LIFETIME GIVING

AND

INTER VIVOS GIFTS

by

ANNE C. BEDERKA, ESQ.

Greenfield Stein & Senior LLP
New York, NY
Updated and Co-Authored by

JOANNE BUTLER, ESQ.

Shipman & Goodwin

Greenwich, CT

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 INTER VIVOS GIFTS

I. GIFTS NOT SUBJECT TO TAXATION

A. TAXATION OF GIFTS: BASIC PRINCIPLES

1. Tax Exclusive Nature of Inter Vivos Gifts. It has been a long-standing tenet of
trusts and estates practice that lifetime gifts offer a greater tax benefit than transfers at death.
There are two primary reasons for this. First, lifetime gifts are taxed on a “tax exclusive” basis,
meaning the transferor pays gift tax only upon the amount of the actual gift, and not upon the
amount of the gift tax paid. (In contrast, transfers at death are taxed on a “tax inclusive” basis --
estate tax is paid both upon the property transferred to the beneficiaries and upon the amount
paid to the taxing authorities.) Second, a lifetime gift removes from the transferor’s taxable
estate not only the property gifted and any gift tax paid1 but also all appreciation and income
generated between the date of the gift and the transferor’s death.

2. ATRA Provides Permanence of Exemption Amounts. The enactment of

Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), enacted in June
2001 (P.L. 107-16), altered the above analysis somewhat and created uncertainty for estate
planners. Prior to the enactment of EGTRRA, the amount that one could give away tax-free (the
“exemption amount”) was the same rerardless of whether such gifts were made during life or
upon death. However, under EGTRRA a transferor could give away tax-free during his lifetime
only $1 million (not counting the annual exclusion and other exempted transfers, discussed
below) while at death a transferor could give away as much as $3.5M (in 2009). The 2010
Taxpayer Relief Act (“2010 TRA”)(P.L. No. 111-312) once again unified the estate and gift tax
exemptions but the provisions of the 2010 TRA were set to expire in 2012. The 2010 TRA
increased the estate and generation-skipping transfer (“GST”) tax exemption amounts to $5
million for decedents dying during and generation-skipping transfers made in 2010-2012, and the
gift tax exemption amount to $5 million for gifts made in 2011-2012. Among other provisions,
the 2010 TRA also adjusted the $5 million exemption amounts for inflation, provided portability
of spouses’ exclusion amounts for estates of decedents dying and gifts made in 2011-2012 and
reduced the maximum estate and gift tax rate to 35% for decedents dying and gifts made in
2010-2012 and for generation-skipping transfers made during 2011-2012. The American
Taxpayer Relief Act of 2012 (“ATRA”) (P.L. No. 112-240) made permanent the provisions of
the 2010 TRA – the $5 million estate, gift and GST tax exemption amounts and portability of a
deceased spouse’s exemption – but also increased the top tax rate from 35% to 40%. In 2016,
the estate, gift and GST tax exemption amounts were increased for inflation to $5,450,000. 2

1
But see, IRC § 2035(b) and section 4 below.
2
From $5,250,000 in 2013, $5,340,000 in 2014 and $5,430,000 in 2015.

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 3. State Gift Tax. Only Connecticut imposes a separate gift tax taxing lifetime gifts
totaling more than $2M with a top rate of 12%. Although New York does not have a gift tax, 3
gifts made within three years of death will be included in the decedent’s New York taxable estate
if made between April 1, 2014 and January 1, 2019 while the decedent was a New York resident.

4. Gift Tax Exemption and Annual Exclusion Should be Used. Due to the tax-
exclusive nature of the gift tax, full use should be made of each donor’s $5 million (increased for
inflation) gift tax exemption to the extent that the donor’s financial and other circumstances
permit. The question of what property to give and the form the gift should take depends on a
host of factors, including whether the donor wishes the donee to have income-producing or
appreciating assets, whether the donor has a larger plan to cede control over time of an asset such
as a family business, and the donor’s basis in the property.4 To the extent possible, the gift tax
exemption should be used sooner rather than later. If the transferor dies within three years of
making the gift, the federal gift tax paid is included in the transferor’s gross estate and is itself
subject to estate tax, effectively eliminating the “tax exclusive” advantage of making a lifetime
transfer. See, IRC § 2035(b). Lifetime transfers that do not require application of the gift tax
exemption and techniques that minimize gift tax on lifetime transfers should also be used.
Discussed below are the use of annual exclusion gifts, payments of tuition and medical expenses,
gifts of partial interests in trust, and the use of a durable power of attorney to make gifts.

B. USE OF THE ANNUAL EXCLUSION

1. $14,000 Gifts to Donees

a. $14,000 Per Donee. Under IRC § 2503(b), U.S. citizens or residents are
permitted to transfer, tax-free, up to $10,000 in each calendar year to an unlimited number of
donees. Starting in 1999, the $10,000 amount began being adjusted for inflation in increments of
$1,000. 1997 Taxpayer Relief Act (P.L. 105-34), § 501(c). For 2016, the annual exclusion
amount is $14,000. Rev. Proc. 2015-53.

b. To Whom Transfers May Be Made. Annual exclusion gifts may be made

to any person, regardless of his or her relationship to the donor. A gift to two or more persons
holding title to property jointly (such as tenants in common or joint tenants) is a gift to each
person in proportion to his or her interest in the property. Helvering v. Hutchings, 312 U.S. 393
(1941). A transfer to a trust is considered a gift to the beneficiaries of the trust, as opposed to the
trust or the trustee. Reg. § 25.2503-2(a). A transfer to a corporation is considered a gift to the
individual shareholders to the extent of their proportionate interest in the corporation. Reg. §
25.2511-1(h).

3
The New York State gift tax was repealed for gifts made on or after January 1, 2000.
4
The donee of an inter vivos gift takes the donor’s adjusted basis in the property. IRC § 1015(a). This is referred to
as “carryover basis.” Basis is increased by the amount of Federal gift tax paid by the donor. IRC § 1015(d). For
the purposes of determining loss, the donee’s basis is equal to the lesser of the donor’s basis or the fair market
value of the property on the date of the gift. IRC § 1015(a).

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 c. Reciprocal Gifting is Prohibited. Where two or more donors give away
identical sums to one another’s families, and seek to apply the annual exclusion to the transfers
in order to increase the non-taxable gifts to their own families, the cross-gifts will not be eligible
for the annual exclusion. Sather v. Commr., T.C. Memo 1999-309, rev’d in part on other
grounds, 251 F.3d 1168 (2001). Similarly, when two donors establish identical trusts, each
giving the other donor’s family members beneficial interests in the trust, the transfers will be
treated as reciprocal and the annual exclusion will be denied. Rev. Rul. 85-24.

d. Gifts of Fractional Interests and Discounts. Gifts may be made of partial

interests in property. For example, a donor may make annual gifts of interests in a partnership or
a corporation or of interests in real property so that, over time, the donee’s aggregate interest in
the property increases incrementally. Discounts on valuation may be given for minority
interests, lack of marketability, blockage or built-in capital gains tax.

i. Minority Discount. The minority discount recognizes that shares

of stock representing a minority interest in a closely held company are worth less than a
proportionate share of the value of the assets of the corporation. This is because the holder of a
minority interest has no control over corporate policy or decision making with respect to that
interest. See Moore v. Commr., 62 T.C.M 1128 (1991), Ward v. Commr., 87 T.C. 78 (1986).

ii. Lack of Marketability. A lack of marketability discount may be

applied if there is no ready market for shares of stock in a closely held business. Such a discount
reflects the reality that, in the absence of a ready market, such shares would be more difficult to
sell. See Estate of Branson v. Commr., T.C. Memo 1999-231.

iii. Discount for Blockage. The blockage discount recognizes that

where one person holds a large number of publicly traded shares in a business, those shares
cannot be liquidated quickly without depressing the market and therefore must be liquidated over
time. Reg. § 25.2512-2(e).

iv. Built in Capital Gains. The discount for built in capital gains taxes
reduces the fair market value of stock to take into account potential capital gains tax liabilities
that would be incurred if a corporation liquidated, distributed or sold its assets, because no
willing buyer of the corporation’s stock will pay an amount that did not take into account a
reduction in the stock’s value for the amount of the potential tax. See, Eisenberg v. Commr., 155
F.3d 50 (1998), Dunn v. Commr., 301 F.3d 339 (2002).

e. No Carryforward. If a donor transfers less than the annual exclusion

amount to a donee during the calendar year, the balance of the annual exclusion is lost; there is
no carryforward of the unused portion of the exclusion.

2. Gift-Splitting

a. $28,000 Limit. If the donor is married and both spouses are U.S. citizens
or residents, the donor and his or her spouse are entitled to transfer up to $28,000 in each
calendar year to an unlimited number of third-party donees and the gifts will be considered to

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have been made one-half by each spouse for gift tax purposes if the proper election is made.
IRC § 2513. As noted above, because the annual exclusion amount for 2016 is $14,000, the
amount a donor and his or her spouse may transfer is $28,000 per donee per year.

b. Transfer of Partial Interests to Spouse. If a donor transfers property in part

to his spouse and in part to a third-party donee, the value of the gift to the donor’s spouse may
not be split. However, the gift to the third-party donee may be subject to gift splitting, provided
the gift is capable of being valued. Reg. § 25.2513-1(b)(4). For example, if a donor creates a
trust for his wife for life and upon her death directs the principal be paid over to his children, the
value of the trust remainder passing to the donor's children may be subject to gift-splitting. If,
however, the donor gives his wife a general power of appointment over the principal of the trust,
gift-splitting is not permitted or needed, arguably, because the retention of a general power of
appointment would make the gift incomplete until the power was actually exercised. IRC §
2513(a) and Reg. § 25.2513-1(b).

c. Election to Gift-Split. The election to gift-split must be made with respect

to all gifts made during a given calendar year to which the election applies, and cannot be
applied to a portion of the gifts. Reg. § 25.2513-1(b).

d. Consent to Gift-Splitting. The consent of both spouses is required. IRC §

2513(a)(2). Consent must be given on an annual basis no later than the April 15th following the
year in which the gifts were made, unless a request for an extension of time to file a gift tax
return has been made. IRC § 2513(b) and Reg. § 25.6081-1. Consent is signified on the gift tax
return(s) filed for that year. Reg. § 25.2513-2. Consent, once given, may be revoked, but no
such revocation can be made after the date the gift tax return is actually due (i.e., April 15th).
Reg. § 25.2513-3.

e. Liability for Tax on Split Gifts. Tax liability for the entire amount of tax
on split gifts made during a calendar year is joint and several. Reg. § 25.2513-4.

