Chapter 8.2 Lifetime Gifting Strategies

• Jurisdiction: Washington

§8.2 LIFETIME GIFTING STRATEGIES

The federal gift tax is an excise tax imposed on property transferred during a calendar year by an individual who is a U.S. citizen, resident, or nonresident alien transferring property with a situs or deemed situs in the United States. I.R.C. §§ 2501(a)(1), 2511. The donor of the gift is primarily liable for payment of the tax. The tax is measured by the fair market value of the property passing from the donor to the donee, even if the identity of the donee is not ascertainable at the time of the transfer. I.R.C. § 2502(c); Treas. Reg. §25.2511-2. Gifts are used for many purposes, including both tax and nontax reasons. Gifts may have important estate planning consequences, reducing the value of

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the estate for estate tax purposes, and may also have important GST or income tax consequences.

(1) Definition of "gift" for gift tax purposes

The Internal Revenue Code does not explicitly define the term "gift" but provides that gift tax applies to gifts of real, personal, tangible, or intangible property, as well as gifts that are direct, indirect, or in trust. I.R.C. § 2511(a). Under federal law, a gift is a transfer for less than adequate consideration in money or money's worth; the amount by which the value of the gift exceeds the value of any consideration paid is deemed a gift. I.R.C. § 2512(b). The gift tax applies to the transfer of property; it is not a tax on the property itself. Treas. Reg. § 25.2511-1(a). Examples of gifts include forgiveness of debt; the assignment of benefits under a judgment or insurance policy; transfers of cash, securities, and other assets; and even the transfer of assets that are statutorily exempt from other taxes (e.g., tax-exempt bonds, the interest of which is exempt from federal income tax).

The Treasury Regulations provide general definitions of "taxable gifts" and of "total amount of gifts." The term taxable gifts means the "total amount of gifts" made by the donor during the "calendar period" (as defined in §25.2502-1(c)(1)), less annual exclusion gifts, the gift tax charitable deduction allowed under I.R.C. § 2522, and the gift tax marital deduction under I.R.C. § 2523. Treas. Reg. § 25.2503-1. The term "total amount of gifts" means the sum of the values of the gifts made during the calendar period less the amounts excludable under I.R.C. § 2503(b). Treas. Reg. § 25.2503-1. The entire value of any gift of a future interest in property (such as a remainder interest) must be included in the total amount of gifts for the calendar period in which the gift is made. Id.

Donative intent is not an essential element in determining whether the transfer is a gift. Treas. Reg. § 25.2511-1(g)(1). The objective facts of the transfer form the basis for application of the tax. Id. A transfer for full and adequate consideration is not a gift, and transfers in the ordinary course of business are not gifts even if they lack consideration. Id.; I.R.C. § 25.2512-8; Estate of Redstone v. Comm'r, 145 T.C. 259 (2015). In Estate of Redstone, a father and son fought bitterly over the ownership of 100 shares of closely held stock that was registered in the name of the son. The father disputed his son's claim to all 100 shares, arguing that a portion of the shares were subject to an oral trust for the benefit of his son's two children. After extensive litigation, the son agreed to settle the matter by selling 66-2/3 shares back to the

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company and holding 33-1/3 shares in trust for the benefit of his two children. The IRS asserted substantial gift tax and penalties, claiming that the son had made a gift of the shares in trust for the benefit of his children, arguing that the children provided no consideration for receipt of the beneficial interests in the shares. The tax court found that the son had no donative intent, his settlement was designed to end a protracted and contentious dispute in the ordinary course of business, and therefore, the transfer in trust was not a gift. The tax court also found that although the children were not parties to the suit and provided no consideration for the shares, the lack of consideration from the children did not create a gift from the son to his children because the transfer settled the dispute in the ordinary course of business.

In contrast, donative intent, actual property, delivery, and acceptance are required to transfer property by gift under Washington law. Old Nat'l Bank & Union Trust Co. v. Kendall, 14 Wn.2d 19, 126 P.2d 603 (1942); see also Henderson v. Tagg, 68 Wn.2d 188, 192, 412 P.2d 112 (1966); Estate of Lennon v. Lennon, 108 Wn.App. 167, 180-81, 29 P.3d 1258 (2001); 38A C.J.S. Gifts §10 (2018); 38 Am.Jur.2d Gifts §18 (2018). Washington, however, does not have a gift tax, and the estate planner may find that gifting property is a useful tool for state estate tax planning purposes.

