Gift Tax Annual Exclusion

Assume the federal gift tax annual exclusion for the current year is 19,000 dollars per donee. Renata Ferreira gives her nephew securities worth 30,000 dollars during the year and makes no other gifts to him. Which statement is correct?

1. A.The entire 30,000 dollars is excluded, because the annual exclusion applies per donor rather than per donee.Wrong. The exclusion is per donee per year. Renata could shelter 19,000 dollars for EACH separate recipient, not 19,000 dollars total per recipient plus the rest.
2. B.The nephew owes federal income tax on the 30,000 dollars in the year he receives it.Wrong. Gifts are not income to the recipient. Any gift tax obligation belongs to the donor.
3. C.Renata may not make the gift, because transfers exceeding the annual exclusion are not permitted.Wrong. There is no limit on the size of a gift. Exceeding the exclusion triggers a filing obligation, not a prohibition.
4. D.The first 19,000 dollars is excluded and the remaining 11,000 dollars is a reportable taxable gift, normally absorbed by Renata's lifetime exclusion so that no tax is actually paid.Correct. The excess over the annual exclusion is reported on a gift tax return and applied against the lifetime exclusion.

Why: The annual exclusion shelters gifts up to the stated amount PER DONEE PER YEAR, so the first 19,000 dollars of this gift is excluded entirely. The remaining 11,000 dollars is a taxable gift, which Renata reports on a federal gift tax return. Reporting it does not necessarily mean paying tax: the excess is normally applied against her lifetime exclusion, and gift tax is actually due only once that lifetime amount is exhausted. The recipient never owes income tax on a gift, and the nephew takes Renata's carryover basis in the securities rather than a stepped-up basis.

Cuthbert bought 3,000 shares of Merriwether Fund nine years ago for 42,000 dollars. He now gives the entire position to his adult niece Perpetua when it is worth 71,000 dollars. Perpetua asks her representative to re-register the shares in her name and later sells them at a gain. For the sale, Perpetua's cost basis and holding period are:

1. A.A basis of 71,000 dollars and a holding period beginning on the date of the gift.This applies stepped-up basis and a fresh holding period, which is the treatment for property inherited from a decedent, not for a lifetime gift.
2. B.A basis of 71,000 dollars and a holding period that includes Cuthbert's nine years.Basis and holding period travel together on a gift. Taking the date-of-gift value while tacking the holding period mixes two different rules.
3. C.A basis of 42,000 dollars and a holding period beginning on the date the shares were re-registered.The donee tacks the donor's holding period on a gift, so the period does not restart at re-registration.
4. D.A basis of 42,000 dollars and a holding period that includes Cuthbert's nine years, so her gain is long term.Correct. For determining gain, a donee takes the donor's carryover basis and tacks the donor's holding period.

Why: A gift of appreciated fund shares transfers the donor's cost basis and holding period to the donee for purposes of determining gain. The transfer agent simply re-registers the shares; it is not a redemption and not a sale, so no gain is recognised at the time of the gift. Perpetua therefore uses Cuthbert's 42,000 dollar basis and tacks his nine-year holding period, making her later gain long term.

Roderick transfers 40,000 dollars of fund shares into a Uniform Transfers to Minors Act account for his niece Perpetua and names HIMSELF custodian. He asks his representative about the transfer tax consequences. The representative should explain that the transfer:

1. A.Is not a completed gift, because Roderick retains control of the assets as custodian.Serving as custodian does not prevent the gift from being complete; the minor owns the property.
2. B.Is a completed gift of a present interest eligible for the annual exclusion, but the property is generally included in his gross estate because he named himself custodian.Correct. The gift is complete and qualifies for the annual exclusion, yet donor-as-custodian causes estate inclusion.
3. C.Is a completed gift and removes the property from his estate in all circumstances, since custodial accounts are irrevocable.Irrevocability settles the gift question but not the estate question. Donor-custodians face inclusion.
4. D.Is a gift of a future interest, so no annual exclusion is available and the entire amount uses his lifetime exclusion.A custodial transfer is treated as a present interest gift, so the annual exclusion is available.

Why: A transfer into a custodial account is a completed gift of a present interest, so it qualifies for the annual gift tax exclusion and any excess counts against the donor's lifetime exclusion. However, where the donor also serves as custodian and dies before the custodianship terminates, the value of the custodial property is generally included in the donor's gross estate, because he retained control over the enjoyment of the property.