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Effectively using the annual gift tax exclusion.

Part I of this two-part article examined the significant long-term benefits of the annual exclusion. Part II focuses on other issues and available planning opportunities, and addresses how the legislation to eliminate the estate and gift tax may affect the strategies discussed.

Part I of this two-part article, in the June 2001 issue, focused on the general planning issues surrounding the annual exclusion. Part II, below, focuses on some of the more detailed planning issues in using the exclusion.

Powers of Attorney

As Americans live longer, incapacity is becoming a growing issue. Guardianship is an expensive and time-consuming process that can often be replaced by a well-drafted power of attorney.(32) The IRS takes the position that an annual exclusion gift cannot be made unless a power of attorney or state law specifically allows such gifts.(33)

Planning

It almost always make sense to grant a powerholder authority to make annual exclusion gifts. The power could be restricted to provide that gifts cannot reduce the estate below the expected applicable unified credit (i.e., the tax benefit of an annual exclusion gift ceases if there is no taxable estate). Because an estate's value is a moving target, a power of attorney should require the power holder to make reasonable estimates of the estate's value. The grantor may also want to place other conditions on gifting (e.g., limiting gifts to children or restricting gifts to tuition and medical costs).

Some states provide that a power of attorney automatically terminates on the incapacity of the document's creator. To ensure that the power is enforceable (i.e., durable) after incapacity, it should contain specific language that it survives the creator's disability.

In many cases, a client is uncomfortable about giving another the ability to act on his behalf before incapacity occurs. In such case, a power of attorney may be "springing" (i.e., becoming operative only on the client's incapacity). The manner in which incapacity is determined should be defined in the document (e.g., via a letter from the client's primary physician).

To assure that a conflict does not develop between the power holder and a potential adverse guardian (e.g., a second spouse), the document should provide that the power holder should be the guardian (if one is appointed). To ensure that the death of the named power holder does not force the grantor's family into guardianship, the document should name one or more successor power holders.

It is generally better to appoint only one power holder at a time. If multiple power holders are appointed, confusion (e.g., must all power holders agree or is a majority sufficient? Can one power holder act without the others' approval?) and conflict may result (e.g., a child wants to make annual exclusion gifts to reduce a parent's taxable estate, but the current (third) spouse wants to retain assets in the estate to fund a marital qualified terminal interest property (QTIP) trust at death).

Court Orders

Many states' laws permit guardians to adopt an estate plan (with court approval) for an incapacitated resident.(34) However, in TAM 9731003,(35) the IRS ruled that, although a court ordered annual exclusion gifts to the family of an incapacitated taxpayer, the gifted assets remained in the decedent's estate. The court noted that, under applicable state law, the gifts could have been rescinded by the taxpayer had she recovered capacity (even though she had Alzheimer's disease).

Planning

The ruling points out the need to execute broad powers of attorney. Because of the substantial estate tax savings to be derived from annual exclusion gifts, a power of attorney should specifically authorize and set conditions for making gifts. A power of attorney granting "all authority" (or similar language) does not appear to be sufficient under the present IRS position.(36)

The GST Tax

The generation-skipping transfer (GST) tax provides for an annual exclusion that applies only to direct skips.(37) In addition to the GST annual exclusion, each taxpayer can make up to $1,060,000 (in 2001) in GSTs (during life and/or at death) without the imposition of a 55% GST tax under Sec. 2631(a).(38) Most direct annual exclusion gifts are also exempt from the GST tax, under Sec. 2642(c). Thus, if gifts are made pursuant to the annual exclusion, the $1,060,000 exemption is not depleted. The same rule applies to tuition and medical expense payments allowed by Sec. 2503(e).

However, gifts in trust do not qualify for the GST annual exclusion, unless the trust has only a single beneficiary, whose estate will include the trust assets at his death under Sec. 2642(c)(2) (should he die before the trust terminates). In many cases, clients are less concerned about depletion of the GST exemption than with ensuring that the benefits of having multiple Crummey, beneficiaries are maintained. Thus, gifts to Crummey trusts usually constitute taxable GSTs, even if the $10,000 gift tax annual exclusion applies; such transfers will reduce the GST exemption. If a married couple agrees to gift-splitting, they are treated as though each made half of the gift for GST tax purposes, under Sec. 2652(a)(2).

