Our context not only suggests clients take advantage of the higher exemption levels available under current law, but a “back to basics” remembrance of taking full advantage of the annual gift tax exclusion.
Under the gift tax rules, a gift can arise when the transferor receives nothing, or less than full value, in return. Each donor files his or her own gift tax return. here is no such thing as a joint gift tax return.
“Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes.” (Instructions to Form 709 (2020).
As adjusted for inflation, the annual exclusion is $15,000 per donee in 2021, unchanged from 2020. Split-gifting with a spouse makes gifts of $30,000 possible without any use of one’s transfer tax exemptions.
The annual exclusion is limited to gifts of a “present interest.” The term includes vested or contingent interests available for the donee’s immediate use, possession or enjoyment (Regs. 25.2503-3(b)).
A trust may contain restrictions that preclude the exclusion, but it is also possible the rights of the beneficiary to assets or income of the trust will be such that the transfer qualifies for the annual exclusion. Interests in trusts are often designed with Crummey powers that allow a person to receive a gift that is not eligible for a gift-tax exclusion, and then effectively transform the status of that gift into one is eligible for a gift-tax exclusion. The donor’s expectation is that such powers will not be exercised.
The IRS may at times be receptive to retroactive corrections of the trust to accommodate such exclusions (PLR 201845029, 11/9/2018). Gifts to minors can qualify for the $15,000 exclusion if they meet certain requirements (Sec. 2503(c) Regs. Sec. 25.2503-4).
Gifts usually arise directly and are known as such, but gifts can also arise when sales are at less than fair market value. The general measure of a gift is FMV. Partial payment of the asset’s value effectively reduces the measure of the gift but it does not eliminate the element of gift.