Gift Tax Analysis on Transfers of Property
Maybe you are considering gifting property or money to a child or other family member, or maybe you have already gifted property and are wondering about the gift tax consequences. If you have not transferred the property and made the gift, it is always advisable to speak with you’re your estate planning attorney or a tax attorney prior to the disposition. However, if the gift has been made, this article may be able to assist you in analyzing the tax consequences of such gift.
First and foremost you must ask, was there a completed gift? Did you actually gift the property to a third party? For a complete gift, you as the donor must completely give up dominion and control of the property to have a completed gift. Thus, the donee must have the immediate right to use, possess or transfer the property, as well as right to enjoy any income from the property. For example, property transferred to a revocable trust is not a gift because the trust can be revoked. If creditors have the right to income from the property transferred, this also would not appear to be a completed gift.
If it is determined that the gift is a completed gift, then you must consider whether the gift constitutes a present interest. For the annual gift exclusion to apply, the gift must be a completed gift of a present interest. For example, if Joe gifts property into trust and his son Mike holds a remainder interest in the trust, Mike does not hold a present interest as a remainderman and thus the annual gift exclusion would not apply.
If it is determined that the gift is a completed gift of a present interest then you must look at the value of the gift. The fair market value of the gift is the fair market value as of the date of transfer. The amount of the gift exceeding the current year annual gift tax exclusion would reduce the donor’s lifetime exclusion or be taxable if the donor has already “used” their lifetime exclusion or credit.
After the gift is made, what is the donee’s (recipient’s) basis in the gift? This is important so that the donee’s gain can be calculated upon their transfer of the property. The recipient takes a carryover basis in the gifted property under Internal Revenue Code Section 1015. Thus, the recipient takes the donor’s basis. Further, if the donor pays gift tax on the transfer, the gift tax paid by the donor increases the donee’s basis, and this is known as the Gift Tax Paid Adjustment (GTPA).
One issue to consider is that property received via inheritance receives a stepped up basis to the fair market value of the property at the death of decedent under Internal Revenue Code Section 1014. Thus, it may not always be wise to gift property (depending upon the circumstances) in order to take advantage of the stepped up basis rules when property is received through an inheritance.
Individuals considering gifting property should consult their estate attorney or tax attorney to discuss the current and long term tax implications of the transfer and to ensure the transfer will achieve the intended results. This article has been posted by John McGuire. John is a Denver business attorney and Denver tax attorney.
Contact The McGuire Law Firm to speak with and schedule a free consultation with a estate planning attorney.