The application of the GST exemption is determined either on a timely fried gift tax return or on the fair market value (FMV) of the property at the time of the allocation, and can yield harsh inadvertent consequences.

Example: G places $1,000,000 in trust, with income to X, his child, for a number of years. If X is alive at the end of the period, he takes the remaining trust assets. If X is deceased, the assets pass automatically to G's grandchild. The assets are worth $5,000,000 when X dies and are passed to the grandchild. If the GST exemption is not elected on a timely filed gift tax return, a GST tax of $2,200,000 (55% x $4,000,000) can be imposed.

This result has particular application to irrevocable life insurance, under which the value of the life insurance proceeds will usually vastly exceed the value of the trust contributions (i.e., the insurance premiums).

Gifts to Minors

Many clients provide annual exclusion gifts to custodial accounts for minors, but fail to consider the long-term effect. For example, assume a client and spouse put $20,000 annually in a custodial account for a minor; the account grows at an eight percent annual rate. Under state law, the child may have control of the account at age 18 or 21; the account balance could easily exceed $750,000.Will the child be able to make the proper decisions as to those funds? Will the funds be used as the donor foresees (e.g., to fund a college education) or merely allow the donee to thwart those plans (e.g., to join a band)?

The gifting of assets to minors is a principal planning issue. A number of alternatives are available: (1) outright gift to a minor; (2) gift to a minor's guardian; (3) gift under a Uniform Transfers to Minors Act (Act); (4) gift to a Sec. 2503>) trust; (5) gift to a Sec. 2503(b) trust; and (6) gift to a Crummey minor's trust.

If income from a gifted asset is used to satisfy a parental support obligation, the IRS may rule that the parent is taxable on the income. For example, in Brooke.(39) the Ninth Circuit ruled that because a guardian, as required by local law, used the income of a gift to provide support for the donor's child, the donor was taxable on the income.

Outright Gifts and Guardianship

Outright gifts to minors are not generally advisable. If a minor has control over an asset, on the child's death, the asset may revert to the parents by intestacy. Gifts to a child's guardian are generally more cumbersome and restrictive than gifts in trust or custodial accounts. Unfortunately, in many cases, the recipient of the funds may not be sufficiently mature to handle them.

Uniform Transfers to Minors Acts

Many states have adopted the Act to replace the Uniform Gifts to Minors Act. The Act is generally a more comprehensive approach to the gifting of assets for minors. A person is designated as a custodian under the Act by using the words: "as custodian for [name of minor] under the [state name] Transfers to Minors Act." The Act provides, under "Powers of Custodian," that "a custodian, acting in a custodial capacity, has all the rights, powers and authority over custodial property that unmarried adult owners have over their own property, but a custodian may exercise those rights, powers and authority in that capacity only"

The Act attempts to reduce concerns about the custodian providing the legal support obligations of the minor's parents, by asserting that payments are in addition to (not in substitution for) and do not affect any obligation of a person to support the minor. The primary disadvantage of gifts made under the Act is that the property gifted must be distributed to the child by age 21. In addition, the property may revert to the parents on the minor's death.

Caution: The donor should never be the custodian. The retention of powers over the property may result in the gifted asset being included in the donor's estate for Federal estate tax purposes.

Sec. 2503(c) Trusts

Under Sec. 2503(c), a trust meeting the following requirements will qualify for the $10,000 annual exclusion, even though a gift in trust would normally not qualify for the annual exclusion because it is a future interest. The principal and income of the trust can only be paid to (or spent on behalf of) the donee before age 21. Any remaining trust assets are distributed to the donee at age 21. If the donee dies before then, the assets are paid to the donee's estate. The primary problem with a Sec. 2503(c) minor's trust is that the recipient can obtain the funds at age. 21.

