With Congress expected to take up major tax reform soon, there has been a lot of talk about what will happen to the estate tax. Little focus has been given to the gift tax, but it also is important.
The gift tax is often thought of as a check on those who would seek to avoid the estate tax. The two taxes are normally set with about the same exemptions, limits and rates. This leads to the impression that the sole purpose of the gift tax is to make it more difficult for people to avoid the estate tax by gifting all of their assets away.
While that is one of the purposes, it is not the only one.
With Congress set to possibly repeal the estate tax, it is important to understand what that might also mean for the gift tax, which Bloomberg recently discussed in "Gift Tax Tweaks Could Lead to Unsavory Avoidance Tactics."
The gift tax also prevents people from avoiding income taxes.
With no gift tax, property could be gifted tax-free to a child to lower tax burdens. It could then be gifted back when needed. This would suggest that the gift tax should remain, even if the estate tax is eliminated.
However, it is not that simple.
If there is no estate tax, then instead of gifting property to a family member, money could be loaned at very generous terms. The amount of the loan could then be given to the family member in an estate plan, effectively allowing the gift to be tax-free.
It is not clear what Congress will do with the gift tax at this point.
The initial plan for tax reform included repeal of the estate tax, but was silent on the gift tax.
Reference: Bloomberg (April 10, 2017) "What Is Community Property and What Are Community Property Trusts?"