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The splitting issue.

Every individual is allowed to transfer up to $10,000 worth of property to any other person and have it qualify for an annual gift tax exclusion, as long as the interest qualifies as a present interest. If the transfer is $10,000 or less, no gift tax return need be filed.

Married couples are given a special opportunity. With their consent, they are allowed to split gifts made during the year so that the gifts are deemed made half by each spouse. Once an election is made, it applies to all eligible gifts made during the year; the spouses cannot pick and choose which gifts to split.

This point is often overlooked. Both spouses must consent to split the gifts; consent is signified only by filing and signing Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return. Consent cannot be implied.

Why not have each spouse make a gift? One spouse may have all the assets, or one spouse may have certain assets that would be a better subject for a gift (e.g., closely held business stock or a limited partnership interest).

Why is consent needed? Consent is needed if the spouses want to make full use of the annual exclusion allowed to each donor. If only one spouse owns the property to be transferred, consent is necessary to make use of each spouse's $10,000 exclusion (rather than being limited to only one $10,000 exclusion).

When Gifts Cannot Be Split

There are times when gifts cannot be split. To split gifts, both spouses must be U.S. citizens or residents; a U.S. citizen married to a nonresident alien may not split gifts. Of course, each can make their own $10,000 gift, but the gifts cannot be split.

In the year of death, only gifts made before death may be split. This is true regardless of the donor's identity. Consent for the deceased spouse is made by the executor or administrator; consent for a decedent can be signified by the surviving spouse only if no executor or administrator is appointed.

Gifts cannot be split if one of the spouses has an interest as a donee in the transferred property.

If a husband transfers property to a trust for the benefit of his wife and children (income and principal to be distributed within the trustee's discretion), he cannot split the gift with his wife because of her interest in the trust. However, under certain circumstances, the gift can be split even if the wife has an interest in the trust. The wife's interest must be severable from the other interests; it must also be ascertainable. A gift can still be split if the spouse's interest in the trust is remote and contingent.

Caution: If spouses elect to split gifts, they split all gifts. But what happens to the gift in which the nondonee spouse has an interest? Obviously there can be no gift-splitting as to that gift, but this does not prevent the remainder of the gifts made during the year from being split.

Special care should be exercised in splitting gifts in certain situations. In the case of second marriages, the spouses may not be benefiting the same beneficiaries at death. While consenting to split gifts that use only the annual exclusion may not cause adverse consequences, if there is use of the unified credit for a split gift, it is possible that there could be some detriment to the nondonor spouse's estate.

Certain types of gifts may require inclusion in the donor's estate because of a retained interest. Two of the more common instances in which this may arise may be with a grantor retained annuity trust or a qualified personal residence trust. There may be adverse consequences to the surviving spouse if there has been use of gift-splitting and the unified credit to shelter the gift from tax and the donor spouse dies during the trust term. While the donor's credit is restored, the surviving spouse's credit is not (Sec. 2001 (b)).

Conclusion

While it is common practice for spouses to split gifts, before the decision is made in any year, the taxpayers should review the gifts made during the year with their estate planning tax adviser to make sure that the correct decision, or at least an informed decision, is made.

FROM RANDI A. SCHUSTER, J.D., LL.M., NEW YORK, NY
COPYRIGHT 2000 American Institute of CPA's
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Title Annotation:gift splitting
Author:Schuster, Randi A.
Publication:The Tax Adviser
Geographic Code:1USA
Date:May 1, 2000
Words:731
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