Lifetime Transfers by Gift

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 donees education, support
  and well being

3
Requirements of a Gift

• Transfer of property by a competent Donor for
  less than full consideration.
• Delivery of the gift by the donor which
  absolutely, irrevocably and presently divest the
  property from the donor (there cannot be
  strings attached)
• 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 insureds
  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??