Crummey Minor's Trust

In lieu of a trust that terminates at age 21, a Crummey trust can be established for a minor. Unlike the minor's trust discussed above, the trustee of a Crummey trust can have broad discretion as to income and principal distributions. The primary benefit of using a Crummey minor's trust is the trustee's ability to maintain the funds well beyond the donee attaining age 21. Distributions can be delayed until the beneficiary, in the trustee's discretion, is sufficiently mature to handle the funds; the trust can have multiple beneficiaries. Thus, if a child does not go to college, the trust assets could fund the education of other children who do go to college.

Planning: Whenever funds gifted for the benefit of a minor are expected to be significant by age 21, an estate planner should consider a Crummey trust that extends beyond age 21. Further, the trustee(s) should have the right to make discretionary distributions of income or principal at any time; multiple beneficiaries should be named.

If a client has already created a custodial account or Sec. 2503(c) trust, a Crummey mast can be created that invests in long-term growth assets with minimal income. All distributions for the benefit of the minor should come from the previously established Sec. 2503(c) trust or custodial account to reduce value as much as possible before age 21.

Because of the Sec. l (g) (4) "kiddie tax" and the high trust income tax rates, trust assets should be invested in growth assets with minimal income. The trust generally pays the same capital gain rate as an individual; further, assets can be sold (at capital gain rates) if needed to meet the minor's anticipated needs.

Choosing Assets

Considerations

In choosing assets to gift, a number of issues arise:

* Assets that are increasing in value should be gifted first. If an appreciating asset is held in an estate, it may produce greater estate taxes, while a decreasing asset (e.g., a retirement plan that passes to a surviving spouse) may reduce the value of the estate over time.

* A donor should first gift assets that have the highest basis (not to exceed the asset's FMV). Because the value of a gift is effectively reduced by the income taxes the donee may ultimately pay, high-basis gifts yield less gain, and thus less tax.

* If a client has significant gain in the value of his residence, perhaps it should be retained until the client either sells it or dies. If a married client sells his residence, he may be able to avoid income tax on up to $500,000 of the gain, under Sec. 121. Moreover, if he dies owning the residence, its basis will step up to FMV. If a gift is made, the donee takes the donor's basis and may lose the benefit of the residential exclusion.

* A donor should make gifts of assets that have a readily ascertainable FMV. This reduces both the need to prepare an appraisal and the chance of the IRS disagreeing with the valuation. Cash and marketable securities are good choices.

* Assets eligible for valuation discounts are good choices.

Example: Y's family business is worth $1,000,000; Y also owns a vacation home valued at $200,000. If Y gifts 20% of the business, its value (with a 40% discount for lack of marketability and minority ownership) may be only $120,000, but the gift of the vacation home is worth $200,000. Thus, a gift of $200,000 in the family business, at a 40% discount, will allow passage of 33.33% of a $1,000,000 family business.

Gifting Unused Equity

Many clients have significant estates, but are reluctant to gift liquid assets, for fear of needing them later.

Planning: The family may own a farm or vacation home that it never intends to sell. Left unsold, the equity value has no benefit to the family; rather, it is an estate tax liability waiting to happen. In addition, such property could result in significant liability to family members (e.g., drowning, farm accident, slip-and-fall). If a family limited liability partnership (FLLP) is created, however, the partners' potential liabilities are significantly reduced. The FLLP interests could be conveyed to family members using the annual exclusion and appropriate discounts, while the older generation retains the nominal equity interests as general partners. As general partners, the older generation would continue to control the use and operation of the family assets; if significant management is involved, it might be entitled to a management fee.

When Not to Make Gifts

There are a number of occasions when an annual exclusion gift is not preferable.

* When a taxpayer is not expected to have a taxable estate, particularly when the gift would be a low-basis asset (unless there are other reasons for gifting). Waiting until the taxpayer's death will allow assets to be stepped up to FMV for basis purposes. Because Congress may significantly increase the unified credit (and, thus, reduce the number of taxable estates), the need for the annual exclusion as a gift-tax-saving technique could diminish.