3. Annual Exclusion Applies Only to Gifts of Present Interests

a. No Gifts of Future Interests. The annual exclusion is not available for gifts of
future interests in property. Rather, the annual exclusion may only be applied to gifts of present
interests. The regulations to IRC § 2503(b) define a “present interest” as “[a]n unrestricted right
to the immediate use, possession, or enjoyment of property or the income from property (such as
a life estate or term certain.)” Reg. § 25.2503-3(b). In contrast, where an interest in property
will not “commence in use, possession, or enjoyment” until “some future date or time,” such
interest is a future interest the gift of which will not qualify for the annual exclusion. Reg. § 25-
2503-3(a). See also, Fondren v. Commr., 324 U.S. 18, 20 (1945) (in determining whether an
interest is a present or future one, the critical question is not when title to the property vests in
the donee, but rather when the donee attains “the right presently to use, possess or enjoy the
property.”)

b. Outright Gifts May Be Gifts of Future Interests. Even outright gifts may be
considered gifts of future interests if enjoyment of the gift is postponed. For example, the

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transfer of limited liability company (“LLC”) membership units by a husband and wife to their
children and grandchildren did not qualify for the gift tax annual exclusion because the donees
did not have the “unrestricted right” to the immediate use, possession or enjoyment of the LLC
units or the income therefrom -- LLC members had no right to withdraw their capital, the LLC
would likely make no distributions in the near future and any potential income distributions were
at the discretion of the LLC’s manager. Hackl v. Commr., 335 F.3d 664 (7th Cir. 2003), aff’g 118
T.C. 279 (2002). A different result was reached in Estate of Wimmer v. Commr., T.C. Memo
2012-157 (2012). The Wimmers formed a family limited partnership and were the initial general
and limited partners. The assets of the partnership consisted of publicly traded and dividend
paying stock. From 1996 through 2000, George Wimmer made gifts of limited partnership
interests to related parties. The partnership made distributions to the limited partners in 1996,
1997, and 1998 to pay federal income tax and beginning in 1999, the partnership distributed all
dividends, net of partnership expenses, to the partners in proportion to their partnership interests.
Limited partners also had access to capital account withdrawal. The court held that “the limited
partners received a substantial present economic benefit sufficient to render the gifts of limited
partnership interests present interest gifts on the date of each gift” which qualified for the annual
gift tax exclusion under IRC § 2503(b).

c. Gifts in Trust under IRC 2503(b). Gifts in trust create two separate interests: an
interest in trust income (“income interest”), and an interest in the principal of the trust upon its
termination (“remainder interest”). A remainder interest is a future interest to which the annual
exclusion may not be applied. The annual exclusion may be applied to a gift of an income
interest if -- and only if -- the trust instrument gives the beneficiary the unrestricted current right
to a determinable amount of trust income. Reg. § 25.2503-3(b). Even gifts of present interests
will not qualify for the annual exclusion if the value of the interest cannot be measured.

i. Example: If a donor creates a trust for his brother for life, with the
principal of the trust payable upon his brother’s death to his brother’s only child, the gift to his
brother of the income of the trust is a present one, to which the annual exclusion applies. The
gift to the donor’s brother’s child of the remainder of the trust is a future one, for which no
annual exclusion is permitted. (The respective values of the income and remainder interests are
determined under the rules set forth under IRC § 7520 for valuing partial interests.)

ii. Example: If, under the above example, the trustee was authorized to
accumulate income and add the same back to principal, the gift to the donor’s brother would not
be a present one and the annual exclusion would not apply. Reg. § 25.2503-3(c).

iii. Example: If instead, under the above example, the trustee was authorized
in his discretion to pay income of the trust not only to the donor’s brother, but also to the donor’s
other siblings, the annual exclusion would not apply, because the amount each sibling would
receive would depend upon the exercise of the trustee’s discretion, and could not be presently
ascertained. Reg. § 25.2503-3(c).

iv. Example: If, under the above example, the trustee was directed to
accumulate trust income until the donor’s brother reached age thirty, and thereafter to pay over
all income of the trust to the brother, the annual exclusion would not apply, because the brother’s

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right to use of the income has been postponed until a future time. See, U.S. v. Pelzer, 312 U.S.
399 (1941).

v. Example: Finally, if, under the above example, the trustee was given
discretion during the trust term to pay over principal of the trust to and among the donor’s
brother and his children, the annual exclusion would not apply to the brother’s income interest,
because the value of the income interest would depend upon the extent to which the trustee
exercised his power to invade principal, and thus would not be capable of valuation as of the date
of the gift. See, Schayek v. Commr., 33 T.C. 629 (1960), but see Jones v. Commr., 29 T.C. 200
(1975) acq. 1958-2 C.B. 6 (present interest not rendered indeterminate by trustee’s power to
invade principal because the power was limited by an ascertainable standard and the possibility
of the invasion was remote). See also, PLR 8213074.

4. Exceptions to the Present Interest Rule

a. IRC § 2503(c) Trusts for Minors. IRC § 2503(c) provides an exception to the rule
that gifts of future interests do not qualify for the annual exclusion. It allows the annual
exclusion to be applied to gifts made to minors in trust as long as certain conditions are met.

i. Statutory Requirements. IRC § 2503(c) provides as follows:

“No part of a gift to an individual who has not attained the age of 21 years on the
date of such transfer shall be considered a gift of a future interest in property for purposes
of subsection (b) if the property and the income therefrom-

(1) may be expended by, or for the benefit of, the donee before his attaining the
age of 21 years, and

(2) will to the extent not so expended-

(A) pass to the donee on his attaining the age of 21 years, and

(B) in the event the donee dies before attaining the age of 21 years, be
payable to the estate of the donee or as he may appoint under a general
power of appointment as defined in section 2514(c).”

If the above requirements are met, the entire value of the trust qualifies for the annual exclusion.

ii. No Substantial Restrictions on Trustee’s Discretion. To meet the

requirements of IRC § 2503(c)(1), the trust instrument need not direct that all income be paid
over currently to or for the benefit of the donee. The trust instrument must, however, give the
trustee discretion to pay over income to or for the benefit of the donee, and may not contain
“substantial restrictions” on the trustee’s exercise of that discretion. Reg. § 25.2503-4(b)(1).
The Tax Court has held that a direction in a trust instrument to pay the income beneficiary or
apply on his behalf so much of the trust income and principal as “may be necessary for the
education, comfort and support of the beneficiary” and to accumulate “all income not so needed”

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did not impose a substantial restriction that violated the requirements of IRC § 2503(c)(1).
Heidrich v. Commr., 55 T.C. 746 (1971), acq. 1974-2 C.B. 3. See also, Rev. Rul. 67-270
(direction in trust instrument to pay income beneficiary so much of trust income and principal as
is necessary for donee’s “support, care, education, comfort and welfare” did not impose
substantial restriction disqualifying trust from annual exclusion.) If, however, the trust
instrument limits the application of income to specific needs and circumstances, and does not
allow the trustee to expend income for the general support of the income beneficiary, the trust
will not qualify for the annual exclusion. For example, where the trust instrument permitted the
trustee to expend income only for medical and other emergencies, the trust did not qualify for the
annual exclusion under IRC § 2503(c). Faber v. U.S., 309 F. Supp. 818 (S.D. Ohio 1969),
aff’d, 439 F.2d 1189 (6th Cir. 1971).

iii. Trust Term May Be Extended At Option of Donee. While IRC §

2503(c)(2) requires that the trust fund pass to the donee upon reaching age 21, this requirement
does not prohibit the donee from extending the term of the trust upon reaching majority. Reg.
§ 25.2503-4(b)(2). A trust instrument may provide that the trust may continue beyond the
beneficiary’s reaching age 21, provided that the beneficiary is given the right, upon attaining age
21, to either (i) demand distribution of the trust fund at any time; or (ii) compel distribution
during a limited period of time by giving notice to the trustee. Rev. Rul. 74-43. If the
beneficiary does not exercise his right to terminate the trust, the trust will continue for the term
provided in the trust instrument.

iv. Reasonable Time to Exercise Right of Withdrawal. The IRS has

determined that giving the beneficiary a period of sixty days after reaching his 21st birthday to
exercise his right of withdrawal is sufficient to qualify the trust for the annual exclusion. PLRs
8521089, 8512048 and 8507017. The IRS has also found thirty days to be sufficient. PLRs
8539022 and 8039023.

v. Principal Must Be Controlled by Donee At Death. To meet the

requirements of IRC § 2503(c)(2)(B), the trust instrument must either direct that the principal of
the trust be paid over to the income beneficiary upon his death before attaining age 21, or must
give the income beneficiary a so-called “general power of appointment” over trust principal,
allowing the beneficiary to direct the disposition of the trust fund upon his death.

vi. Default Provisions Permitted in Absence of Exercise of Power of

Appointment. If the trust instrument gives the donee a power of appointment, the trust
instrument may direct that the trust fund be paid over to third parties in the event the donee fails
to exercise his power. Reg. § 25.2503-4(b)(3). Thus, a trust instrument may give the donee the
right to appoint the principal of the trust as he directs, and in default of the exercise of the power
by the donee, may direct that the trust fund be paid over to persons selected by the donor.

vii. Donor Should Not Serve as Trustee. The donor should not serve as a
trustee of a § 2503(c) trust. Because the trustee possesses significant discretion to distribute trust
income and principal, the donor who acts as trustee will be considered to have retained a power
to control the beneficial enjoyment of the trust fund. As a result, the trust fund will be includible
in the donor’s estate under IRC § 2036 and 2038. Regs. §§ 20.2036-1(b)(3) and 20.2038-1(a)(3).

