Academic journal article Journal of Accountancy

Iceberg Ahead! Navigating the Murky Waters of Gift-Tax-Return Preparation

Academic journal article Journal of Accountancy

Iceberg Ahead! Navigating the Murky Waters of Gift-Tax-Return Preparation

Article excerpt

Amid the declarations of victory and chest thumping that accompanied enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001, it was easy to miss some of the legislation's finer points. For example, although the legislation reduces the estate and generation-skipping transfer (GST) taxes gradually through 2009 and repeals them completely in 2010 for that year alone, it does not eliminate the gift tax. This raises numerous compliance issues and compounds the uncertainties CPAs face when they prepare gift tax returns and allocate GST exemption. This article highlights some of these concerns and the points practitioners could overlook when they prepare gift tax returns.


The first step in preparing a gift tax return is the simplest and most important. CPAs must ask the client if he or she has ever filed such a return and should obtain copies. It's also important to ask if the client made other gifts that should have been, but were not, reported on a gift tax return. Practitioners should not accept the client's offhanded "no" for an answer, but instead should speak to his or her attorney and previous accountant and confirm in writing any assurances they give. This information will determine how much, if any, unified credit and GST exemption the client has left. (See glossary of key terms on page 79.)

If a client makes and reports current-year gifts that use up her unified credit and to which she allocates some of her GST exemption, and the CPA later discovers prior taxable gifts already had exhausted the credit or exemption, the client will owe taxes, interest and penalties. If she paid gift taxes for transfers made before 2002, the increased gift tax exemption ($1 million as of January 1, 2002) will not serve as a credit to "undo" those prior taxable gifts.


Certain transfers can be subject to both the gift and estate taxes. Simply because a client transfers property and retains an interest in it (usually under IRC section 2036 or 2038), causing all or part of the property to be included in the donor's estate, that does not mean the transfer is not a taxable gift reportable on a tax return. For example, a transfer to a grantor retained annuity trust (GRAT) or a qualified personal residence trust (QPRT) may produce a taxable gift the grantor must report. If the grantor dies before the trust's term expires, the date-of-death value of the trust property is included in her gross estate for estate tax purposes.

In Walton v. Commissioner, 115 TC 589 (2000), the Tax Court held that it is possible to structure a GRAT on a "zeroed out" basis so the value of the grantor's retained annuity exactly equals the value of the property transferred to the trust. This means no taxable gift occurs when the client funds the trust. This ruling, combined with the general inadvisability of paying gift taxes in light of possible permanent estate tax repeal, may increase the popularity of GRATs when doing lifetime estate planning.

Taxable gifts that are included in a donor's gross estate (on line 1 of the estate tax return) are not counted in the tax base twice because IRC section 2001(b) removes such gifts from the decedent's total taxable gifts (line 4) when calculating the estate tax. Such transfers therefore are not subject to double taxation although the donor nonetheless must report them on a gift tax return.


When a married taxpayer makes a gift to a third party, his or her spouse may elect to be treated as having made half of that gift. Splitting gifts can help minimize or eliminate the tax consequences a gift might create if only the donor had made it. Although this rule may seem simple, several traps for the unwary CPA could result in an ineffective split and unintended use of the unified credit by one or both spouses.

If one spouse elects to split gifts, the other must do the same. …

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