* If a donor is facing imminent death and will have a taxable estate, annual exclusion gifts of high-basis assets are preferable to those of low-basis assets, because the asset will step up to FMV basis at death. For example, a client is terminally ill and has assets that have depreciated over her life. If she holds the assets until death, they will step up to FMV; if she gifts them, the donees may have depreciation recapture on the assets' sale.

* Assets should not be gifted directly to heirs in poor health. If the donee dies before the donor, the transfer may be subject to estate tax in the donee's estate or be subject to the donee's creditors. If a gift must be made (i.e., to reduce the donor's taxable estate), a Crummey trust should be used, with other heirs as the trust remainder interest holders.

* The gift of a qualified personal residence is not normally appropriate. Often, the asset has a low basis; unless the donee uses the property as a personal residence, he will not qualify for the Sec. 121 personal residence exclusion.

* The gift of an installment sale note can trigger the gain in the note, because the gift is Considered a transfer.(40) Passing the note at death will not normally(41) trigger the gain.(42)

* In general, the value of a gifted asset that is collateral for a debt is the amount by which its FMV exceeds the debt. Thus, a piece of real estate worth $100,000 with a $90,000 mortgage is valued for gift tax purposes at $10,000. However, if the secured debt exceeds the donor's basis in the asset, the donor may incur taxable income from the transaction. If the donor's basis in the above real estate were $70,000, the gift could create $20,000 ($90,000 - $70,000) in taxable income to him.(43)

Making an annual exclusion gift in which the donor retains use may result in the date-of-death value of the gifted asset remaining in the donor's estate.(44) For example, gifting jewelry to a daughter, while retaining control and use, is an incomplete gift.

Dispositional Considerations

Estate planning must involve more than passing as much wealth as possible to the next generation as tax-free as allowed. Increasingly, clients are recognizing the negative effects of inherited wealth and designing dispositions to minimize them.(45)

While such planning is technically important to preserve a family's wealth, three nontax issues must be addressed:

1. Can the client afford the gift? When gift planning is driven by estate tax savings, most affluent clients can afford to make some gifts to family members, because the unified credit assures that at least $675,000 to $1 million can be retained by the grantor, without any transfer tax being imposed. However, the younger the donor, the more he may feel the need to preserve his estate to provide for future needs (e.g., a recession, nursing home care).

2. Does the client want to make the gift? When an heir has shown a financial inability to manage assets, part of the planning process should include using structures that restrict his access to the funds. Family limited partnerships and generation-skipping trusts with spendthrift provisions are often used for this purpose. Other parties (e.g., trustees) can be given the authority to distribute the funds to the heir either in a third-party's discretion or subject to certain donor-established criteria.

3. Can the donees properly handle the girl? Increasingly, clients are discussing the effect of their wealth on their descendants and seek to place reasonable restraints on wealth passage.(46)

Common Gifting Problems

Determining Basis

One of the greatest difficulties in gift planning is the inability to accurately determine the basis of an asset to be gifted.

Planning: A donor should provide a donee with copies of supporting detail as to the donor's basis in the gifted asset. The donee should retain the donor's closing statements, old estate or gift tax returns, receipts and the like to support his reported taxable gain on a subsequent sale. These documents should never be destroyed. In addition, in reporting a gift, Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return, Schedule A, requires a donor to report his adjusted basis in the gibed property.

State Gift Taxes

Even when a gift is covered by a Federal gift tax exclusion or exemption, state gift taxes may still result(47); unlike the Federal estate tax, no Federal gift tax credit exists for state gift taxes paid by a donor. Local tax issues can create other tax problems. For example, gifts in Tennessee that would be covered by the Federal unified credit may still result in the imposition of state gift tax.

Planning: Because the Federal gift tax laws do not permit a state gift tax credit, in states with a gift tax, the advisability of making a lifetime gift (versus waiting until death to make a transfer) should include a calculation of the state gift tax cost.

Reciprocal Gifts

The IRS has long recognized that taxpayers may make gifts to benefit themselves.(48) For example, if each of three brothers gives $10,000 to each of his brother's three children, each has increased his family's assets by $60,000 tax-free (i.e., gifts to two sets of three children at $10,000 each).

