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By Bill Bardwell
The gift-tax rules allow a donor to give away a substantial amount during the donor’s lifetime without incurring a gift tax.
Currently, the lifetime exemption amount is $1 million.
Taxable gifts are defined as gifts other than annual exclusion gifts, charitable gifts, gifts to spouses who are U.S. citizens, gifts of educational expenses paid directly to the educational institution, gifts to political organizations, and gifts of medical expenses paid directly to the service provider.
Under the Internal Revenue Code, the donor is responsible for paying the gift tax and filing the gift tax return.
If the donor fails to pay the gift tax when due, Section 6324(b) of the code imposes a lien on all gifts, including annual exclusion gifts, made by the donor during the period for which the return was filed.
The amount of the lien is equal to the tax on the gifts.
The lien extends for a period of 10 years from the date the gifts were made, unless terminated earlier.
If the gift tax is not paid when due, the receiver of the gift, known as the donee, becomes personally liable for the payment thereof.
The donee’s liability, however, is limited to the value of his or her gift.
The rules that are used to determine a donee’s income tax basis for property acquired by an inter-vivos gift are found under Section 1015 of the code.
The donee’s basis is relevant for depreciation, depletion and for purposes of determining gain or loss on the sale or other disposition of the property by the donee.
The rules apply to outright gifts and to gifts in trust.
Section 1015 of the code provides for a “carryover” basis to the donee that is equal to the donor’s basis in the property.
If a gift tax is paid, the donee is allowed under Section 1015(d) of the code to increase his or her carryover basis by that portion of the gift tax that is attributable to the “net appreciation” in the gift property.
Net appreciation is defined as the excess of the fair market value of the gift over the donor’s adjusted basis immediately before the gift.
To calculate the amount by which the donee’s carryover basis is increased, the amount of gift tax paid is multiplied by a fraction, the numerator of which is the net appreciation in the gift property, and the denominator of which is the “amount of the gift”.
The amount of the gift is the gift’s value for gift-tax purposes, after deducting the annual exclusion amounts under Section 2503, the charitable deduction amounts under Section 2522 and the marital deduction amounts under Section 2523 of the code.
For illustration purposes, assume a donor funds a 5 percent charitable remainder unitrust, or CRT, with $2 million of appreciated stock.
The beneficiary of the CRT is the donor’s daughter, age 50.
Also assume the donor has not made any prior taxable gifts.
The donor’s basis in the stock is $650,000, the donor’s charitable deduction is $565,760, the annual exclusion is $12,000, and the gift tax paid is $176,563.
Using the formula underlined above and located under Section 1015 of the code for gifts made after Dec. 31, 1976, the increase to the donee’s carryover basis for the gift taxes attributable to the net appreciation in the stock is determined in the following manner:
Gift tax paid: $176,563
Multiplied by Net Appreciation Factor: x .95
$1,350,000 (Net appreciation in property)
$1,422,240 (Original gift value minus charitable deduction minus annual exclusion)
Section 1015(d) Adjustment for gift tax paid: $167,735
Plus donor’s carryover basis to donee: + $650,000
CRT basis in the stock $817,735
If more than one gift is made during the same taxable period, the gift tax paid must be allocated among all gifts before determining the amount allocable to the appreciation of a particular gift.
Remember the gift taxes because they give back in the form of lower taxes.
This communication is not a covered opinion as defined by Circular 230 and is not intended or written to be used, and cannot be used, or relied on, by the taxpayer, for the purpose of avoiding federal tax. This communication was written to support the promotion or marketing of the transaction(s) or matter(s) addressed in the written communication; and the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
Bill Bardwell is a philanthropic advisor at Wachovia Nonprofit and Philanthropic Services.