The example in section 25.2511-1(h)(1) illustrates that, in general, a gift to an entity is an indirect gift to the owners of the entity. In that example, a transfer of property to a private corporation is an indirect gift to the other individual shareholders of the corporation to the extent of their proportionate interests therein. The regulation cautions, however, that a transfer made by an individual to a charitable, public, political, or similar organization may constitute a gift to the organization as a single entity.
The danger of the indirect gift - the annual exclusion will be exceeded, and the Unified Credit will be consumed, or there will be a gift/transfer tax owing.
Simplified Example of This Legislation |
| Circumstances:
Father and one child. There is a family limited partnership. The FLP has total
assets of $1,000 with the father owning 50% and the child owning 50%. Each has a
$500 equity in the FLP. In a subsequent year Father writes a check for $200,000 and deposits it in the FLP savings account. There are no adjustments to the capital accounts and the partnership does not reimburse Father for the $200,000. Since Child has a 50% interest in the FLP, Child would then have 50% of $201,000. This is clearly an increase in the net worth of Child. This transaction will be deemed an indirect by the law. There are other instances in which the creation of the indirect gift will not be evident, so a watchful General Partner is mandatory. For example: The Father places only a mutual fund owned by Father in the FLP have a cost basis of $5,000, which is well under the limits - however, The fair market value of the mutual fund at the date of the transfer was $20,000. This is clearly an indirect gift and it is in excess of the annual exclusion. For example: There are two parents and several children, with each child owning a partnership interest as a limited partner and several trusts or UGMA entities with the children as beneficiaries. The parents have been giving a percentage of the FLP to each child's LP interest for several years. Caution has been used so that not more than $10,000 is transferred to each child by each parent each year. However in your number 3 the parents place more cash in the FLP, place an appreciated mutual fund in the FLP AND place an partnership not related to the FLP, but the partnership being transferred owns real estate with a substantially appreciated commercial building in the FLP. Clearly, this last move is extremely prone to exceeding the annual gift tax exclusion.
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§25.2511-1
(h) The following are examples of transactions resulting in taxable gifts and in each case it is assumed that the transfers were not made for an adequate and full consideration in money or money's worth:
(1) A transfer of property by a corporation to B is a gift to B from the stockholders of the corporation. If B himself is a stockholder, the transfer is a gift to him from the other stockholders but only to the extent it exceeds B's own interest in such amount as a shareholder. A transfer of property by B to a corporation generally represents gifts by B to the other individual shareholders of the corporation to the extent of their proportionate interests in the corporation. However, there may be an exception to this rule, such as a transfer made by an individual to a charitable, public, political or similar organization which may constitute a gift to the organization as a single entity, depending upon the facts and circumstances in the particular case.
(2) The transfer of property to B if there is imposed upon B the obligation of paying a commensurate annuity to C is a gift to C.
(3) The payment of money or the transfer of property to B in consideration of B's promise to render a service to C is a gift to C, or to both B and C, depending on whether the service to be rendered to C is or is not an adequate and full consideration in money or money's worth for that which is received by B. See section 2512(b) and the regulations thereunder.
(4) If A creates a joint bank account for himself and B (or a similar type of ownership by which A can regain the entire fund without B's consent), there is a gift to B when B draws upon the account for his own benefit, to the extent of the amount drawn without any obligation to account for a part of the proceeds to A. Similarly, if A purchases a United States savings bond registered as payable to "A or B," there is a gift to B when B surrenders the bond for cash without any obligation to account for a part of the proceeds to A.
(5) If A with his own funds purchases property and has the title conveyed to himself and B as joint owners, with rights of survivorship (other than a joint ownership described in example
(4) but which rights may be defeated by either party severing his interest, there is a gift to B in the amount of half the value of the property. However, see Section 25.2515-1 relative to the creation of a joint tenancy (or tenancy by the entirety) between husband and wife in real property with rights of survivorship which, unless the donor elects otherwise is not considered as a transfer includible for Federal gift tax purposes at the time of the creation of the joint tenancy. See Section 25.2515-2 with respect to determining the extent to which the creation of a tenancy by the entirety constitutes a taxable gift if the donor elects to have the creation of the tenancy so treated. See also Section 25.2523(d)-1 with respect to the marital deduction allowed in the case of the creation of a joint tenancy or a tenancy by the entirety.
(6) If A is possessed of a vested remainder interest in property, subject to being divested only in the event he should fail to survive one or more individuals or the happening of some other event, an irrevocable assignment of all or any part of his interest would result in a transfer includible for Federal gift tax purposes. See especially section 25.2512-5 for the valuation of an interest of this type.
(7) If A, without retaining a power to revoke the trust or to change the beneficial interests therein, transfers property in trust whereby B is to receive the income for life and at his death the trust is to terminate and the corpus is to be returned to A, provided A survives, but if A predeceases B the corpus is to pass to C, A has made a gift equal to the total value of the property less the value of his retained interest. See section 25.2512-5 for the valuation of the donor's retained interest.
(8) If the insured purchases a life insurance policy, or pays a premium on a previously issued policy, the proceeds of which are payable to a beneficiary or beneficiaries other than his estate, and with respect to which the insured retains no reversionary interest in himself or his estate and no power to revest the economic benefits in himself or his estate or to change the beneficiaries or their proportionate benefits (or if the insured relinquishes by assignment, by designation of a new beneficiary or otherwise, every such power that was retained in a previously issued policy), the insured has made a gift of the value of the policy, or to the extent of the premium paid, even though the right of the assignee or beneficiary to receive the benefits is conditioned upon his surviving the insured. For the valuation of life insurance policies see Section 25.2512-6.
(9) Where property held by a husband and wife as community property is used to purchase insurance upon the husband's life and a third person is revocably designated as beneficiary and under the State law the husband's death is considered to make absolute the transfer by the wife, there is a gift by the wife at the time of the husband's death of half the amount of the proceeds of such insurance.
(10) If under a pension plan (pursuant to which he has an unqualified right to an annuity) an employee has an option to take either a retirement annuity for himself alone or a smaller annuity for himself with a survivorship annuity payable to his wife, an irrevocable election by the employee to take the reduced annuity in order that an annuity may be paid, after the employee's death, to his wife results in the making of a gift. However, see section 2517 and the regulations thereunder for the exemption from gift tax of amounts attributable to employers' contributions under qualified plans and certain other contracts.
[indirect gifts]