Gift-splitting: the intricacies of [section] 2513 of the Code.

• Author: Pratt, David

Many practitioners assume that they have a complete understanding of the gift-splitting provisions found in [section]2513 of the Internal Revenue Code of 1986, as amended, and the gift tax regulations promulgated thereunder. In fact, the laws surrounding gift-splitting are complex, and an election to gift-split or the failure to properly gift-split can cause unintended adverse tax consequences. When practicing in the field of estate and gift taxation, a practitioner should have a complete understanding of the requirements that must be satisfied in order for a married couple to properly elect to gift-split, as well as the effects of such an election. This article will discuss the intricacies of gift-splitting.

Statutory Requirements

There are three requirements that must be met in order for a married couple to elect for all gifts to third parties (gifts to spouses may not be split) to be considered as made one-half by the donor spouse and one-half by the nondonor spouse: 1) at the time of the gift, each spouse must be a U.S. citizen or a U.S. resident; 2) at the time of the gift, the spouses must be married (if during the same year the gift was made, the spouses divorce, they may still elect to split gifts made while they were married, provided neither of them remarry during the same calendar year); and 3) both the donor spouse and the nondonor spouse must signify their consent to the election to gift-split. (1)

The Code also prescribes limitations as to which gifts a married couple may elect to gift-split. For example, a couple may not elect to split gifts to each other. (2) In addition, a gift by the donor spouse cannot be split where the donor spouse created in the nondonor spouse a general power of appointment as defined in [section]2514(c) of the Code. (3)

Gifts Must Be Ascertainable

Gifts which are eligible to be split are also limited to those gifts which are ascertainable. (4) For example, if a donor spouse transfers property so that a portion of the property interest is gifted to a third party and a portion of the interest is gifted to his or her spouse, in order for the portion gifted to a third party to be eligible for gift-splitting, such interest must be ascertainable at the time of the gift and, hence, severable from the interest transferred to the nondonor spouse.

In Kass v. Commissioner, T.C. Memo 1957-227, the donor spouse made a gift of corporate stock to a trust that provided for the net income of the trust to be paid to the nondonor spouse for life. The trust further provided that the trustees of the trust, in their absolute discretion, could pay from the principal of the trust any sum they deemed necessary or advisable for the "general welfare" of any income beneficiary to such beneficiary. The value of the stock as of the date of transfer was $54,000. The donor spouse and nondonor spouse each filed a U.S. Gift (and Generation-Skipping Transfer) Tax Return, Form 709 ("709") electing to split the gift of corporate stock to the trust. The Tax Court addressed whether the portion of the stock transfer attributable to third parties was ascertainable so that such transfer would be eligible for gift-splitting. The Tax Court held that such interest was not ascertainable, as it could not be demonstrated that the existence of the nondonor spouse's other assets would make the invasion of the trust's principal for her benefit unlikely. (5)

In Wang v. Commissioner, T.C. Memo 1972-143, the donor spouse was the grantor of a trust agreement which provided that during the joint lives of the donor spouse and the nondonor spouse, the trustee(s) should distribute the trust income to the nondonor spouse. The trust further provided that upon the death of the donor spouse, if the nondonor spouse was living, the trustee(s) were to set apart a separate portion of the trust assets, to be referred to as "Fund A" to be administered for the nondonor spouse's benefit. Fund A was to consist of an amount equal to the difference between one-half of the value of the donor spouse's adjusted gross estate and the value of all the property passing to the nondonor spouse pursuant to the donor spouse's will or by operation of law. Only assets that would qualify for the marital deduction were to be used to fund Fund A. The balance of the trust was to be used to fund "Fund B." The nondonor spouse was to receive the income from Fund A during her lifetime and she had a noncumulative right to withdraw $10,000 per year from the principal of Fund A in her sole discretion for any purpose whatsoever. The nondonor spouse also had a general power of appointment over Fund A. The trustees had the power to distribute as much of the trust's principal to the nondonor spouse as they deemed necessary or advisable for her proper care, support, and health, or in the event of an emergency. Upon the death of the nondonor spouse, the balance of the trust was to be divided equally into three trusts. Each then living child of the donor-spouse would be the beneficiary of one trust and if a child had predeceased the nondonor spouse, such child's share would be administered for the...