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 b. Crummey Trusts. A trust may also qualify for annual exclusion treatment if the
trust instrument gives the beneficiaries a demand or withdrawal right with respect to funds
transferred into the trust, referred to as a “Crummey power.” A so-called “Crummey trust” has
advantages over both IRC § 2503(b) trusts and § 2503(c) trusts. Unlike § 2503(b) trusts, a
Crummey trust need not pay out all of its income in order to qualify for the annual exclusion.
Moreover, unlike § 2503(c) trusts, a Crummey trust need not be subject to termination when the
income beneficiary attains age 21. Even more significantly, a Crummey trust allows a donor to
apply multiple annual exclusion amounts to reduce or eliminate taxable gifts. However, as
discussed below, Crummey trusts have annual notice requirements and may have negative gift
and income tax implications for the donee.

i. Right of Withdrawal Creates Present Interest. Typically, a Crummey trust

gives beneficiaries the right to demand, on an annual basis, trust principal up to the amount of
the annual exclusion. Beneficiaries are given a limited amount of time to exercise their
withdrawal right. This right of withdrawal -- regardless of whether it is exercised -- converts
what would otherwise be a gift of a future interest in trust into a gift of a present interest that
qualifies for the annual exclusion. As will be seen below, the IRS has attempted to limit the
number of annual exclusions that may be used to offset gifts to a trust so that annual exclusions
are not applied in respect of persons with contingent interests or no interests (other than their
right of withdrawal) in the trust.

ii. Crummey v. Commissioner. In this seminal case the donors created a trust
for their four children. The trustee had discretion to accumulate trust income until each
beneficiary attained age 21, was required to pay over trust income between ages 21 and 35, and
thereafter was permitted to withhold income or distribute it to the beneficiary and his or her
issue. The trust was not set to terminate until the death of each child, whereupon trust principal
was payable to the child’s issue, subject to certain restrictions. The trust instrument also gave the
income beneficiaries the right to withdraw annually an amount equal to the lesser of $4,000 or
their pro rata share of the funds transferred into the trust that year. Crummey v. Comm’r, 397
F.2d 82 (9th Cir. 1968.) Under the trust instrument, the beneficiaries’ right to withdraw the funds
transferred into the trust expired at the end of the calendar year in which the transfer was made.
The Ninth Circuit ruled that the beneficiaries’ right to demand immediate payment gave them a
present interest in the annual additions to the trust. The annual exclusion was therefore found to
apply to the full value of the property that was subject to the beneficiaries’ right of withdrawal,
even though the income of the trust was not to be distributed currently and the trust was not
scheduled to terminate when the beneficiaries reached age 21.

iii. Cristofani Expands Circle of Crummey Holders. In a subsequent case, the

IRS sought to disallow the annual exclusion for gifts to a trust where Crummey powers were
given to beneficiaries with only contingent remainder interests in the trust. Cristofani Estate v.
Comm’r, 97 T.C. 74 (1991). Under the trust created by the donor, trust income was payable to
the donor’s two children, and the trustees also were given discretion to apply principal for the
benefit of the children. Upon the donor’s death, trust principal was payable to the donor’s living
children and to the issue of any deceased child. The donor’s five grandchildren therefore had
only contingent remainder interests in the trust. The trust agreement gave each of the children

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and grandchildren a power of withdrawal equal to the $10,000 annual exclusion, which power
expired 15 days after funds were transferred to the trust. The donor claimed seven $10,000
annual exclusions for the transfers to the trust, and the IRS sought to disallow five of such
exclusions on the ground that the donor’s grandchildren did not have present interests in the
trust. The Tax Court ruled that the grandchildren’s right to withdraw principal within 15 days of
a contribution gave them a present interest in the trust and therefore that the donor was entitled to
claim annual exclusions corresponding to the funds subject to a power of withdrawal by his
grandchildren. In so holding, the Court observed that in determining whether a present interest
exists, the critical inquiry is not whether the beneficiary actually will receive present enjoyment
of the property, but rather is whether the beneficiaries have a legal right to withdraw funds from
the trust. The IRS acquiesced in 1992 and again in 1996 to the result only in the Cristofani
decision. 97 T.C. 74 (1991), acq. in result only, 1992-2 C.B. 1, acq. in result only, 1996-2 C.B.
1.

iv. IRS Has Sought to Limit Application of Cristofani. The IRS stated that it
will not seek to deny annual exclusions where Crummey powers are held by income
beneficiaries and vested remaindermen, but would seek to challenge where facts and
circumstances indicate that the donor did not intend to make a bona fide gift of a present interest.
The IRS also indicated that it would mount a challenge in those circumstances where it can be
shown that there was a “prearranged understanding that the withdrawal right would not be
exercised or that doing so would result in adverse consequences to the holder . . . .” AOD 1996-
010. See, TAM 9628004, in which the IRS denied annual exclusions based on evidence of a
pre-arranged understanding that the beneficiaries would not exercise their withdrawal rights
where: (i) the trust agreement did not require notice to Crummey holders of their withdrawal
rights or of additions to the trusts in question; (ii) in the year the trusts were created, the
Crummey holders’ withdrawal rights expired before the transfers were actually made to the
trusts, leaving no time for the exercise of those rights; (iii) many of the Crummey holders had no
interest in the trusts other than their right of withdrawal; and (iv) none of the Crummey holders --
even those who had no other interests in the trust funds -- exercised their right of withdrawal.
See also, TAM 9731004, in which the IRS denied annual exclusions for the primary
beneficiaries’ children and siblings who had only contingent income and remainder interests and
for spouses of the beneficiaries children and siblings who had withdrawal powers but no other
interests. But see, Kohlsaat Estate v. Commr., T.C. Memo 1997-212 (rejecting IRS position that
contingent or no interests combined with a lack of exercise of Crummey powers signaled
improper pre-arranged plan, and allowing annual exclusions for contingent beneficiaries who had
never exercised their withdrawal rights).

v. Notice of Demand Right. In order for additions to a Crummey trust to

qualify for the annual exclusion, reasonable notice must be provided to the donees of their right
of withdrawal. The IRS has taken the position that the annual exclusion is not available unless
the beneficiaries receive current notice of their right to withdraw funds. Rev. Rul. 81-7. But see,
Turner Estate v. Commr., T.C. Memo 2011-209 (indirect gifts to beneficiaries when grantor paid
life insurance premiums on policies held in a trust qualified for the annual exclusion
notwithstanding that beneficiaries did not receive notice of the transfers). An addition to a trust
qualifies as a present interest even if contributed in one year where the beneficiary may exercise
the demand right in the following year. Rev. Rul. 83-108. Beneficiaries may not waive their

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right to notice of future additions to the trust. TAM 9532001. Prudent planning therefore
requires that the trust instrument include a notice requirement, that actual written notice be given
to the beneficiaries each time an addition is made to the trust, and that an acknowledgement of
the right of withdrawal be executed by all beneficiaries each time an addition is made.

vi. Notice to Minors. Where Crummey holders have not yet attained
majority, notice must be given to a parent or guardian of the minor. PLR 8133070.

vii. Reasonable Time to Exercise Right of Withdrawal. The IRS has not
stated what constitutes a reasonable time within which to exercise withdrawal rights but several
Private Letter Rulings have held that where a beneficiary has at least 30 days to exercise his
withdrawal rights was a reasonable opportunity. See, PLRs 200130030, 200123034 and
200011054. Note that in Cristofani the Crummey holders were given 15 days to exercise their
rights of withdrawal, and the IRS did not challenge that period as unreasonable. But see, TAM
9141008 (20 days found to support conclusion that donor did not intend Crummey holders to
exercise right of withdrawal).

viii. Requirement of Transferable Assets. No annual exclusion is available

unless the trust owns assets that may be used to satisfy a withdrawal demand. TAM 8445004.

ix. Gift Tax Consequences of Crummey Powers. The annual power to

withdraw funds from the trust is considered to be a general power of appointment held by the
Crummey holder under IRC § 2514(c). To the extent that the Crummey holder does not exercise
his or her right of withdrawal in a given year, there is a release or lapse of this power of
appointment, which may constitute a taxable gift from the Crummey holder to the person or
persons who will benefit from the lapse under the terms of the trust. IRC § 2514(b) and (e).

