United States Gift (and Generation-Skipping Transfer) Tax Return

If you are filing this form solely to elect gift-splitting for gifts of not more than $20,000 per donee, you may be able to use Form 709-A, United States Short Form Gift Tax Return, instead of this form. See Who Must File on page 3 and When the Consenting Spouse Must Also File a Gift Tax Return on page 5.

Changes To Note

• For 2001, mail this form to Internal Revenue Service Center, Cincinnati, Ohio, 45999. See Where To File on
  page 4.
• For gifts made to spouses who are not U.S. citizens, the annual exclusion has increased to $106,000. See page 3.
• The generation-skipping transfer (GST) lifetime exemption has increased to $1,060,000. See page 10.
• Act section 561 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (code section 2632) made several changes to the special rules for allocation of GST exemption. One of the changes creates an automatic allocation of GST exemption to indirect skips. Other changes create special elections including an election out of the automatic allocation. See the instructions for Line 5 on page 11.

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Note: If you meet all of the following requirements, you are not required to file Form 709:

For additional information, see Transfers Not Subject to the Gift Tax below and Who Must File on page 3.

Purpose of Form

Use Form 709 to report the following:

• Transfers subject to the Federal gift and certain generation-skipping transfer (GST) taxes and to figure the tax, if any, due on those transfers, and
• Allocation of the lifetime GST exemption to property transferred during the transferor's lifetime. (For more details, see the instructions for Part 2 - GST Exemption Reconciliation on page 10, and Regulations section 26.2632-1.)

All gift and GST taxes are computed and filed on a calendar year basis regardless of your income tax accounting period.

Transfers Subject to the Gift Tax

Generally, the Federal gift tax applies to any transfer by gift of real or personal property, whether tangible or intangible, that you made directly or indirectly, in trust, or by any other means to a donee.

The gift tax applies not only to the gratuitous transfer of any kind of property, but also to sales or exchanges, not made in the ordinary course of business, where money or money's worth is exchanged but the value of the money (or property) or money's worth received is less than the value of what is sold or exchanged. The gift tax is in addition to any other tax, such as Federal income tax, paid or due on the transfer.

The exercise or release of a general power of appointment may be a gift by the individual possessing the power. General powers of appointment are those in which the holders of the power can appoint the property subject to the power to themselves, their creditors, their estates, or the creditors of their estates. To qualify as a power of appointment, it must be created by someone other than the holder of the power.

The gift tax may also apply to the forgiveness of a debt, to interest-free or below market interest rate loans, to the assignment of the benefits of an insurance policy, to certain property settlements in divorce cases, and to the giving up of some amount of annuity in exchange for the creation of a survivor annuity.

Bonds that are exempt from Federal income taxes are not exempt from Federal gift taxes.

Code sections 2701 and 2702 provide rules for determining whether certain transfers to a family member of interests in corporations, partnerships, and trusts are gifts. The rules of section 2704 determine whether the lapse of any voting or liquidation right is a gift.

Transfers Not Subject to the Gift Tax

Three types of transfers are not subject to the gift tax. These are transfers to political organizations and payments that qualify for the educational and medical exclusions. These transfers are not gifts as that term is used on Form 709 and its instructions. You need not file a Form 709 to report these transfers and should not list them on Schedule A of Form 709 if you do file Form 709.

Political organizations. The gift tax does not apply to a transfer to a political organization (defined in section 527(e)(1)) for the use of the organization.

Educational exclusion. The gift tax does not apply to an amount you paid on behalf of an individual to a qualifying domestic or foreign educational organization as tuition for the education or training of the individual. A qualifying educational organization is one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. See section 170(b)(1)(A)(ii) and its regulations.

The payment must be made directly to the qualifying educational organization and it must be for tuition. No educational exclusion is allowed for amounts paid for books, supplies, room and board, or other similar expenses that do not constitute direct tuition costs. To the extent that the payment to the educational institution was for something other than tuition, it is a gift to the individual for whose benefit it was made, and may be offset by the annual exclusion if it is otherwise available.

Contributions to a qualified state tuition program on behalf of a designated beneficiary do not qualify for the educational exclusion.

Medical exclusion. The gift tax does not apply to an amount you paid on behalf of an individual to a person or institution that provided medical care for the individual. The payment must be to the care provider. The medical care must meet the requirements of section 213(d) (definition of medical care for income tax deduction purposes). Medical care includes expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, or for transportation primarily for and essential to medical care. Medical care also includes amounts paid for medical insurance on behalf of any individual.