Because of the benefit to the donor, the IRS may deny the gift under the "reciprocal gift doctrine." In Est. of Grace,(49) the Supreme Court held that "the application of the reciprocal trust doctrine requires only that the trusts be interrelated and that the arrangement, to the extent of mutual value, leaves the settlors in approximately the same economic position as they would have been in had they created trusts naming themselves as life beneficiaries" To avoid the doctrine's application,(50) (1) if trusts are used, each should have a different third-party trustee and the beneficiaries should have varying interests; and (2) gifts should be made at different times and for varying amounts.

Planning: Gifts between family groups should not be equal. Even though one family may receive a larger benefit, the tax savings to both family groups may override the result.

Example: A and B are brothers. A has 10 descendants, B has eight and both are in the 55% estate tax bracket. The $20,000 difference ((10 - 8) X $10,000) in annual exclusion gifts to family members is more than offset by the overall $99,000 ($180,000 x 55%) estate tax savings from the gifts. Although the B family passes an extra $20,000 to the A family, the former still saves $44,000 ($80,000 X 55%) from the A family gifts.

Indirect Gifts

If a gift does not directly benefit an individual, the annual exclusion may not be permitted. For example, in Stinson Est.,(51) the Seventh Circuit ruled that the forgiveness of a corporate debt due a shareholder was not a present interest, because the shareholders would have to liquidate the corporation to receive any benefit from the gift. Thus, the indirect gift to the shareholders did not qualify for the annual exclusion. Ignoring the possible income tax issues (e.g., acceleration of the tax on an installment debt), the better approach might have been for the creditor/shareholder to have transferred the debt directly to the other shareholders in proportion to their stock ownership.

Similar indirect transfers may lose the benefit of the annual exclusion. For example, in Est. of Bies,(52) the Tax Court ruled that gifts of stock made to inlaws that were immediately transferred to blood relatives did not qualify as annual exclusion gifts; the gifts were effectively sham transactions. Although any prearranged transaction may be reconsidered under the step-transaction doctrine, this one was particularly questionable, because of the short time between the gifts and the transfers to blood relatives.

Compliance Issues

Gift Tax Returns

In general, Sec. 6019 requires a gift tax return (Form 709 or 709A) to be fried for any gift transfer, except for the following:

* Gifts covered by the annual exclusion.

* Gifts covered by the tuition and medical annual exclusion.

* Gifts covered by the marital deduction, unless a QTIP election has been made.

* Most charitable gifts.

Under Sec. 6075(b)(2), the gift tax return is due when the income tax return is due (including extensions). According to Sec. 6151(a), any gift tax due must be paid when the return is filed. Failure to file a required gift tax return may result in Sec. 6651 penalties. Even gifts covered by the unified credit must be disclosed on a gift tax return.

If a donor and spouse elect gift-splitting, the donor must file a gift tax return, but the electing spouse need not file unless he also made reportable gifts during the tax year. Unlike income tax returns, there is no joint gift tax return for married couples.

Reevaluations

Prior to the Taxpayer Relief Act of 1997 (TRA '97), the IRS could revalue any gift at the donor's death for purposes of computing the estate tax, effectively opening the statute of limitations (SOL) on prior gifts. TRA '97 Section 6007(e)(2)(A) enacted Sec. 6501(c)(9), which disallows such revaluation if the gift was "adequately disclosed" on a gift tax return. The IRS issued regulations defining "adequate disclosure."(53) The regulations require broad disclosure about the gift.

The new regulations effectively place a burden on taxpayers to alert the IRS to any possible issues it might have as to a gift. So much detail is required that it is relatively easy for the IRS to argue that the adequate disclosure standard was not met. Moreover, in many cases, the donor may not control, have available or cannot afford to obtain the information the IRS requires.