x. $5,000 or 5% Exception. There is a safe harbor provision, however,

which provides that no taxable gift occurs unless the property that is subject to the lapsed power
of withdrawal exceeds the greater of $5,000 or 5% of the total value of the property from which
the withdrawal power could have been satisfied (the so-called “five and five exception”). IRC §
2514(e). Therefore, a lapse of a right to withdraw less than $5,000 (or 5%) annually will not
have any gift tax consequences to the Crummey holder. A gift tax problem may arise, however,
where the donor wishes to take full advantage of the annual exclusion, and therefore gives the
Crummey holder the right annually to withdraw the full amount of the addition to the trust. In
such an instance, if the withdrawal power is not exercised, the Crummey holder may be treated
as having made a gift of the difference to the persons who would take the trust funds in default of
the exercise of the withdrawal power.

xi. Avoiding Completed Gifts to Third Persons. The provisions of IRC §

2514 apply only in those circumstances where the lapse of the Crummey holder’s withdrawal
power would constitute a completed gift to a third person or persons. Therefore, where a
Crummey holder and/or his estate is entitled to all of the income of a trust and is also entitled to
all of the principal, no gift tax consequences arise from the lapse of the annual power of
withdrawal. This is because the lapse of the power of withdrawal does not provide a benefit to
any third person. See, Reg. § 25.2511-2(b) and PLR 8142061. Moreover, where a Crummey

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holder is given the right to direct the disposition of the trust principal upon his death through a
power of appointment, no gift tax consequences arise from the lapse of his annual power of
withdrawal, because the Crummey holder’s retained power to appoint the trust fund results in no
completed gift being made at the time the withdrawal power lapses. PLRs 8825111, 8545076,
8517052 and 8229097. See also, Reg. § 25.2511-2(b). Therefore, trust instruments often give
Crummey holders a general or limited power of appointment over the trust fund.

xii. Hanging Powers. To avoid the gift tax consequences of a completed gift
upon the lapse of a right of withdrawal, practitioners have also given Crummey holders so-called
“hanging powers” over trust principal. Under this approach, the right to withdraw the amount of
the annual addition to the trust does not lapse automatically upon the expiration of the notice
period. Rather, in each year of the trust, the right of withdrawal lapses only to the extent of the
greater of $5,000 or 5% of the property from which the withdrawal could have been satisfied (as
provided in IRC § 2514(e)). The balance of the funds over which the Crummey holder was
given a right of withdrawal continues to be subject to that right of withdrawal.

Example: In year 1 of the trust, the donor contributes $10,000. The donor’s son has the
right to withdraw the entire $10,000 but does not elect to exercise his right. At the end of
the year, the son’s right to withdraw trust principal lapses, but only to the extent of the
greater of $5,000 or 5% of the trust assets. The balance of $5,000 continues to be subject
to the son’s right of withdrawal. In year 2, the donor again contributes $10,000 to the
trust, over which the son has a Crummey power. The son now has a right to withdraw
$15,000 -- $5,000 hanging over from year 1 and $10,000 for year 2. If the son again
elects not to exercise his right of withdrawal, his withdrawal right will lapse with respect
to $5,000 of such funds, and his right to withdraw the remaining balance of $10,000 will
continue, and so on.

xiii. Only 1 Five and Five Exemption Per Donee. Under IRC § 2514(e), a
Crummey holder is entitled to only one “five and five” exemption each year. Thus, a donor may
not avoid potential gift tax problems by creating multiple trusts for the same donee. Rev. Rul.
85-88.

xiv. Avoiding Tax Savings Language. In drafting a hanging power provision

in a Crummey trust, the practitioner must be careful to avoid any language that suggests that the
purpose of the provision is solely one of tax savings. No reference should be made to avoiding a
taxable gift, and the amount of the withdrawal power that will lapse annually should not be tied
to the amount that may lapse without creating a taxable gift. The provision should state simply
that each Crummey holder’s right of withdrawal shall lapse only to the extent of $5,000 or 5% of
the trust assets. See, TAM 8901004.

xv. Income Tax and Estate Tax Implications for Donees. A Crummey holder
may be considered to be the owner, for income tax purposes, of those trust funds over which he
or she has a right of withdrawal and may be required to report as income a percentage of trust
income, deductions, and credits corresponding to his or her ownership interest. IRC § 678. To
the extent that a Crummey holder continues to have a right of withdrawal over trust property at
the time of his or her death (prior to the termination of the trust), the property that is subject to

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the right of withdrawal is includible in the Crummey holder’s estate under IRC § 2041.
Moreover, to the extent that a Crummey holder failed to exercise a power of withdrawal in the
years before his or her death, trust property that was the subject of taxable lapses may also be
includible in the Crummey holder’s estate under IRC § 2041. See, Reg. § 20.2041-3(d). If the
Crummey holder survives to the termination of the trust, the Crummey holder will own the trust
property outright, and the entire value of the property will be includible in her estate under IRC §
2033.

C. TUITION AND MEDICAL EXPENSES

1. Tuition Exclusion

a. Tuition Paid to Qualified Educational Organization is Not a Taxable Gift.

IRC § 2503(e) provides that any amount paid on behalf of an individual as tuition to a qualified
educational organization for education or training is not a taxable gift. To qualify for the tuition
exclusion, the educational organization must be one that “normally maintains a regular faculty
and curriculum and normally has a regularly enrolled body of pupils or students in attendance at
the place where its educational activities are regularly carried on.” Reg. § 25.2503-6(b)(2). The
educational organization must also have as its primary purpose the presentation of formal
instruction. If an organization is engaged in both educational and non-educational activities, the
tuition exemption is not available unless the non-educational activities are merely “incidental” to
the formal educational instruction. Reg. § 1.170A-9(b). The term “educational organization”
includes primary, secondary, preparatory and high schools, and colleges and universities. Reg. §
1.170A-9(b). It would likely not include summer camp, nursery, pre-school or day care
programs that were merely custodial as opposed to educational. See, Rev. Rul. 78-446.

b. Tuition Must Be Paid Directly to School. The tuition exclusion is

available without regard to the relationship between the donor and the donee. Reg. § 25.2503-6.
However, the tuition must be paid directly to the education institution; it may not be reimbursed
to the student. Reg. § 25.2503-6(b)(2).

c. Tuition May Be Prepaid. The amount of the tuition exclusion is unlimited

and in addition to the § 2503(b) annual exclusion. Tuition for future years may be pre-paid by a
donor provided that tuition must be forfeited and cannot be subject to refund in the event the
donee ceases to attend school. TAM 199941013. See also PLR 200602002.

d. Exclusion Does Not Apply to Education Trusts. The exclusion is not

available to funds placed in trust for a student’s education. Reg. § 25.2503-6(c). Moreover, the
tuition exclusion may not be applied to payments made to pre-paid tuition programs under IRC §
529. IRC § 529(c)(2)(A)(ii).

e. Exclusion Does Not Cover Living or Other Expenses. The exclusion

applies to tuition only for full-time or part-time studies. It does not cover amounts paid for
books, supplies, room and board, or any other incidental expenses that do not constitute tuition.
Reg. § 25.2503-6(b)(2).

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 2. Medical Expense Exclusion

a. Medical Expenses Paid Directly to the Provider Are Not Taxable Gifts.
Any amount paid on behalf of an individual to a medical provider in respect of medical care is
not a taxable gift. IRC § 2503(e). This exclusion also applies without regard to the relationship
between the donor and the donee. Reg. § 25.2503-6. The exclusion applies to expenses
“incurred for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the
purpose of affecting any structure or function of the body or for transportation primarily for and
essential to medical care.” Reg. § 25.2503-6(b)(3). The exclusion also applies to amounts paid
for medical insurance on behalf of any person. Id.

b. Medical Expenses Must Be Paid Directly to Service Provider. To qualify

for the unlimited exclusion for amounts paid to a medical provider for medical care, payment
must be made directly to the service provider, and cannot be reimbursed to the donee. Regs. §
25.2503-6(b)(1)(ii) and (c).

c. Exclusion Does Not Apply to Amounts Reimbursed by Insurer. The

exclusion does not apply to amounts paid for medical care that are reimbursed by the donee’s
insurance. Reg. § 25.2503-6(b)(3).

d. Exclusion is Not Available for Contributions to § 529A State-Run

Qualified ABLE Programs. These programs are established and maintained by a state (or its
agency or instrumentality) for tax years beginning after December 31, 2014. A person may
make contributions to an account established for the sole purpose of supporting individuals with
disabilities to maintain their health, independence and quality of life. IRC § 529A(c)(2)(A)(ii).
The medical expense exclusion does not apply to contribution to ABLE Programs – any
contribution is treated as a gift of a present interest qualifying for the annual exclusion. Prop.
Reg. § 1.529A-4(a)(1).

II. DURABLE POWERS OF ATTORNEY

A power of attorney is a document by which an individual (the “principal”) grants to one or more
persons (the “agent” or “attorney-in-fact”) the authority to perform certain financial transactions
on his or her behalf. A “durable” power of attorney allows the agent to act even if the principal
becomes incapacitated and unable to make decisions on his or her own behalf. Durable powers
of attorney are a popular estate planning tool because they allow individuals to delegate
management of their financial affairs in the event of incapacity through the use of a relatively
simple document. The powers given to an attorney-in-fact may be very broad or, conversely,
may be quite limited.

