1. Chapter 7 Lifetime Transfers by Gift an Overview

2. The Gift Tax is an excise tax …. It is a fee for the priviledge of transferring property. Based on the value of the property transferred. There are progressive tax rates based on cumulative lifetime gifts. Gifts can be in the form of cash, proper- ty, life insurance, or even the cancellation of debt. Almost anyone can be a donee …. person, corporation, p’ship, trust, foundation

3. Tax Advantages of Lifetime Gifts 1.An individual can give up to $12,000 gift tax free per year to each donee …….. ($24K if we gift split) 2.Obviously, gifts would not then be included in your estate …. “Gifts in Contemplation of Death” …. the 3 year rule. 3.After a gift is made, future appreciation is excluded from the donor’s estate (give early). 4.Annual income moves to the donee once the gift is made 5.Gifts may allow the donor’s estate to qualify for installment payment of taxes or stock redemption. 6.No tax is paid on transfers until the $1MM lifetime exclusion is reached

4. Gift Splitting A married donor – with the consent of the nondonor – can elect to a gift to a 3 rd party as made ½ by each (i.e. “split” between the two). Election must be made on the gift tax return of the donor. What if donor makes a $24,000 gift to an individual and elects gift splitting? What if donor makes a $124,000 gift to an individual and elects gift splitting? What if there is a divorce …. How does it affect the ability to gift split?

5. Annual Exclusion The annual exclusion allows the Donor to make a gift up to $12,000 to any person during a calendar year without triggering the gift transfer tax. With gift splitting, that amount becomes $24,000 annually. Cash gift Gifts of stock ….. how do we value?? Future interest ….. I give my mountain house ten years from now The $12K gift is considered “de minimis”.

6. Present Interest & Future Interest Annual Exclusion ($12,000) can only be used for a present interest gift and not a future interest. Qualified Personal Residence Interest Trust A single gift can be split into a present interest and a future interest. See example on page 169

7. Consider the example on page 169: If income is required to be distributed (simple trust) we have a “present interest” based on the lifetime income stream to the income beneficiary If we have a complex trust (income is not required to be distributed), then we cannot calculate a present interest. Why do we care if this can be valued as a present interest (or not)?? Present Interest & Future Interest

8. Does the gift of a life insurance policy qualify as a present gift subject to the annual exclusion?? Does the gift of a life insurance policy into a life insurance trust qualify as a present gift subject to the annual exclusion?? Gift of Life Insurance

9. Trust for Minors Section 2503(b) Trust (Mandatory Income Trust) Trust set up for the benefit of a minor child ……. Income must be distributed at least annually. Qualifies for the annual exclusion. Principal not required to be distributed at age 21 ….. but does require annual income.

10. Trust for Minors Section 2503(c) Trust Trust set up for the benefit of a minor child ……. Income and principal must be distributed at when the child reaches majority (age 21 or 18). Income and principal can be spent on the minor along the way (prior to age 21). Can the beneficiary elect to leave the trust in place past age 21??

11. Trust for Minors Uniform Transfer to Minors Account (UTMA) Custodian holds the property for the minor Income and principal can be spent on the minor along the way (prior to age 21). Beneficiary entitled to property at age of majority. All income is taxed to the minor child along the way Account is for the benefit of one person (not multiple) If donor is custodian, property pulled in custodian’s estate No spendthrift provision

12. Trust for Minors Crummey Trusts Crummey (demand) powers allow the transfer to be treated as a “present” interest ….. why do we care about the current interest?? The beneficiary must be allowed to “demand” the annual addition to the trust or the greater of $5,000 or 5% of trust assets (5 and 5 power) Why would the beneficiaries not demand the money? Income and principal can be spent on the minor along the way Vesting of the trust assets can be delayed past the age of majority ….. say, age 25 or 30 or 35.