Since 2013, the gift tax filing threshold has been $14,000, making it relatively apparent that if your client made a gift in excess of $14,000 to any one person (other than a spouse) in 2013 or any year thereafter, the client probably had to file a federal gift tax return (Form 709). Less obvious are the various elections, allocations, and disclosures reported on Form 709 that provide additional reasons to file gift tax returns, some of which are mandatory and some of which are elective. This article explores some of those less obvious issues that may arise when preparing a Form 709.
Gift Splitting—Not As Easy As It Looks
Code Section 2513 allows a married couple to split a gift made by one of them for federal gift tax purposes if, at the time of the gift, each spouse is a citizen or resident of the United States. An individual is considered the "spouse" of another individual only if they were married to each other at the time of the gift and he or she does not remarry during the calendar year. The consent must be made on a gift tax return filed for the year in which the gift is made. If a return is filed for that year that does not indicate consent by the spouse, it cannot later be changed in an amended return unless the amended return is filed by April 15 of the year after the year of the gift. If no timely return is filed, the consent may be indicated on the first late return filed for that gift unless a notice of deficiency with respect to the gift in question has been sent by the IRS. Note that if the spouse of the donor is not a U.S. citizen but the couple is living in the U.S. at the time of the gift, the gift can be split, but if the couple is living outside of the U.S. at the time of the gift, the gift cannot be split.
Gift splitting is an all or nothing proposition. The consent must apply to "all...gifts made during the calendar year by either while married to each other."2 This is an important point that many couples and professionals do not realize. It is especially important in second marriages if gifts in excess of the annual exclusion are being made. A spouse readily may agree to split annual exclusion gifts to their respective children and families, but doing so also means that any taxable gifts during the year are split and both spouses' lifetime gift tax exclusions are used. This can result in one spouse inadvertently using his or her lifetime gift tax exemption for gifts made to the children of a prior marriage. The only exception to this rule is that the gift cannot be split to the extent it is to or for the benefit of the spouse. If a donor makes a gift to an irrevocable trust of which the spouse is one of the beneficiaries, the gift cannot be split unless, at the time of the gift, the interests of the other beneficiaries are ascertainable and identifiable separate from the spouse's interest.3 This rule does not directly impact annual exclusion gifts, but it can have an impact in a trust over which the spouse and children (or descendants) have Crummey powers, such as a typical irrevocable insurance trust. Most practitioners view the Crummey withdrawal rights as separately identifiable and ascertainable interests. Therefore, they report gift splitting for the children's Crummey powers but not, of course, for the spouse's Crummey power.
EXAMPLE: John gives $61,000 to a Crummey trust over which his wife, Jane, has a $5,000 Crummey power and each of their two children have $28,000 Crummey powers. John and Jane elect to split gifts. John's transfer to Jane qualifies for the annual exclusion and is not split. The gifts to the children are treated as onehalf from John and one-half from Jane. Thus, for gift tax purposes, John is treated as having made $33,000 of gifts and Jane is treated as having made $28,000 in gifts. It should be noted that on occasion, the IRS has disagreed with this treatment. If the trust is a spray trust with the spouse and children all as beneficiaries, the IRS has concluded that none of the gifts can be split because the children's underlying interests in the trust are not ascertainable in value.4
With certain trusts, such as QPRTs and non-zero-out GRATs, gift splitting can have a negative effect if the actual grantor of the trust dies before the end of the income or annuity term. In that case, the portion of the gift deemed made by the deceased grantor will have no effect for transfer tax purposes since adjusted taxable gifts do not include gifts that are included in the donor's estate for federal estate tax purposes, but the gift deemed to be made by the nongrantor spouse will continue to be an adjusted taxable gift in that spouse's estate at his or her death.
Although for gift tax purposes, the portion of a gift to a trust of which a spouse is the beneficiary cannot be split, for GST purposes, it is, in effect, split when determining the amount of GST exemption to allocate. Each spouse is treated as the transferor of one-half of the gift even if a portion of the gift was to the spouse.5 Thus, in the example above, even though John is treated as making a gift of $33,000 and Jane is treated as making a gift of $28,000, each must allocate $30,500 of GST exemption to the trust to keep it exempt from GST tax. What if the spouse's interest in the trust is not susceptible to valuation? Assuming all other gifts are split for gift tax purposes in the year in question, does the GST exemption for this gift still get allocated onehalf by each spouse? Although the regulations are not clear on this, it seems that the better position is that the donor spouse must allocate all of the GST exemption to this trust.
Adequate Disclosure to Start Statute of Limitations
The IRS generally has three years from the filing of a gift tax return to assess a deficiency.6 However, this will only apply to gifts that are adequately disclosed on the gift tax return.7 If the statute of limitations expires with respect to a gift, then the IRS cannot later revalue the gift for any purpose. Since the calculation of whether any gift tax is due is dependent on the value of prior gifts, this prevents the IRS from revaluing the gift in a later year solely for the purpose of determining the gift tax due as a result of a subsequent gift. Similarly, the IRS cannot contest the value of a gift for which the statute has run in the estate of the donor for purposes of determining the amount of estate tax that is owed. Prior to changes in the law in 1997 and 1998, the IRS had successfully asserted this position in a number of cases.
The IRS has issued regulations regarding what constitutes "adequate disclosure."8 Adequate disclosure must include: (1) a description of the property transferred and any consideration received for it; (2) the identities of the transferor and transferee and how they are related; (3) if the transferee is a trust, the trust's FEIN and a brief description of the trust terms (or a copy of the trust); (4) a detailed description of the method used to determine the fair market value of the transferred property; and (5) a statement describing any position that is contrary to IRS regulations or Revenue Rulings.
For gifts of nonmarketable assets, the key requirement for adequate disclosure is the description of how the fair market value was determined. Section 301.6501-1(f)(2)(iv) states that the return must include a detailed description of the method used to determine fair market value, including financial data used in making the determination. Any restrictions that were considered in valuing the property and any valuation discounts also must be disclosed. If the value of the entity or interest in an entity being transferred is determined based on the net asset value of the entity, the gift tax return must include a statement providing the fair market value of 100% of the entity before any discounts. When the value of an asset is not based on particular financial data, the regulations do not address what disclosure is required. For example, if recent sales are the basis for the valuation, is it sufficient to disclose that fact and the dates and prices for the sales? It would appear that the additional information relating to financial information should not be necessary in that case. If the entity that is the subject of the transfer owns an interest in another nonmarketable entity, then the information required by the regulations showing how the gift was valued also must be provided for the indirectly owned entity if the information is relevant and material in determining the value of the gift.9
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Footnotes
1 The authors would also like to thank Georgia Loukas Demeros for her contributions to this article.
2 Section 2513(a)(2).
3 Reg. 25.2513-1(b)(4).
4 See Letter Rulings 200616022 & 200422051 (withdrawal rights of children ignored in determining availability of gift splitting). But see Letter Ruling 200130030 (gift splitting allowed for amounts subject to children's Crummey powers); Letter Ruling 200218001 (wife's interest subject to ascertainable standard and therefore susceptible of valuation).
5 Reg. 26.2652-1(a)(4).
6 See Section 6501(a).
7 See Section 6501(c)(9).
8 Reg. 301-6501(c)-1(f).
9 Reg. 301-6501(c)-1(f)(4).
This article was first published in the April 2016 edition of Estate Planning magazine.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