A. CURRENT LAW IN NEW YORK

1. New York Statutory Short Form Power of Attorney. The New York State
legislature enacted sweeping changes to New York’s power of attorney statute which became
effective on September 1, 2009. Amendments to the statute became effective as of September
12, 2010, retroactive to September 1, 2009. N.Y. Gen. Oblig. Law §§ 5-1501 through 5-1514.
The changes to the statute were intended to provide safeguards against abuse and misuse of the

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power of attorney. The new law requires that all powers of attorney5 executed in New York
contain a “cautionary statement” to the principal and “important information” to the agent
regarding the agent’s fiduciary duties using the exact wording provided in the statute. GOL § 5-
1513. The new power of attorney must be signed by both the principal and agent and
acknowledged by them before a notary public. GOL § 5-5-1501B(1)(b) and (c). The effective
date of the agent’s authority is the date the agent signs in front of a notary public. Any writing
that complies with the new statutory requirements may be used as a power of attorney. GOL §
5-1504. However, there are benefits of using the statutory short form. First, if the statutory short
form is used, third parties (i.e., financial institutions) are legally required to honor it. GOL § 5-
1501(2)(q) and § 5-1504(1). There is nothing that requires the acceptance of a form that is not a
statutory short form. GOL § 5-1504(a)(6). Second, if the statutory short form is used, the
powers enumerated in the form will be construed in accordance with the detailed construction
provisions of the statute, thereby reducing the possibility of disagreement over the scope and
meaning of the enumerated powers.

2. New York Statutory Gifts Rider. The most significant change in the new power
of attorney statute is the Statutory Gifts Rider (“SGR”), a separate document that supplements
the statutory short form and when read together comprises one document. GOL § 5-1514(9)(c)-
(d). If the SGR is not completed, the agent may only make gifts of $500 per year in the
aggregate, if the principal grants that authority under the power of attorney. GOL § 5-1502I(14).
The purpose of the SGR is to give gift giving authority to the agent. The SGR is divided into
three categories: (a) limited authority -- i.e., for annual gift tax exclusion amount gifts to the
principal’s spouse, children and more remote descendants and parents, (b) modified authority --
i.e., for gifts less than or in excess of the annual gift tax exclusion amount to other beneficiaries
or other gift transactions6, and (c) specific authority for gifts of any amount to the agent or
agents. The principal must sign the SGR in front of two witnesses and the principal’s signature
must be acknowledged before a notary public.

3. Modifications. Both the statutory short form power of attorney and SGR may be
modified to make additional provisions, including language to limit or supplement the authority
granted to the agent. GOL § 5-1503. For example, the statutory short form can be changed from
a durable to a non-durable power of attorney.

4. Revocation. The execution of the statutory short form power of attorney does not
automatically revoke any other powers of attorney previously executed by the principal unless
the principal so indicates.

5
Defined in GOL § 5-1501C to exclude powers of attorney granted in connection with certain commercial and
business transactions.
6
Such as gifts in trust for the benefit of persons designated by the principal or for purposes that are in the principal’s
best interests such as for estate planning purpose, if the principal so designates.

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B. ESTATE TAX IMPLICATIONS OF INVALID GIFTS

1. Invalid Gifts Result in Inclusion in Donor’s Estate. When the principal dies, the
IRS looks to state law to determine whether gifts made by his agent under a power of attorney
were authorized under the instrument. See, Commr. v. Estate of Bosch, 387 U.S. 456, 465
(1967); Estate of Goldman v. Commr, T.C. Memo 1996-29; TAM 9342003. Where a gift made
under a durable power of attorney is found to be invalid under state law and the terms of the
instrument, the property subject to the gift becomes includible in the principal’s gross estate as a
revocable transfer under IRC § 2038. TAM 9342003, TAM 9403004. See also, Estate of
Goldman v. Commr, T.C. Memo 1996-29 (NY power of attorney did not explicitly authorize
gifts and absence of intent by principal to make gifts); Gaynor Estate v. Commr., T.C. Memo
2001-206 (CT power of attorney did not authorize gifts and no showing that decedent had any
established gift giving pattern or that she intended to include such a power in the power of
attorney).

2. Valid Gifts Avoid Inclusion in Donor’s Estate. Conversely, where the IRS
determines that the gift would be upheld under state law even in the absence of a express
authorization in the instrument to make a gift, the gift will not be included in the principal’s
gross estate under IRC § 2038. See, e.g., TAM 199944005 (applying Texas law, Service upheld
validity of gifts for estate tax purposes where instrument granted attorney-in-fact broad powers,
gifts were relatively small compared to size of principal’s estate, gifts did not disadvantage
principal, and gifts were consistent with principal’s prior pattern of gifting and her testamentary
plan); Estate of Ridenour, T.C. Memo 1993-41 (applying Virginia law, court ruled gifts were
valid for estate tax purposes where gifts were consistent with principal’s past pattern of gifting);
Estate of Bronston v. Commr, T.C. Memo 1988-510 (applying New Jersey law, court ruled gifts
were valid where instrument authorized agent to “grant and convey any property” owned by the
principal and gifts were consistent with principal’s past pattern of gifting).

C. PRACTITIONERS MUST USE NEW NY STATUTORY SHORT FORM

To avoid having to defend the validity of gifts made under a power of attorney,
practitioners should be certain to use the new New York statutory short form. Moreover, clients
that executed powers of attorney before 2009 should be counseled to execute new forms
containing the SGR. Failure to do so may cause a battle on two fronts – between beneficiaries
fighting over the propriety of the gifts made, and between the principal’s estate and the IRS.

III. GRANTOR RETAINED INTEREST TRUSTS

(GRITs, GRATs, GRUTs and QPRTs)

A. GRANTOR RETAINED INCOME TRUST (“GRIT”)

1. Generally. A GRIT is an irrevocable trust created by an individual (the “grantor”)

during his or her lifetime. The grantor transfers property to a trust while retaining the right to
receive income from the trust for a specified term of years (or until the grantor’s earlier death).
At the end of the trust term, the trust remainder is distributable to the beneficiaries named in the
trust instrument. Often the trust instrument provides that if the grantor dies prior to the

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expiration of the stated term of years, the remainder will revert to the grantor’s estate (a
“reversion”) or in the alternative, the grantor was granted a limited power of appointment.

2. A GRIT Provides A Significant Tax Advantage. The tax benefit of a GRIT is that
it allows the donor to pass property to the remainder beneficiaries at a reduced gift tax cost: the
value of the grantor’s retained interests in the trust is not subject to gift tax; rather, gift tax is
imposed only on the fair market value of the remainder interest. The value of the remainder
interest is determined by subtracting the income and reversionary interests from the fair market
value of the property transferred to the trust. If the grantor survives the term of the GRIT, the
value of the property transferred, including any post-transfer appreciation, will not be included in
the grantor’s estate.

3. GRITs Provide No Tax Advantages for Inter-Family Transfers. Congress enacted

IRC § 2036(c) (later repealed) and IRC § 2702 to restrict a GRIT’s favorable results for transfers
between family members. Under IRC § 2702, where trust assets pass to family members, the
interest retained by the grantor or an applicable family member is valued at zero, and the assets
transferred to the GRIT are valued at full fair market value for gift tax purposes. Nevertheless, a
“common law” GRIT is still a favorable tax-planning device if a grantor wants to make a gift in
trust to someone who is not a family member. This favorable tax treatment is illustrated below.

4. If Grantor Dies During Trust Term the Tax Advantange is Lost. If the grantor
dies prior to the end of the term, the value of the property in the GRIT is includible in the
grantor’s estate under IRC § 2036, which provides in pertinent part that “the value of the gross
estate shall include the value of all property to the extent of any interest therein of which the
decedent has at any time made a transfer by trust or otherwise under which he retained for his
life . . . the right to the income from the property.” (A credit will be given for the gift tax paid by
the grantor when the trust was created.) If the grantor had retained the right to receive only a
portion of the GRIT income only that portion of the GRIT necessary to provide the retained
income payment (without reducing or invading principal) is includible in the grantor’s estate if
the grantor does not survive the retained trust term. Reg. § 20.2036-1(c)(2)(i), (iv), Ex. 4, (3),
IRC § 20.2039-1(e), (f). If it is expected that the grantor will not survive the trust term, the
GRIT could permit the trustee to prepay the grantor’s interest. If the grantor should die after
such prepayment the trust property would not be includible in the grantor’s estate because the
grantor had no retained interest under IRC § 2036.

5. Valuing Partial Interests in Trust. With respect to trusts such as GRITs (as well as
GRATs discussed below) in which the grantor has retained an interest, the value of the gift is the
present value of the property transferred less the value of the grantor’s retained interests in the
property. Reg. § 25.2512-5(d)(2). To determine the value of the gift, reference is made to the
IRS tables set forth in IRC § 7520.7 These tables are based on two components: (i) a mortality
component, which establishes the life expectancy of the grantor or other individual whose life

7
IRC § 7520 states that “the value of any annuity, interest for life or a term of years or any remainder or
reversionary interest shall be determined (1) under the tables prescribed by the Secretary and (2) by using an
interest rate . . . equal to 120 percent of the federal midterm rate in effect under § 1274(d)(1) for the month in
which the valuation date falls.”

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measures the interest; and (ii) an interest rate component, which assumes a given rate of return
from the property based upon when the gift was made. (Where an interest has been retained only
for a term of years rather than for the life of an individual, the mortality component is not
relevant unless the grantor has retained a reversionary interest.) The assumed rate of return
varies monthly. The rate of return is set at the applicable federal rate (“AFR”) for the month in
which the gift is made. IRC § 7520(a)(2). The IRS publishes the IRC § 7520 rate in monthly
revenue rulings.

B. OVERVIEW OF GRANTOR RETAINED INTEREST TRUSTS AND IRC § 2702

1. Section 2702. As discussed above, Congress enacted IRC § 2702 to restrict the
favorable tax treatment resulting from the use of trusts to effect transfers between family
members. Section 2702 provides special rules to determine the amount of the gift when a
grantor makes a transfer in trust to or for the benefit of a member of his family and the grantor or
an applicable family member retains an interest in the trust. Reg. § 25.2702-1(a). Under IRC §
2702(e)8 a “member of the family” means with respect to any individual, (A) such individual’s
spouse, (B) any ancestor or lineal descendant of such individual or such individual’s spouse, (C)
any brother or sister or the individual and (D) any spouse of any individual described in (B) or
(C). If IRC § 2702 applies to the transfer, the value of interest retained by the grantor or
applicable family member is valued at zero and the entire transfer to the trust is subject to gift
tax. Reg. § 25.2702-1(b). However, if the interest retained by the grantor is a “qualified
interest,” the zero valuation rule is inapplicable and the regular valuation rules under IRC § 7520
apply. Reg. § 25.2702-2(b)(2).

