Net Gift Agreement

28th September 2021 • By

Having abandoned all arguments in favour of the position that the value of a tax liability under paragraph 2035(b) was too speculative to be determined, the Tax Court concluded that such an assumption could be considered in cash or monetary value for the purposes of determining the value of a gift. As mentioned above, in the case of a transfer, a donor only has to pay gift tax to the extent that the value of the transferred property exceeds the value of a consideration in cash or monetary value that the donor receives in return. To be considered a monetary or monetary value consideration, the consideration received must be reducible to the currency value or monetary value. However, a transfer made in the ordinary course of business is in itself for remuneration in cash or monetary value and is therefore not subject to gift tax. Departing from its own precedent, the Tax Court has held that the fair value (FMV) of a donor`s taxable gift may be determined for the gift based on the recipient`s assumption of potential estate tax under paragraph 2035(b). Was the value of the hypothesis too speculative?: In McCord, the Tax Court referred to Robinette v. Helvering, 318 U.S. 184 (1943), and the accompanying case, Smith v. Shaughnessy, 318 U.S. 176 (1943).

In Robinette, in a situation involving a complex conditional reversal interest, the Supreme Court held that taxpayers could not reduce the value of a gift by the value of the interest, since there was no accepted way to determine the value of the interest actuarially and the value was therefore too speculative. In Smith, which was a mere reverse interest, the Court held that the taxpayer could reduce the value of the gift by reverse interest, since it contained only one factor and could be determined by recognized actuarial methods. In order to further strengthen its position with respect to the assessment of the assumption of tax payable under section 2035(b), the Tax Court in McCord relied on Murray, 687 F.2d 386 (Ct. Cl. 1982), and Estate of Armstrong, 277 F.3d 490 (4th Cir. 2002), on the basis that, before a person`s death, there is no recognized method of reconciling the burden of inheritance tax with a sufficient degree of certainty to be effective for Confederation. Purposes of donation tax. Although the Finance Court in McCord concluded that the facts in Murray and Estate of Armstrong differed only “slightly from the facts before it”,” the Court in Steinberg concluded that the facts of these cases were so different that the use of the opinions of the two cases was “unreasonable in relation to the present case.” In the example above, the net gift amount (“G”) is $10 million, less 40% of the net gift.

The tax (“T”) is 0.4 G. The formula that gives us the amount of tax is (0.4/1.4) times $10 million or $285,714.29. However, paying taxes on donations is hard to swallow. For some, the solution is not to pay taxes on donations. Instead, let the recipient pay taxes on donations. If the donor dies within three years of the donation, the gift tax is included in the donor`s estate. In general, this tax is payable by the estate of the deceased, which could be an injustice for heirs other than the recipient of the gift. To remedy this injustice, the beneficiary could agree to provide the funds for the payment of inheritance tax on gift tax. If the recipient agrees, it also reduces the value of the gift. Generally, when a taxable gift is made, the donor must pay taxes on the donations once the donation exceeds the annual exclusion amount and all lifetime donations exceed the applicable exclusion amount (currently $5,450,000). For example, a donation of $10 million, all taxed at 40%, would mean paying $4 million in taxes on donations.

The Tax Court also suggested in McCord that it would be difficult to determine the amount of tax payable under paragraph 2035(b) because estate tax rates and deductions can be changed (and revoked altogether). After reconsideration, the court dismissed this decision because it had found that the amount of tax was too speculative, because in cases where a gift or bequest of property could be reduced by capital gains tax on the property, the courts had uniformly held that a present value could be used for tax on the basis of the capital gains rate. Since capital gains tax rates are as likely to change as estate tax rates, the Tax Court, as the Fifth Circuit did in McCord, concluded that there was no reason to treat an inheritance or gift tax for these purposes differently than a capital gains tax. What would happen if the father in this example gave the son real estate with a fair market value of $2 million and a cost base of $500,000? If the son pays $571,429 in gift tax, the excess of this amount on the father`s basis ($71,429) is a taxable capital gain for the father. You can avoid paying capital gains tax by making a funded net gift transaction with a settling trust instead of the beneficiary. Those considering a substantial donation in 2016 should carefully consider whether the “net, net gift” technique validated at Steinberg is worth the risk. Assuming conditional estate tax after 2035 (b) by a beneficiary in the case of an older donor may be particularly attractive, as it would result in a greater reduction in the value of the gift than if a younger donor were involved. but that`s because the older donor is less likely to live three years after giving the donation. .