The federal gift tax doesn’t raise much revenue (less than 2% of the total federal revenue). Like the estate tax, it is retained today for political, not revenue-raising, purposes.

It’s a complex and tricky tax. There’s no reason for a gift officer to try to grasp the whole of it; but gift planners do need to know a few things about it.

The most important is that a gift to charity is a gift for federal gift tax purposes. To see what this means, let’s consider a $20,000 charitable gift (stock or cash). The way the gift tax deals with this gift is:

• The first $14,000 of the gift is disregarded for gift tax purposes because of the $14,000 annual gift exclusion (unchanged for 2017).
• The $6,000 balance of the gift is shielded from the gift tax by the unlimited gift tax charitable deduction.
• No gift tax return is required to be filed for this outright, current gift.
• In a sense, the gift tax functions out of sight, in the background, here.

Things quickly get more complicated when we turn to deferred gift arrangements, such as the charitable remainder trust (CRT). The remainder interest given to charity via a CRT is supposed to be reported on a federal gift tax return (Form 709), even though it qualifies for the gift tax charitable deduction.

If individual A sets up a CRT and gives individual B a payout interest in the trust, A is generally regarded as making a gift to B for gift tax purposes. But the waters here can run deep. If B is A’s spouse, the gift may qualify for the gift tax marital deduction, depending on the exact payout arrangement (it will qualify, for example, if B is the only payout recipient).

One big question is whether if A sets up a gift annuity or a CRT to pay just to B, A’s gift to B qualifies for the $14,000 annual gift exclusion. For some complex reasons, this writer doesn’t think so; but others do think so. That’s part of what makes the gift tax complex—differing opinions on key issues.

We’ll consider a few other gift tax matters next time.

by Jon Tidd