2. Qualified Interests. A “qualified” income interest in a trust can be one of two

kinds: a qualified annuity interest (in a trust commonly referred to as a GRAT), or a qualified
unitrust interest (in a trust commonly referred to as a GRUT). These qualified income interests
are patterned after the income interests given in charitable remainder trusts. See IRC § 664(d)
and the Regulations relating thereto. A qualified annuity interest is an irrevocable right to
receive a fixed amount, which can be either a stated dollar amount or a fixed fraction or
percentage of the initial fair market value of the property transferred to the trust as finally
determined for federal tax purposes. Reg. § 25.2702-3(b)(1). A qualified unitrust interest is an
irrevocable right to receive a fixed fraction or percentage of the net fair market value of the trust
assets, determined annually. Reg. § 25.2702-3(c)(1). A qualified interest also includes payments
to the grantor’s estate if the grantor dies during the stated term. Reg. § 25.2702-3(e) Exs. 5 and
6. 9 The regulations had provided that only the interest of the grantor and not the grantor’s estate
was a qualified interest. If the annuity or unitrust amount is payable to the grantor’s estate for
the remainder of the term if the grantor dies before the term ends, the value of the annuity or
unitrust interest (and the remainder) may be determined without regard to any mortality factor.

8
Which references IRC § 2704(c)(2),
9
The regulations adopted the decision in Walton v. Commr., 115 T.C. 589 (2000) explained below, acq. Notice
2003-72, 2003-44 I.R.B. 964.

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 a. Fixed Term for Annuity or Unitrust Interest. The governing instrument
must fix the term of the annuity or unitrust interest. The term must be for the life of the term
holder, for a specified term of years or for the shorter of those two periods. Reg. § 25.2702-
3(d)(4).

b. Amount Must Be Payable At Least Annually. Both the annuity amount, in

the case of a GRAT, and the unitrust amount, in the case of a GRUT, must be payable not less
frequently than annually. Regs. § 25.2702-3(b)(3), (c)(3).

c. Right to Receive Excess Income Is Not a Qualified Interest. The fixed

amount or percentage may not, in any given year, exceed 120 percent of the amount or
percentage payable in the preceding year. Regs. § 25.2702-3(b)(1)(ii) and (c)(1)(ii). A qualified
interest will not fail simply because the trust instrument permits income in excess of the fixed
amount or percentage to be paid to the qualified interest holder. However, the right to receive
excess income is not a qualified interest and is not taken into account in valuing the qualified
interest. Regs. § 25.2702-3(b)(1)(iii), (c)(1)(iii) and (e), Exs. 1 and 2.

d. Incorrect Valuations of Trust Property. With respect to annuities that are

based on a fraction or percentage of the initial fair market value of the trust, and also with respect
to unitrust interests, the trust instrument must contain provisions meeting the requirements of
Reg. § 1.664-2(a)(1)(iii) or Reg. § 1.664-3(a)(1)(iii), which require payment adjustments or
repayment in the event that the fair market value of the trust property has been incorrectly
determined. Regs. § 25.2702-3(b)(2) and (c)(2).

e. Period for Payment. Payment of the annuity or unitrust amount may be

based on either the anniversary date of the creation of the trust or the taxable year of the trust.
The governing instrument must contain provisions relating to pro rata computation of the annuity
or unitrust amounts in the case of a short taxable year and the last taxable year of the trust. Regs.
§ 25.2702-3(b)(3) and (c)(3).

f. Distributions to Third Parties Prohibited. Distributions from a GRAT or

GRUT may not be made to anyone other than the annuitant or unitrust recipient and the term of
the trust must be fixed. Regs. § 25.2702-3(d)(2) and (3) and (e), Ex. 7.

g. Commutation of Interests Prohibited. The governing instrument of either

type of qualifying income interest must prohibit commutation of the term holder’s interest, i.e.,
prepayment of the interest for its actuarial value. Reg. § 25.2702-3(d)(5).

h. Additional Contributions to the Trust. The trust instrument for a GRAT

must prohibit any additional contributions to the trust. Reg. § 25.2702-3(b)(5). There is no
restriction on additional contributions to a GRUT.

3. If the Grantor Dies During the Trust Term the Tax Advantage is Lost. If the
grantor dies before the end of the term, all of the trust property is includible in the grantor’s gross
taxable estate and subject to estate tax. (A credit will be given for gift tax previously paid in
respect of the transfer to the trust.) For estates of decedents dying after July 13, 2008, the IRS

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will include in the grantor’s estate, only that portion of the GRAT or GRUT principal necessary
to provide the retained annuity or unitrust (without reducing or invading principal) if the grantor
does not survive the trust term. The portion of the trust principal includible in the grantor’s estate
under IRC 2036 shall not exceed the fair market value of the trust’s principal at the decedent’s
date of death. See Regs. §§ 20.2036-1(c)(2)(i), (iv), Ex. 6, (3), 20.2039-1(e), (f).

C. GRANTOR RETAINED ANNUITY TRUST (“GRAT”)

1. Generally. A GRAT is an irrevocable split-interest trust whereby the grantor

transfers property to a trust and retains a “qualified” annuity interest (as defined above) for a
term of years, with the remainder passing to beneficiaries designated in the trust instrument at the
end of the trust term. The value of the GRAT remainder interest subject to gift tax is the fair
market value of the property transferred to the trust less the value of the retained annuity interest.
No discount is allowed for a reversion in a GRAT because the contingent reversion is not a
“qualified interest” and is, therefore, valued at zero. IRC § 2702(b), see also Reg. § 25.2702-
3(e), Ex. 1 and PLR 9239015. The annuity percentage and term can be chosen, however, so that
the value of the annuity payments over the term of the GRAT will almost equal or actually equal
the entire value of the transferred property, resulting in a very small or, in the case of the
“zeroed-out” GRAT discussed below, no current gift.

2. GRAT Tax Advantages. Like GRITs, a GRAT offers a significant tax advantage:
the value of the grantor’s retained interests in the trust is not subject to gift tax; rather, as stated
above, gift tax is imposed only on the fair market value of the remainder interest. If the grantor
survives the term of the GRAT, the value of the property transferred, including any post-transfer
appreciation, will not be included in the grantor’s estate. GRATs are most tax-effective when
appreciating assets are transferred to the trust. This is because the annuity amount paid to the
interest holder is determined at the time the property is initially transferred to the trust, without
regard to post-transfer appreciation. If the assets in the GRAT grow in excess of the IRC § 7520
rate, the excess benefits the remaindermen and will escape gift tax as well as estate tax. Because
the excess benefits only the remaindermen, a grantor can potentially pass more to his children
through a GRAT than he can by a direct gift to them.

3. Minimum Value Annuity Interest. As noted above, the annuity percentage and
term for a GRAT can be chosen so that the present value of the annuity payments over the term
of the GRAT will equal the entire value of the transferred property, resulting in no current gift
tax on the remainder interest. The language of IRC § 2702 does not prohibit structuring a GRAT
in this manner. Originally, IRC § 664 applying to charitable remainder trusts did not provide for
any minimum value of the remainder but this provision was amended to provide for a minimum
value. IRC § 664(d)(1)(D). No amendment was made to IRC § 2702 at that time. Therefore, it
seems that the value of a GRAT remainder may be very small, even zero.

4. The Walton Decision. The IRS’s position on zeroed-out GRATs was rejected by
the Tax Court in Walton v. Commr., 115 T.C. 41 (2000), the first reported decision to address
this issue. In Walton, the value of the remainder interest was less than .003% of the value of the
property contributed to the GRAT. The IRS did not argue that the annuity interest of the grantor
was not a qualified interest. The IRS questioned whether the interest created by the grantor’s

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estate was a qualified interest. In Walton, the IRS argued that the transferor created three
interests in each GRAT: an annuity payable to her during her life, the contingent interest of her
estate to receive annuity payments in the event she died prior to the expiration of the term, and
the remainder interest. Because the contingent interest was not a qualified interest, the IRS
concluded, it was valued at zero. The Tax Court disagreed with the IRS and held that payment to
the grantor’s estate should not be ignored in valuing the grantor’s interest in the trust. See B 2
supra.

5. Qualified Interest in Grantor’s Spouse. The value of the gift to the remainder
beneficiaries will be smaller if the qualified interest is retained by the grantor and the grantor’s
spouse than it would be where only the grantor, and not the grantor’s estate, retains a qualified
interest, if the grantor’s spouse has a successive qualified interest in the property transferred to
the trust and the grantor retains the power to revoke the spouse’s interest. Reg. § 25.2702-3(e),
Ex. 8.

D. GRANTOR RETAINED UNITRUST (“GRUT”)

1. Generally. A GRUT is an irrevocable split-interest trust whereby the grantor

transfers property to a trust, retaining a “qualified” unitrust interest (as defined above), with the
remainder passing to the beneficiaries named in the trust instrument at the end of the trust term.
The value of the GRUT remainder interest is the fair market value of the property transferred to
the trust minus the value of the retained unitrust interest. As with a GRAT, no discount is
allowed for a reversion in a GRUT because the contingent reversion is not a “qualified interest”
and is, therefore, valued at zero.