Planning: The new rules provide some new planning Opportunities and tax traps:

* Return filing. If a gift tax return is not filed, the SOL on the gift's value never begins to run. Thus, proper planning may include creating a gifting program that requires filing a gift tax return (e.g., gifts of $10,100), to begin the SOL. The IRS does not have the resources to examine closely every gift tax return fried. Those that adequately disclose information and include appraisals of nonreadily marketable assets will stand less of chance of audit.(54)

* Appraisals. More than ever, tax planners need to ensure that appraisals are adequate, especially when valuation discounts are taken or gifted assets are not readily tradable on an established market. The new rules significantly increase the audit potential for gifts; filing a return without an appraisal of nonreadily marketable assets begs for an audit. The IRS has provided information on the type of data to be contained in an appraisal.(55) Although it is sometimes expensive, clients should be encouraged to obtain appraisals from qualified experts unrelated by business or family.

* Document transfers. Whenever a nonreadily marketable asset is transferred (even if not gibed) to a family member, an appraisal should be obtained. If there is inadequate disclosure on a gift tax return, the IRS can argue that the SOL does not apply and that the value was understated. If the IRS makes such an assertion, the burden of proof switches to the taxpayer. For example, if the IRS argues that a sale made 15 years ago was understated, will the client have retained sufficient financial information on the asset (15 years later) to meet the burden of proof?

Proposed Legislation

As this article went to press, Congress was considering President Bush's proposed estate tax changes,(56) Two potential changes may have a significant effect on the planning discussed in this article. First, the annual exclusion may be increased for the first time since the early 1980s; a range from $15,000-$25,000 is expected. Such an increase will significantly enhance the tax benefits of the planning opportunities discussed in this article.

The second change may reduce the number of taxpayers who need to use the techniques discussed in this article to reduce their taxable estates. Most likely, the unified credit will increase significantly in the next few years (or the estate tax might be eliminated), moving U.S. taxpayers out of the transfer tax system. These taxpayers will no longer have transfer tax reasons for conveying their assets to family members using the annual exclusion.

Conclusion

The annual exclusion, when properly used as a part of an overall estate plan, can be one of the most effective planning tools available. Its relatively small size does not reflect its potential benefits.

EXECUTIVE SUMMARY

* A power of attorney should specifically authorize and set conditions for making gifts.

* The manner of gifting assets to minors is a principal planning issue.

* A donee should always retain the donor's dosing statements, old estate or gift tax returns, receipts and the like to support his reported taxable gain on a subsequent sale.

(32) See Collin, Jr., and Ohlandt, "Gift-Giving Under Durable Powers of Attorney," 20 Tax Mgmt. Ests., Gifts and Tr. J. 63 (January/February 1995); Insel, "Durable Power Can Alleviate Effects of Client's Incapacity," 22 Est. Plng. 1 (January 1995); and Tieman, "Gift-Giving by an Agent Under a Durable Power of Attorney," 26 Est. Plng. 372 (October 1999).

(33) See Est. of Sylvia S. Swanson, 46 Fed. Cl. 388 (2000) and Sylvia P. Goldman, TC Memo 1996-29; but see Est. of Suzanne C. Pruitt, TC Memo 2000-287, Est. of Rosa B. Neff, TC Memo 1997-186, Est. of Joseph E. Ridenour, TC Memo 1993-41, and Est. of Olive D. Casey, TC Memo 1989-511, rev'd, 948 F2d 895 (4th Cir. 1991).

(34) See Clark, "Substituted Judgment: Medical and Financial Decisions by Guardians," 24 Est. Plng. 66 (February 1997).

(35) IRS Letter Ruling (TAM) 9731003 (3/31/97).

(36) See IRS Letter Ruling 9736004 (6/6/97); Est. of Swanson, note 33 supra.

(37) See Gopman and List, "Impact of the Generation-Skipping Tax on Trusts Using Crummey Powers," 26 Est. Plng. 169 (May 1999).

(38) A thorough discussion of the GST rules is beyond the scope of this article; for more detail, see Harrington and Acker, 850 T.M., Generation Skipping Tax (BNA, 2001); Harrington, Plaine and Zaritsky, Generation-Skipping Transfer Tax (WG&L, 1996).

