To split or not to split? That is the question! (tax advantages of gift-splitting)

• Author: Rhine, David S.

Strategy

Evaluate whether gift-splitting consents are advisable for gifts if the donor's gifts for the year include some gifts that may be included in the donor's estate. The following are some situations in which gift-splitting should be closely examined.

* Qualified personal residence trusts (QPRTs).

* Grantor retained annuity trusts (GRATS).

* Grantor retained unitrusts (GRUTS).

* Common-law grantor retained income trusts (GRITS).

Background

If a married couple consents to split its gifts with third parties during a calendar year, all of these gifts are treated as having been made one-half by each spouse. It usually is advantageous to split gifts to capture each spouse's lower brackets and any available unified credit.

Caution

There may be hazards to this technique. If, at the donor's death, the property is included in the donor's estate, gift-splitting could be detrimental to the donor's spouse.

The Code provides for remedies to the donor if property transferred by gift is subsequently included in the donor's estate. But these remedies generally do not apply to the donor's spouse who merely consented to having the gift treated as being made one-half by each. The donor is mad whole, but generally not the donor's spouse.

Example: H, age 70, places $1,000,000 home in a QPRT, retaining the home's use for seven year with the remainder interest to C. and W, his wife, consent under Sec. 2513 to split the $388,880 gift (base on the January 1995 applicable Federal rate). H dies during the trust's term. The full value of the trust's corpus is included in his gross estate under Sec. 2036; gift splitting does not make W "transferor" of half of the property for estate tax purposes.

Since the home is included in H's estate, his portion of the gift, $194,440, is removed from his cumulative tax base under the adjusted taxable gifts exception (Sec. 2001(b)). However, W's portion of this gift is not removed from her cumulative tax base.

While any gift tax paid by W on her split gift will be credited in computing her estate tax, her split gift will push her subsequent taxable gifts and taxable estate into higher marginal rate brackets (or use up her unified transfer tax credit). If the gift were not split, H's entire gift would be eliminated if he died during the trust's term. However, the gift tax on this gift might be somewhat higher.

Further discussion

If the full amount of a split gift is included in the donor-spouse's gross estate, any gift tax paid...