1. Chapter 6 Lifetime Transfers by Gift an Overview

2. Gifts Gifts are private (unlike a bequest at death) Gifts are immediate (there is no probate or administrative red tape) Protection from creditors (unless abused) Gifts are made of “love and affection” …. it brings joy to the donor. Provides for the donee’s education, support and well being

3. Requirements of a Gift 1.Transfer of property by a competent Donor for less than full consideration. 2.Delivery of the gift by the donor which absolutely, irrevocably and presently divest the property from the donor (there cannot be “strings” attached) 3.The Donee must accept the gift

4. Adequate and Full Consideration Sufficiency of Consideration Test - Has something of value been given (consideration) in return for the property received?? If the answer is “NO”, then there will be some element of GIFT (or compensation) Can I assign income I earn to someone else?? Example: If I earn $300,000, can I it to my children and exclude it from my tax return and let them pick it up on their tax returns. (Lucas versus Earle, Supreme Ct)

5. Transfers that are not GIFTS Services – provided is not considered to be “property” Qualified Disclaimers – treated as if the property goes directly from the transferor to the person who received it ……….. discussed later. Ordinary Business Transactions – Gift tax not applicable to business transactions. Compensation Issues. Sale or transfer of property. Can be considered a gift is primary motivation is “detached and disinterested generosity”. Bad Bargain – in the ordinary course of business. Sham Gifts – no economic substance …. tax motivated.

6. What is NOT a Gift?? Exempt by Statute Disclaimers (already discussed) Transfers in a Divorce Tuition – need not be related. Must be paid directly to the educational institution. (Example: Tuition at Stanford) Medical Care – paid on behalf of another. Should be paid directly to the care provider.

7. Life Insurance Insurance Policies have an “owner” …. usually the person purchasing the policy. It is not uncommon for life insurance policies to be gifted ….. usually through a life insurance trust for the benefit of the children. Names a benefit other than his or her estate Retains no interest in the policy Does not have the power to change the beneficiary of the policy Gift is on the value of the policy (CSV). Payment of future premiums would be a gift.

8. Life Insurance Why would one want to give away an insurance policy?? Example: $10MM Life Insurance Policy purchased in a Life Insurance Trust fbo the insured’s children. Examine the difference between the insured owning the policy or purchasing the policy using an insurance trust.

9. Qualified Disclaimers Donee refuses or renunciates the gift. After disclaiming, the gift will usually go to another person. A qualified disclaimer is treated for gift tax purposes as going from the Donor directly to the substitute recipient. Disclaimers are most often used by benefi- ciaries of estates. EXAMPLE

10. What makes a “Completed” Gift? Delivery – check cashed, stock transferred, deeds, gifts in anticipation of death (causa mortis). Cancellation of Notes – no gift where property is given in return for a note. Gift when and if note is cancelled. For tax purposes, how do we treat “Forgiveness or Indebtedness”) Revocable Trust – gift is not made as long as the donor has “incidents of ownership”. That is, he can change his mind. Also, if the donor retains rights to change beneficiaries, the gift is not complete. What about a CHARITABLE Trust …. i.e. Fidelity Gift Trust?

11. Completed Gifts Once a gift is “completed” …. the donor has irrevocably parted with the gift and cannot “get it back”. If the donor can revoke the gift, we do not have a completed gift. Incomplete Delivery –check must be cashed. –deathbed gifts are not complete until death (gift causa mortis) –stocks – certificate must be endorsed Incomplete Gifts in Trust – no gift if trust is revocable

12. How do we value the Gift? Fair Market Value (FMV) - on the date of the gift ….. Price a willing buyer and a willing seller accept. Reduce the value by the indebtedness (unless the donor has personally guaranteed the loan. Adjust the value for RESTRICTIONS placed on the property ….. usually provides a discount. i.e closely-held stock … lack of marketability. Discounts for Large Blocks of Stock (marketability) Mutual Funds What is the role of an appraiser??