(39) C.P. Brooke, 468 F2d 1155 (9th Cir. 1982)

(40) See Sec. 453B and Rev. Rul. 79-371, 1979-2 CB 294. Passing the installment note to a grantor trust may avoid immediate taxation; see Rev. Rul. 74-613, 1974-2 CB 153.

(41) However, if the note is bequeathed to its maker, the inherent gain is immediately taxable; see Sec. 691(a)(5).

(42) Under Sec. 453B(c), the installment deferral treatment of the note continues; the estate or the beneficiaries report the taxable gain as received.

(43) See Est. of Aaron Levine, 634 F2d 12 (2d Cir. 1980).

(44) See Est. of Daniel McNichol, 29 TC 1179 (1958), aff'd, 265 F2d 667 (3d Cir. 1959); but see Est. of Rebecca A. Wineman, TC Memo 2000-193 (a gift of a partial interest in a farm that the children operated and on which the donor remained was not a retained use).

(45) See Linden and Machan, "The Disinheritors," Forbes (5/19/97) at www.forbes.com/forbes/97/0519/5910152a.htm; Kirkland, Jr., "Should You Leave it to Your Children?" Fortune (9/29/86), p.76.

(46) See Scroggin, "Family Incentive Trusts," 54 J. of Fin'l Svce. Prof'ls 74 (July 2000).

(47) The following jurisdictions impose a gift tax: Connecticut, Delaware, Louisiana, New York, North Carolina, Puerto Rico and Tennessee.

(48) See Hader, "Planning to Avoid the Reciprocal Trust Doctrine," 26 Est. Plng. 358 (October 1999); Barton and Sager, News & Views, "Tax Court Denies Annual Exclusion for Reciprocal Gifts," 70 CPA Journal 12 (February 2000).

(49) Est. of Joseph P. Grace, 395 US 316 (1969), rev'g 393 F2d 939 (Ct. Cl. 1968); see also Est. of Robert V. Schuler, TC Memo 2000-392.

(50) These roles are extremely ambiguous; thorough research should be undertaken before attempting a gift that has reciprocal-gift implications.

(51) Lavonna J. Stinson Est., 214 F3d 846 (2000).

(52) Est. of Marie A. Bies, TC Memo 2000-338.

(53) See Kegs. Sec. 301.6501(c)- l(e); Kove and Kosakow, "Problems Created by New Prop. Kegs. on Revaluation of Gifts," 26 Est. Plng. 165 (May 1999); Vail, Tax Clinic, "Transfer Tax Valuation Finality and Prop. Regs. on the `Adequate Disclosure' of Gifts," 30 The Tax Adviser 388 (June 1999); Kessel and Agran, "Final Regs. on Disclosure of Gifts Liberalized, but Problems Remain," 27 Est. Plng. 147 (May 2000); Mulligan, "Adequate Disclosure: Its Impact on Gift Tax Return Strategies," 28 Est. Plng. 3 (January 2001).

(54) The New York Times noted that the 1999 audit rate for gifts under $600,000 was only 0.3%, while 75.3% of gifts over $1 million were audited; see Johnston, "I.R.S. Sees Increase in Evasion of Taxes on Gifts to Heirs," NY Times (4/2/00).

(55) Rev. Proc. 66-49, 1966-2 CB 1257; Regs. Sec. 301.6501(c)-1(f)(3); see also Reilly, "When the Appraiser Takes the Stand," 2 Valuation Strategies 12 (November/December 1998) and Est. of Albert L. Dougherty, TC Memo 1990-274.

(56) See the Economic Growth and Tax Relief Reconciliation Act of 2001.

For more information about this article, contact Mr. Scroggin at Jeff@scrogginlaw.com.
John J. Scroggin, J.D., LL.M.
Scroggin & Associates
Roswell, GA
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Title Annotation:part 2
Author:Scroggin, John J.
Publication:The Tax Adviser
Geographic Code:1USA
Date:Jul 1, 2001
Words:5422
Previous Article:Exemptions in unclaimed property: Fact or fiction?
Next Article:What every CPA needs to know about life insurance.
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