The medical exclusion does not apply to amounts paid for medical care that are reimbursed by the donee's insurance. If payment for a medical expense is reimbursed by the donee's insurance company, your payment for that expense, to the extent of the reimbursed amount, is not eligible for the medical exclusion and you have made a gift to the donee.

To the extent that the payment was for something other than medical care, it is a gift to the individual on whose behalf the payment was made and may be offset by the annual exclusion if it is otherwise available.

The medical and educational exclusions are allowed without regard to the relationship between you and the donee. For examples illustrating these exclusions, see Regulations section 25.2503-6.

Qualified disclaimers. A donee's refusal to accept a gift is called a disclaimer. If a person makes a qualified disclaimer with respect to any interest in property, the property will be treated as if it had never been transferred to that person. Accordingly, the disclaimant is not regarded as making a gift to the person who receives the property because of the qualified disclaimer.

Requirements. To be a qualified disclaimer, a refusal to accept an interest in property must meet the following conditions:

1. The refusal must be in writing;
2. The refusal must be received by the donor, the legal representative of the donor, the holder of the legal title to the property to which the interest relates, or the person in possession of the property within 9 months after the later of (a) the day on which the transfer creating the interest is made or (b) the day on which the disclaimant reaches age 21;
3. The disclaimant must not have accepted the interest or any of its benefits;
4. As a result of the refusal, the interest must pass without any direction from the disclaimant to either (a) the spouse of the decedent or (b) a person other than the disclaimant; and
5. The refusal must be irrevocable and unqualified.

The 9-month period for making the disclaimer generally is determined separately for each taxable transfer. For gifts, the period begins on the date the transfer is a completed transfer for gift tax purposes. For a transfer by will, it begins on the date of the decedent's death.

Transfers Subject to the Generation-Skipping Transfer Tax

You must report on Form 709 the GST tax imposed on inter vivos direct skips. (See Regulations section 26.2662-1(b) for instructions on how to report other generation-skipping transfers.) An inter vivos direct skip is a transfer made during the donor's lifetime that is: (a) subject to the gift tax; (b) of an interest in property; and (c) made to a skip person. (See
page 6.)

A transfer is subject to the gift tax if it is required to be reported on Schedule A of Form 709 under the rules contained in the gift tax portions of these instructions, including the split gift rules. Therefore, transfers made to political organizations, transfers that qualify for the medical or educational exclusions, transfers that are fully excluded under the annual exclusion, and most transfers made to your spouse are not subject to the GST tax.

Transfers subject to the GST tax are described in further detail in the instructions on page 6.

Important: Certain transfers, particularly transfers to a trust, that are not subject to gift tax and are therefore not subject to the GST tax on Form 709 may be subject to the GST tax at a later date. This is true even if the transfer is less than the $10,000 annual exclusion. In this instance, you may want to apply a GST exemption amount to the transfer on this return or on a Notice of Allocation. For more information, see Part 2 - GST Exemption Reconciliation on page 10.

Transfers Subject to an Estate Tax Inclusion Period

If property that is transferred by gift in a GST direct skip would have been includible in the donor's estate if the donor had died immediately after the transfer (other than by reason of the donor having died within 3 years of making the gift), the direct skip will be treated as having been made at the end of the estate tax inclusion period (ETIP) rather than at the time it was actually made. For details, see section 2642(f).

Report the gift portion of such a transfer in Schedule A, Part 1, at the time of the actual transfer. Report the GST portion in Schedule A, Part 2, but only at the close of the ETIP. Use Form 709 only to report those transfers where the ETIP closed due to something other than the donor's death. If the ETIP closed as the result of the donor's death, report the transfer on Form 706.

If you are filing this Form 709 solely to report transfers subject to an ETIP, complete the form as you normally would with the following exceptions:

1. Write ETIP at the top of page 1;
2. Complete only lines 1-4, 6, 8, and 9 of Part 1, General Information;
3. Complete Schedule A, Part 2, as explained in the instructions for that schedule on page 8;
4. Complete Column B of Schedule C, Part 1, as explained in the instructions for that schedule on page 10;
5. Complete only lines 14 and 15 of Schedule A, Part 3. (Also list here direct skips that are subject only to the GST tax as the result of the termination of an estate tax inclusion period. See instructions for Schedule C beginning on page 10.)

