Indirect gift tax considerations for 2021.

AuthorLantz, Marcy D.

With the looming threat of legislative change expected to drastically lower the estate and gift tax basic exclusion amount, the pressure to make large gifts before year end is causing a flurry of gifting.

It is important to consider some of the less-obvious gifts when you are advising clients who are intent on using up their full $11.7 million basic exclusion amount before the end of the year. Outside the more obvious outright transfers of money or property, some indirect gifts may cause your client to exceed the lifetime exclusion inadvertently when property (tangible or intangible) is transferred without full and adequate consideration under Regs. Sec. 25.2512-8.

One common example is providing support to an adult child. To first determine whether support to a child over the age of 18 is a gift, start by looking to the applicable state's law to determine whether it imposes a legal obligation to support the child. Each state defines its legal support obligation, and the duty to support must be a legally enforceable obligation under state law, not a purely moral obligation (see, e.g., Lester, 35 F. Supp. 535, 540 (Ct. Cl. 1940) ("A moral obligation is not a sufficient consideration to avoid the incidence of the [gift] tax."). In most states the age of majority is 18, and in others it is 19 or 21. Further, there appears to be no clear guideline on whether a parent is legally obligated to pay for a college education or to provide support if a child is merely unable to support himself or herself (and not mentally or physically disabled). Laws in each state vary, and, in some states, making a determination may boil down to a careful review of the facts and circumstances.

It is also important to recognize that the federal income tax requirements for the dependency deduction fall under different rules and that a parent does not automatically have a legal obligation to provide support under state law just because the child qualifies as a dependent. It is possible to claim the adult child as a dependent under the support and other tests and still make a taxable gift in the form of the support. A discussion of income tax consequences is beyond the scope of this item.

Often, the client assumes that if the child is in college, the client can continue to support the child without incurring any gift tax consequences. The payments could include providing a home or paying for room and board at the school dormitory, or paying for books and other college...

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