Gifts - Identification and Documentation

Gifts - Documentation Requirements

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Question or Topic

What documentation is required for gifts?

Word Format Gifts - Identification of Gifts

PDF Format Gifts - Identification of Gifts (PDF)

The Answer

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The transferor should keep this in his or her records, as this will show the intent of the transfer. The recipient or the parent/guardian of a minor recipient should keep this as a permanent record in their file so that it is available should the Internal Revenue Service ask for proof this was a gift.

Why This is important: The Internal Revenue Service tax examiners presume all cash or property received is income to the recipient and will charge income tax plus interest and penalties on the underpayment — unless the recipient proves by documents from third parties the receipt of the money was intended as a gift (not payment for goods, property, services or a loan – intra-family loans are too lengthy to cover herein). Retention of this document should satisfy the Internal Revenue Service examiner’s desire for proof and establish the intention of the transfer as a gift. This document identifies the gift, the amount, the date, the recipient and the signatures establish all parties are aware of the transfer and its character.

There is a strategy to make gifts to an heir without including them in the annual gift tax exclusion and without reducing the unified credit! Here it is:

MEDICAL AND EDUCATIONAL EXCLUSIONS

Code Section 2503(e)(1) provides that "qualified transfers" for the payment of certain educational and medical expenses will not be considered gifts for gift tax purposes. Qualified transfers are defined as any amount paid on behalf of an individual as tuition to an educational organization described in Code Section 170(b)(1)(A)(ii) for the education or training of the individual, or to any person who provides medical care (as defined in Code Section 213(d) with respect to the individual as payment for such medical care. Code Section 2503(e)(2).

More specifically, for educational expenses to qualify for this special treatment they must meet the following requirements:

(1) The amount must be paid on behalf of an individual as tuition;

(2) the tuition must be paid to an educational organization described in Code Section 170(b)(1)(A)(ii) (includes primary, secondary, and preparatory, and high schools, and colleges and universities, whose primary activity is formal instruction)(Reg. Section 1.170-2(b)(3)) ;

(3) the tuition must be for the education or training of the individual donee;

(4) the tuition must be paid by the donor directly to the institution (the exclusion will not apply to the donor's reimbursement of the donee's payments to his educational institution); and,

(5) the exclusion is unavailable for amounts paid for books, supplies or dormitory fees (Reg. Section 25.2503-6(b)(2)).

Also excluded from taxable gifts are payments made by the donor on behalf of the donee directly to a provider for medical care. This includes payments of medical insurance premiums. It does not include the donor's reimbursement of medical expenses paid by the donee and also does not include payments made by the donor for expenses, which are later reimbursed to the donee by the donee's medical insurance. Reg. Section 25.2503-6(b)(3).

Identification of Gifts for the Calendar Year _____________

Description	Fair Market Value at Date of Gift
Husband Donor:
[name of donee]; Description of gift, date	$
[name of donee]; Description of gift, date	$
Wife Donor:
[name of donee]; Description of gift, date	$
[name of donee]; Description of gift, date	$
Total fair market value of gifts	$

We desire to fund the gifts out of our _______________ (i.e., money market) accounts at __________ [name of institution], and/or certificate of deposits at __________ [name of bank], number __________, in the amount of $__________. This document shall authorize the assignment and transfer of the amount necessary to establish and fund the gifts and trusts referred to in this Agreement.

SIGNED on __________ [date].

____________________[Husband]

____________________[Wife]

____________________

WITNESS

____________________

You will need to keep the following documents in addition to the above:

Donor	Recipient or Parent/Guardian
Canceled check	Copy of check and deposit slip
Bank Statement	Bank Statement
Copy of Gifts Identified Statement	Copy of Gifts Identified Statement

Final Note - Basis for the Donee

Number and describe all gifts (including charitable, public, and similar gifts) in the columns provided in Schedule A. Describe each gift in enough detail so that the property can be easily identified, as explained below.

For real estate provide:

A legal description of each parcel;
The street number, name, and area if the property is located in a city; and
A short statement of any improvements made to the property.

