Lifetime Giving
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Copyright 1992, 1998 - Thomas J. Keating, IV, All Rights Reserved
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Section One - Background
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1.1 Some Legal Background. Let
us begin by describing the legal requirements for the making of
an effective gift. Those requirements are (a) a giver (the
"donor") who is legally capable of making the gift, (b)
a recipient ( the "donee") who is legally capable of
accepting the gift, (c) an intent on the part of the donor to
make the gift, (d) actual delivery of the gifted property from
the donor to the donee, (e) acceptance of the gift by the
donee, (f) absence of any valuable consideration for the gift,
and (g) relinquishment of control by the donor over the
gifted property.
If any of these ingredients is missing, the gift transaction may
be ineffective for property law and/or tax law purposes.
1.2 Some Tax Background. Since
much giving, even within a family, is motivated and structured
by tax considerations, let me now give you a brief and simplified
overview of the various applicable taxes.
These taxes are (a) gift taxes, which apply to transfers made
during a taxpayer's lifetime, and (b) estate or inheritance taxes,
which apply to transfers made at the time of a taxpayer's death.
For purposes of simplification, these taxes will be generically
and indiscriminately referred to in this memorandum as
"transfer taxes". They are assessed at two separate
governmental levels, federal and state:
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A. Federal Taxes. At
the federal level, each taxpayer has an individual gift
and/or estate tax exclusion, which can be applied
against lifetime transfers or those made at death, or
in combination.
Married couples have a combined exclusion equal to twice
the amount of the individual exclusion, usable in like
fashion. The individual exclusion in 1997 was $600,000,
but this amount will rise in the ensuing decade, in
unequal annual increments, to $1,000,000.
Once the exclusion amount is exceeded, tax commences to
be payable at a marginal rate which is at least 37% and
which rises, in half-a-dozen steps, to as much as 55%
on taxable transfers of over $3,000,000.
Under the gift tax portion of the federal law, two
additional exclusions are available, one the so-called
"annual exclusion", available on a
"use-it-or-lose-it" basis for gifts not
exceeding $10,000 (indexed to inflation) by any one
donor to any one donee in any one year, and the other,
which is unlimited in amount, for certain gifts for
education and/or medical care.
B. Maryland Taxes. At
the state level, in Maryland, there is no gift tax as
such, but there is an inheritance tax on any significant
transfers which were made within two years prior to the
donor's death.
Maryland inheritance taxes are payable at the rate of
1% on transfers to parents, spouses, children, etc., and
10% on transfers to others. There are no exclusions
such as are available at the federal level.
There is also a Maryland estate tax, but it does not
normally figure importantly in the matter of lifetime
giving.
C. Generation-Skipping Taxes.
There is a separate tax, at both the federal and state
levels, on transfers to grandchildren or other recipients
who are more than a prescribed number of years younger
than the transferor, called the generation-skipping
transfer tax.
It applies both to transfers during life and at death,
and the tax, if imposed, is at a very high rate (e.g.
55%), but there are substantial exclusions ($1,000,000
for each taxpayer, indexed to inflation), and,
accordingly, this tax presents difficulties only in
the most extraordinary cases.
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1.3 Gifts in Disguise. There
are certain types of transactions which are considered as gifts,
at least for federal gift tax purposes, even though you might not
ordinarily think of them in that context.
Such transactions would include (a) sales of assets for less than
their full fair market value, in which case the difference between
the sale price and the full value of the asset is treated as a
reportable gift, (b) loans which are made either at no interest
or at an interest rate which is below normal, and (c)
forgiveness of debt.
Any transaction of this sort, or any other transaction which might
be treated as wholly or partially a gift, should be undertaken
only with appropriate technical advice, so that the tax
consequences will not come as a surprise, and the adverse effects,
if any, can be kept to a minimum.
1.4 Gifts by Disclaimer. A
somewhat unusual type of gift transaction which can have
enormously effective tax results is a "disclaimer".
Briefly, a disclaimer is a formal action which can be taken
by the primary recipient of a gift or bequest, by which he
declares his unwillingness to accept the property involved.
If done in the manner and within the time prescribed by law,
the primary recipient is by-passed and the "unwanted"
property is deflected to whomever was named as the alternate
recipient(s) in the Will or other instrument making the gift
or bequest.
A particular attraction of this technique is that, if done
correctly, there is no gift tax cost to the person making the
disclaimer, no matter how great the value of the property
which is being disclaimed.
An even better result is sometimes possible if the prospective
recipient feels comfortable in discussing the matter with his
would-be benefactor.
In such a case it may prove possible for the prospective
recipient to "steer" the property to persons of
his own choosing, thus giving him the best of both worlds -
control over the disposition of the property without any of
the tax burdens normally associated with owning it.
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Law Offices of Thomas J. Keating IV
Centreville, Maryland, USA
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