Practice Tip: Planning considerations may include gifting highly appreciable property to avoid inclusion of the property in the gross estate upon the donor's death gifting high-basis assets to minimize the impact of losing the step-up in basis upon death, gifting or retaining income-producing assets, and gifting specifically for the purpose of leveraging the impact of Washington state estate taxes.

(2) Community property versus separate property

In analyzing the gift tax consequences of a gift by a married person or married persons, the character of the property as the donor's separate property, the separate property of both the donor and donor's spouse (i.e., property held as tenants in common, joint tenants, or tenants by the entireties), or the community property of the donor and the donor's spouse must be determined.

(a) Community property gifts

When a married couple makes a gift of community property to a third person, each spouse is treated as making a gift of one-half

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of the property. I.R.C § 2513. Under Washington property law, the express or implied consent of both spouses is required to make a gift of community property. RCW 26.16.030(2). For example, assume John and Mary, husband and wife, own Blackacre as community property, with John owning a 50 percent undivided interest and Mary owning a 50 percent undivided interest. If John and Mary convey all of their respective interests in Blackacre to their child, each donor is making a gift of an undivided 50 percent interest in Blackacre.

(b) Separate property gifts

If one spouse owns a 100 percent interest in property as that spouse's separate property, a gift of the property by the donor spouse to a third party is made solely by the donor spouse, and no part of such gift is deemed made by the nondonor spouse.

If a married couple makes a gift to a third person of property that they own as cotenants, as joint tenants, or as tenants by the entirety, each spouse is making a gift of that spouse's interest in the property. Assume John and Mary, husband and wife, own Blackacre as tenants in common and not as community property, with John owning a 25 percent undivided interest as his separate property and Mary owning a 75 percent undivided interest as her separate property. If John and Mary convey all of their respective separate property interests in Blackacre to their child, John is making a gift of 25 percent of Blackacre and Mary is making a gift of 75 percent of Blackacre. To the same effect, if John and Mary own Blackacre as joint tenants with right of survivorship and not as community property, each spouse owns a 50 percent undivided interest as his or her separate property. If they transfer ownership of Blackacre to their child, each donor is making a gift of his or her 50 percent joint tenancy interest.

Practice Tip: In Washington, the rights of survivorship in tenancy by the entireties has been abolished. RCW 11.04.071; see also RCW 64.28.020. However, other states maintain characterization of ownership as tenants by the entireties. Carefully consider the issues raised when a married couple brings property into Washington that was previously acquired or held by the couple as tenants by the entirety.

A gift by one spouse to a person who is not the donor spouse's husband or wife is treated as made one-half by each spouse if the couple is married and both spouses are citizens or residents of the United States at the time of the gift. I.R.C. § 2513(a)(1). Even though, under

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community property law, a gift of community property is a gift of one-half of the property by each spouse, any gifts of separate property and gifts of property by spouses who do not reside in community property states require that the spouses elect to split the gift to treat the gift as made one-half by each spouse for gift tax purposes. I.R.C. § 2513(a)(2). (See §8.1(2)(c), below.) The election is available for any gifts of property made during a calendar year. I.R.C. § 2513(a)(2).

(c) Split-gift election for separate property

The Treasury Regulations under I.R.C. § 2513 and the Instructions for Form 709, https://www.irs.gov/pub/irs-pdf/i709.pdf, explain the procedures and mechanics for making a split-gift election, on IRS Form 709 (the gift tax return). Depending on the facts, both spouses may need to file a gift tax return to make a split-gift election, and in other cases only one spouse may need to file a gift tax return, with the other spouse consenting to the gift-splitting on the filing spouse's gift tax return by signing the spousal consent section.

The consent of both spouses is required to treat a gift of separate property as a split gift. I.R.C. § 2513(a)(2). Exceptions include gifts of separate property to third parties by each spouse when only one spouse signifies consent to such gifts. In such instances, both spouses will be treated as having consented to splitting the gifts. If only one spouse makes a gift of separate property, the consenting spouse...