For bonds, give:

The number of bonds transferred;
The principal amount of each bond;
Name of obligor;
Date of maturity;
Rate of interest;
Date or dates when interest is payable;
Series number if there is more than one issue;
Exchanges where listed or, if unlisted, give the location of the principal business office of the corporation; and
CUSIP number. The CUSIP number is a nine-digit number assigned by the American Banking Association to traded securities.

For stocks:

Give number of shares;
State whether common or preferred;
If preferred, give the issue, par value, quotation at which returned, and exact name of corporation;
If unlisted on a principal exchange, give location of principal business office of corporation, state in which incorporated, and date of incorporation;
If listed, give principal exchange; and
CUSIP number. The CUSIP number is a nine-digit number assigned by the American Banking Association to traded securities.

For interests in property based on the length of a person's life, give the date of birth of the person.

For life insurance policies, give the name of the insurer and the policy number.

Clearly identify in the description column which gifts create the opening of an estate tax inclusion period (ETIP) as described under Transfers Subject to an Estate Tax Inclusion Period on page 2. Describe the interest that is creating the ETIP. You may not allocate the GST exemption to these transfers until the close of the ETIP. See the instructions for Schedule C on page 10.

Donor's Adjusted Basis of Gifts

Show the basis you would use for income tax purposes if the gift were sold or exchanged. Generally, this means cost plus improvements, less applicable depreciation, amortization, and depletion.

Short Summary of the rules (with a caveat)

The basis of property acquired by gift is usually (but not always) the donor's adjusted basis in the property at the time of the gift. Code Section 1015(a).

The "carry-over" basis basis is used for all purposes, such as depreciation and the computation of gain or loss (with the exception shown below) on a taxable disposition of the property by the donee. Thus, the owner of appreciated property transfers any built-in gain (and the responsibility to recognize this gain for tax purposes) to the recipient when s/he makes a gift of the property.

Losses cannot be transferred by gift. If the fair market value of property at the time of the transfer is less than the donor's basis, the donee's basis for purposes of determining a loss on any future taxable disposition (and only for loss determination) is the fair market value of the property on the date of the gift. Code Section 1015(a). The donee's basis for all other purposes, including determining gain, however, continues to be the donor's adjusted basis.

Property

Received as a Gift

To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it.

FMV Less Than Donor's Adjusted Basis

If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the prop-erty.

Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis, earlier).

If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property.

Example. You received an acre of land as a gift. At the time of the gift, the land had an FMV of $8,000. The donor's adjusted basis was $10,000. After you received the land, no events occurred to increase or decrease your basis. If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss.

If the sales price is between $8,000 and $10,000, you have neither gain nor loss. For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain.

Business property. If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property.

FMV Equal to or More Than Donor's Adjusted Basis

If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift.

Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. See Adjusted Basis, earlier.

Gift received before 1977. If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. However, do not increase your basis above the FMV of the gift at the time it was given to you.

Example 1. You were given a house in 1976 with an FMV of $21,000. The donor's adjusted basis was $20,000. The donor paid a gift tax of $500. Your basis is $20,500, the donor's adjusted basis plus the gift tax paid.

Example 2. If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift.

Gift received after 1976.If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. Figure the increase by multiplying the gift tax paid by the following fraction. The numerator is the net increase in value of the gift and the denominator is the amount of the gift.

The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes.

Example. In 2000, you received a gift of property from your mother that had an FMV of $50,000. Her adjusted basis was $20,000. The amount of the gift for gift tax purposes was $40,000 ($50,000 minus the $10,000 annual exclusion). She paid a gift tax of $9,000. Your basis, $26,750, is figured as follows:

Fair market value .................................. $50,000

Minus: Adjusted basis ............................... 20,000

Net increase in value .............................. $30,000

Gift tax paid ....................................... $9,000

Multiplied by ($30,000 ÷ $40,000) ...................... .75

Gift tax due to net increase in value ............... $6,750

Adjusted basis of property to your mother ........... 20,000

Your basis in the property $26,750

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