2. GRUT Advantages and Disadvantages. If a GRUT grows in excess of the § 7520

rate, the interest holder will benefit through his or her unitrust payments, which represent a
percentage of the increasing value of the GRUT assets. Thus, if a grantor wishes to receive
additional income in the event trust assets appreciate in value, a GRUT is more desirable than a
GRAT. (Because the interest holder shares in the appreciation of the trust assets, the
remaindermen of a GRUT generally will not receive more from the GRUT than they would have
via a direct gift equivalent to the value of the remainder interest.) Note that GRUTs are more
administratively burdensome than GRATs because GRUT assets are required to be valued
annually.

E. QUALIFIED PERSONAL RESIDENCE TRUST (“QPRT”).

1. Generally. Using a tax vehicle called a “QPRT,” a donor transfers his or her
personal residence to a trust, with the donor retaining the right to live in the residence for a stated
term of years (or until his or her earlier death). At the end of the stated term, the trust terminates
and the residence passes to the remaindermen of the trust. Thus, the donor loses control of the
residence at the end of the stated term, when ownership passes to the remaindermen. If the
donor wishes to continue to occupy the residence after the term has ended, he or she must rent it
from the beneficiaries at a fair rental value.

2. A QPRT Provides A Significant Tax Advantage. Under the QPRT rules, the
value of the gift to the remaindermen is reduced by the value of the donor’s retained interest in

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the trust. If the donor survives the term, the residence is not included in his or her estate, and any
appreciation in the residence after the date of the gift passes to the remainder beneficiaries free of
gift and estate tax. In general, the longer the QPRT term, the smaller the gift tax cost in creating
the trust. However, the longer the QPRT term, the more risk there is that the donor may not
survive the term. If the donor dies during the QPRT term, the tax advantage is lost, and the value
of the residence (including any appreciation through the date of death) is included in the donor’s
federal gross estate. See 7, below.

3. Exception to § 2702 Valuation Rules. The special valuation rules of IRC § 2702
do not apply to QPRTs established to benefit family members. Rather than valuing the retained
interest at zero under IRC § 2702, the value of the gifted remainder is determined under the
regular § 7520 valuation rules. Section 2702 allows two types of trusts to qualify under this
exception: personal residence trusts and qualified personal residence trusts.

4. Requirements for Both Types of Personal Residence Trusts.

a. Personal Residence Requirement. The residence transferred to both types

of trusts must be used primarily as a personal residence when occupied by the term interest
holder. During periods when the residence is not occupied by the term holder, it may not have a
primary use that is other than as a residence. Regs. § 25.2702-5(b)(2)(iii) and (c)(2)(iii). A
“personal residence” is defined as either the principal residence of the term holder, one other
residence of the term holder, or an undivided fractional interest in either. Regs. § 25.2702-
5(b)(2)(i) and (c)(2)(i). If the residence is not the term holder’s principal residence, it must be
treated as “used” by the term holder within the meaning of IRC § 280A(d)(1). Reg. § 25.2702-
5(b)(2)(i)(B). Section 280A(d)(1) provides that a term holder uses a residence as such if he uses
it for personal purposes for more than 14 days per year or ten percent of the number of days
during such year for which such unit is rented at fair rental value.

i. “Personal Residence” is Interpreted Broadly. A personal residence

is interpreted broadly to include a houseboat, a house trailer or a cooperative housing unit. See,
Reg. § 1.1034-1(c)(3)(i) and PLR 9448035. It is also construed to include appurtenant structures
used for residential purposes, such as a garage, a green-house, or a tool shed. See, PLRs
9827037 and 9639064. It also includes adjacent land not in excess of an amount of land
reasonable appropriate for residential purposes (taking into account the residence’s size and
location). Regs. § 25.2702-5(b)(2)(ii) and (c)(2)(ii). See also, PLRs 9529035 and 9442019. The
IRS has also concluded that a personal residence may include a tennis court and swimming pool.
PLR 9533025. A personal residence does not include any personal property held in the
residence, such as household furnishings. Regs. § 25.2702-5(b)(2)(ii) and (c)(2)(ii).

b. Two Personal Residence Trust Limitation. If, at the time of transfer to

either a personal residence trust or qualified personal residence trust, the term holder is already
the grantor of two trusts in which he or she currently holds term interests, IRC § 2702 will apply
and the term interest retained by the grantor will be valued at zero. Trusts holding fractional
interests in the same residence are treated as one trust for this purpose. Reg. §25.2702-5(a)(1).

c. Restrictions on Use of Residence. The regulations for both personal

residence trusts and qualified personal residence trusts provide that a residence qualifies only if it

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is not occupied by any person other than the term holder and his or her spouse and dependents
and is available at all times for use by the interest holder as a personal residence. Regs.
§ 25.2702-5(b)(1) and (c)(7). Nevertheless, a residence will not fail to qualify simply because is
occupied by houseguests or other individuals who use the residence rent-free at the grantor’s
invitation. PLRs 200023020 and 9718007. If, however, the trustee rents the house to a third
party, the residence would no longer qualify because it would not be held for use as the grantor’s
personal residence. Reg. § 25.2702-5(d), Example 5. But see, PLR 9609015 (lease of a portion
of premises did not affect qualification as personal residence).

d. Restrictions on Sale of Residence. The trust instrument for both types of

personal residence trusts must prohibit the residence from being sold or transferred, directly or
indirectly, to the grantor, the grantor’s spouse, or an entity controlled by the grantor or the
grantor’s spouse, during or at any time after the original duration of the term interest of the trust
during which the trust is a grantor trust. Regs. § 25.2702-5(b)(1) and (c)(9). If the grantor dies
during the trust term, however, the trust instrument may permit a distribution (without
consideration) of the residence to any person, including the grantor’s estate, and may give the
grantor a power of appointment over the residence. Moreover, the trust instrument may direct an
outright distribution of the residence (without consideration) to the grantor’s spouse upon the
expiration of the retained trust term. Regs. § 25.2702-5(b)(1) and (c)(9).

e. Co-Ownership by Spouses. Spouses having interests in the same

residence may transfer their interests in the residence to the same personal residence trust. The
trust instrument must provide that no person other than one of the spouses may hold a term
interest in the trust concurrently with the other spouse. Regs. § 25.2702-5(b)(2) and (c)(2).

5. Personal Residence Trusts: Additional Requirements.

a. Assets of Trust. A personal residence trust must be prohibited by the

terms of the governing instrument from holding, for the original duration of the term interest, any
asset other than: (i) one residence to be used or held for use as a personal residence of the term
holder; and (ii) “qualified proceeds.” Reg. § 25.2702-5(b)(1). “Qualified proceeds” are
proceeds payable as a result of damage to or destruction or involuntary conversion of the
residence. The trust instrument must provide that such proceeds (and any income thereon) are
reinvested in a personal residence within two years from the date of receipt of the proceeds.
Reg. § 25.2702-5(b)(3). Trust expenses must, therefore, be paid from non-trust funds; any rents
generated by the property must be paid to the term holder and may not be added to the trust.
Reg. § 25.2702-5(b)(1).

b. Sale During Trust Term Prohibited. A trust will not meet the requirements
of a personal residence trust if the trust instrument permits the residence to be sold or transferred
(even to independent third parties) during the trust term. Reg. § 25.2702-5(b)(1).

6. Qualified Personal Residence Trusts: Benefits and Additional Requirements.

a. Advantages of Qualified Personal Residence Trust. A qualified personal

residence trust (“QPRT”) is more flexible than a personal residence trust because it may: (1) hold

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assets other than the residence, such as additions of cash for the payment of expenses,
improvements, and insurance policies; (2) authorize sale of the residence during the retained
term and reinvestment of the proceeds in another residence; (3) permit improvements to the
residence to be added the trust; and (4) be converted to a GRAT if it ceases to satisfy the
requirements of a QRPT. Regs. § 25. 2702-5(c)(5) - (8).

b. Trust May Hold Cash. The trust instrument for a QPRT may permit
additions of cash to the trust and authorize the trust to hold such cash in a separate account. Reg.
§ 25.2702-5(c)(5)(ii)(A)(1). However, the amount of cash held may not exceed the amount
needed to pay trust expenses, such as insurance, repairs, mortgage payments or improvements,
already incurred or reasonably expected to be paid by the trust within six months from the
addition. Reg. § 25.2702-5(c)(5)(ii)(A)(1)(i) and (ii). The trust instrument may also permit cash
contributions to the trust to acquire the initial personal residence or replacement residence,
within three months from the date the trust is created or of the addition, as the case may be, if the
trustee has previously entered into a contract to purchase the initial residence or to acquire a
replacement residence. Regs. §25.2702-5(c)(5)(ii)(A)(1)(iii) and (iv).

c. Insurance and Insurance Proceeds. A QPRT may also hold insurance

policies on the residence and the proceeds from such policies payable to the trust as a result of
damage or destruction to the residence. Such insurance proceeds may be held in a separate
account. Reg. § 25.2702-5(c)(5)(ii)(D).

d. Sale During Trust Term Allowed. The trust instrument may permit the
sale of the residence (to independent third parties) and may permit the trust to hold the proceeds
in a separate account. Reg. § 25.2702-5(c)(5)(ii)(C). This is the most significant distinguishing
feature between the personal residence trust and qualified personal residence trust.

