifts excludible under the annual exclusion or the marital deduction, or gifts of tuition or health care. Gift tax returns must generally be filed and any tax paid on an annual basis. I.R.C. § 6019. Note that a gift tax return may be required even if no gift or estate taxes will ultimately be owed. For hard-to-value assets such as closely held business interests, artworks, or real property, it may also be advantageous to voluntarily file a gift or estate tax return to report the transfer even if no taxes may be owing, in order to help establish a...