e. Distributions. The trust instrument must: (i) require that trust income be
distributed to the term holder not less frequently than annually; (ii) prohibit distributions of trust
principal to any beneficiary other than the transferor prior to the expiration of the retained trust
term; and (iii) if additions of cash are permitted, require that the trustee determine not less
frequently than quarterly, the amounts held by the trust for payment of expenses in excess of
what is permitted, and require that those amounts be distributed immediately to the term holder.
Regs. § 25.2702-5(c)(3), (4) and (5)(ii)(A)(2).

d. Commutation. The trust instrument must prohibit prepayment of the term

holder’s interest. Reg. § 25.2702-5(c)(6). This prohibition does not seem to apply to personal
residence trusts.

e. Cessation and Conversion. The trust instrument must provide for

cessation of the trust if the residence ceases to be used or held for use as a personal residence by
the term holder. Reg. § 25.2702-5(c)(7). The trust instrument must further provide that the trust
ceases to be a qualified personal residence trust upon the sale of the residence unless the trust
instrument permits the trust to hold the proceeds of sale in a separate account. Reg. § 25.2702-
5(c)(7). If the trust instrument does permit the proceeds of sale to be held in a separate account,
it must provide that the trust ceases to be a qualified residence trust with respect to all proceeds

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of sale held by the trust upon the earlier of : (i) two years after the date of sale; (ii) the
termination of the term holder’s interest in the trust; and (iii) the date on which a new residence
is acquired by the trust. Reg. § 25.2702-5(c)(7). Accordingly, sale of the residence does not
result in cessation of the trust if a new residence is purchased within two years. If a cessation of
the trust does occur, the trust assets must, within thirty days of cessation, be distributed outright
to the transferor or rolled over into a qualified annuity trust for the balance of the term holder’s
term. Reg. § 25.2702-5(c)(8). If the trust is converted into a GRAT, the amount of the annuity
payment back to the grantor may not be less than the amount produced by dividing the lesser of
the value of all interests retained by the term holder (as of the date of the original transfer) or the
value of all trust assets as of the conversion date by the annuity factor for the original term of the
holder’s interest and the date of the original transfer. Reg. § 25.2702-5(c)(8)(ii).

7. If Grantor Dies During Trust Term the Tax Advantage is Lost. If the grantor dies
before the end of the retained term, the value of the residence including any appreciation through
the date of the donor’s death is includible in the grantor’s gross taxable estate under IRC § 2036
and is subject to estate tax. (A credit will be given for gift tax previously paid in respect of the
transfer to the QPRT.) For estates of decedents dying after July 13, 2008, the IRS will include in
the grantor’s estate, only that portion of the personal residence trust or QPRT principal necessary
to provide the retained use (without reducing or invading principal) if the grantor does not
survive the trust term. The portion of the trust principal includible in the grantor’s estate under
IRC 2036 shall not exceed the fair market value of the trust’s principal at the decedent’s date of
death. See Regs. §§ 20.2036-1(c)(2)(i), (iv), Ex. 6, (3), 20.2039-1(e), (f).

8. Sample QPRT. Rev. Proc. 2003-42 contains an annotated sample QPRT for a
single term holder that meets the requirements of § 2702(a)(3)(A) and § 25.2702-5(c).

IV. REPORTING OF GIFTS: AN OVERVIEW

A. Filing Due Date. Federal gift tax returns (Form 709) are required to be filed and
gift tax paid at the same time the donors’ federal income tax return is due – April 15 of the year
following the calendar year in which the gifts were made, or on the due date of any applicable
extensions for filing and paying the tax.10 If the donor is granted an extension of time to file his
or her income tax return, the extension is deemed to have been granted for his or her gift tax
return as well, but the extension may not be for longer than six months. Regs. §§ 25.6075-1 and
25.6081-1(a). A donor who is not requesting an extension of time to file his or her income tax
return may receive an automatic six-month extension of time to file Form 709 by filing Form
8892 by the later of (1) the original return due date or (2) the expiration of any extension of time
to file granted under Reg. 1.6081-5.

B. No Tax Return Required for Annual Exclusion Gifts. No gift tax return need be
filed unless the annual gifts to any one donee exceed $10,000, now, $14,000. Reg. § 25.6019-
1(a).

10
If the donor dies in the year gifts were required to be reported, the due date for Form 709 may be sooner. Reg. §
25.6075-1.

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 C. Filing of Gift Tax Returns for Split Gifts. If both spouses consent to gift-splitting
but only one spouse actually made the gifts, the other spouse is not required to file a gift tax
return if the total gifts to each donee do not exceed $28,000 in any given calendar year and no
portion of the property transferred constitutes a gift of a future interest (as discussed below).
Reg. § 25.2513-1(c). The donor spouse is not required to file a gift tax return unless total annual
gifts to any donee exceed the $14,000 annual exclusion.

D. Finality of Reported Gift Tax Values. The IRS may not revalue prior gifts for
purposes of determining the available applicable credit amount and appropriate transfer tax
bracket if the gift was “adequately disclosed” on a gift tax return and the time for assessing the
gift tax has expired. IRC § 2504(c).

1. Three-Year Statute of Limitations. The limitations period within which

additional gift tax may be assessed by the IRS is three years from the date the gift tax return is
filed. IRC § 6501(a). Reporting the transfer as a completed gift will start the gift tax statute of
limitations, even if the transfer is later determined to be an incomplete gift, but the disclosure of
a transfer as an incomplete gift will not start the assessment period even if the transfer is later
determined to be a completed gift. Reg. § 301.6501(c)-1(f)(5). The period of assessment on a
completed transfer that is reported as not constituting a gift will start to run only if the
transaction is adequately disclosed in accordance with Reg. § 301.6501(c)-1(f)(2) and an
explanation as to why the transfer is not a gift is provided. Reg. § 301.6501(c)-1(f)(4). Once the
limitations period expires, presuming adequate disclosure has been made, the amount of the gift
as reported on the gift tax return may not be adjusted for the purpose of determining future gift
and estate tax liability. IRC § 2001(f).

a. Unreported Gifts. In the case of a gift that is required to be

"shown" on a return, but which is not shown, the gift tax may be assessed at any time. IRC §
6501(c)(9).

2. Adequate Disclosure. A transfer will be considered adequately disclosed

only if “it is reported in a manner adequate to apprise the Internal Revenue Service of the nature
of the gift and the basis for the value so reported.” Reg. § 301.6501(c)-1(f)(2). Information
required to be provided to the IRS is as follows:

(i) A description of the transferred property and any consideration received for the
transfer;
(ii) The identity of the transferee and his or her relationship to the donor;
(iii) If the property is transferred in trust, the trust’s tax identification number and
either a brief description of the terms of the trust or a copy of the trust instrument;
(iv) A detailed description of the method used to ascertain the fair market value of the
property, including any financial data that was utilized in determining the value of
the interest, any restrictions of the property that were considered in determining
its value, and a description of any discounts (such as discounts for blockage,
minority or fractional interests, and lack of marketability) claimed in valuing the
property; and

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 (v) A statement describing any position taken on the gift tax return that is contrary to
any proposed, temporary or final Treasury Regulations or Revenue Rulings
published at the time the transfer was made.

a. Disclosure of Gifts of Actively Traded Securities. Where the gift is of an

interest that is actively traded on an established exchange (such as the New York Stock
Exchange or NASDAQ), the tax return must disclose the exchange where the interest is listed,
the CUSIP number of the security, and the mean between the highest and lowest selling prices on
the date of the transfer. Reg. § 301.6501(c)-1(f)(2).

b. Disclosure of Gifts Not Actively Traded. Where the gift is of an interest

in an entity that is not actively traded (such as a partnership or corporation), the tax return must
disclose any discount claimed in valuing the interests in the entity or any assets owned by the
entity. Reg. § 301.6501(c)-1(f)(2).

c. Disclosure Must Be Made At Every Level of the Transaction. If an entity

that is the subject of the transfer owns, either directly or indirectly, an interest in another entity
that is not actively traded, the information set forth above must be provided for each entity if the
information is relevant and material in determining the value of the interest. Reg. § 301.6501(c)-
1(f)(2).

d. Donor May Submit Appraisal. As an alternative to providing a detailed

description of the method used to ascertain fair market value (as required by Reg. § 301.6501(c)-
1(f)(2)(iv)), the donor may submit an appraisal of the property. Reg. § 301.6501(c)-1(f)(3). The
regulations contain specific requirements that must be met with respect to the qualifications of
the appraiser and the contents of the appraisal. See, Reg. § 301.6501(c)-1(f)(3).

3. Separate Disclosure Rules for Transfers Made under Chapter 14. The regulations
provide a completely separate yet similar set of disclosure requirements with respect to transfers
made under the special valuation rules of IRC §§ 2701 and 2702. See, Reg. § 301.6501(c)-1(e).
In the event disclosure is not made in accordance with the requirements described below, the
statute of limitations on the assessment and collection of gift tax does not begin to run and gift
tax on the transfer may be assessed at any time. Regs. § 301.6501(c)-1(e)(1) and (f)(1). With
respect to transfers of property subject to Chapter 14, the gift tax return must set forth:

(i) A description of the transferred and retained interests and the method used to
value each;
(ii) The identities and relationships of all parties involved in the transaction and all
parties related to the donor holding an equity interest in any entity involved in the
transaction; and
(iii) A detailed description (including all actuarial factors and discount rates used) of
the method used to value the gift, including, in the case of an equity interest in an
entity that is not actively traded, the financial and other data used in determining
value. (Financial data should include balance sheets and statements of net
earnings, operating results, and dividends paid for each of the five years preceding
the gift.)

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 4. Benefits of Disclosure. If adequate disclosure is properly made, the IRS loses not
only the right to assess gift tax after three years, but also loses the right to challenge legal issues
relating to the transfer, such as whether the transfer is entitled to application of the annual
exclusion.

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