Section 2701 Elections

The special valuation rules of section 2701 contain three elections that you must make with Form 709.

1. A transferor may elect to treat a qualified payment right he or she holds (and all other rights of the same class) as other than a qualified payment right.
2. A person may elect to treat a distribution right held by that person in a controlled entity as a qualified payment right.
3. An interest holder may elect to treat as a taxable event the payment of a qualified payment that occurs more than 4 years after its due date.

The elections described in 1 and 2 must be made on the Form 709 that is filed by the transferor to report the transfer that is being valued under section 2701. The elections are made by attaching a statement to Form 709. For information on what must be in the statement and for definitions and other details on the elections, see section 2701 and Regulations section 25.2701-2(c).

The election described in 3 may be made by attaching a statement to either a timely or a late filed Form 709 filed by the recipient of the qualified payment for the year the payment is received. If the election is made on a timely filed return, the taxable event is deemed to occur on the date the qualified payment is received. If it is made on a late filed return, the taxable event is deemed to occur on the first day of the month immediately preceding the month in which the return is filed. For information on what must be in the statement and for definitions and other details on this election, see section 2701 and Regulations section 25.2701-4(d).

All of the elections may be revoked only with the consent of the IRS.

Who Must File

Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes.

The donor is responsible for paying the gift tax. However, if the donor does not pay the tax, the person receiving the gift may have to pay the tax.

If a donor dies before filing a return, the donor's executor must file the return.

A married couple may not file a joint gift tax return. However, see Split Gifts - Gifts by Husband or Wife to Third Parties on page 4.

If a gift is of community property, it is considered made one-half by each spouse. For example, a gift of $100,000 of community property is considered a gift of $50,000 made by each spouse, and each spouse must file a gift tax return.

Likewise, each spouse must file a gift tax return if they have made a gift of property held by them as joint tenants or tenants by the entirety.

Citizens or Residents of the United States

If you are a citizen or resident of the United States, you must file a gift tax return (whether or not any tax is ultimately due) in the following situations:

Gifts to your spouse. You must file a gift tax return if your spouse is not a U.S. citizen and the total gifts you made to your spouse during the year exceed $106,000, or if you made any gift of a terminable interest that does not meet the exception described in Life estate with power of appointment on page 9.

You must also file a gift tax return to make the QTIP (Qualified Terminable Interest Property) election described on page 9.

Except as described above, you do not have to file a gift tax return to report gifts to your spouse regardless of the amount of these gifts and regardless of whether the gifts are present or future interests.

Gifts to donees other than your spouse. You must file a gift tax return if you gave gifts to any such donee that are not fully excluded under the $10,000 annual exclusion (as described below). Thus, you must file a gift tax return to report any gift of a future interest (regardless of amount) or to report gifts to any donee that total more than $10,000 for the year.

Gifts to charities. If the only gifts you made during the year are deductible as gifts to charities, you do not need to file a return as long as you transferred your entire interest in the property to qualifying charities. If you transferred only a partial interest, or transferred part of your interest to someone other than a charity, you must still file a return.

If you are required to file a return to report noncharitable gifts and you made gifts to charities, you must include all of your gifts to charities on the return.

Gift splitting. You must file a gift tax return to split gifts (regardless of their amount) with your spouse as described in the Specific Instructions for Part 1 on page 4.

The term citizen of the United States includes a person who, at the time of making the gift:

• Was domiciled in a possession of the United States;
• Was a U.S. citizen; and
• Became a U.S. citizen for a reason other than being a citizen of a U.S. possession or being born or residing in a possession.

Annual Exclusion

The first $10,000 of gifts of present interests to each donee during the calendar year is subtracted from total gifts in figuring the amount of taxable gifts. For a gift in trust, each beneficiary of the trust is treated as a separate donee for purposes of the annual exclusion.

All of the gifts made during the calendar year to a donee are fully excluded under the annual exclusion if they are all gifts of present interests and if they total $10,000 or less.

Note: For gifts made to spouses who are not U.S. citizens, the annual exclusion has been increased to $106,000, provided the additional $96,000 gift would otherwise qualify for the gift tax marital deduction (as described in the line 8 instructions on page 9).

A gift of a future interest cannot be excluded under the annual exclusion.

A gift is considered a present interest if the donee has all immediate rights to the use, possession, and enjoyment of the property and income from the property. A gift is considered a future interest if the donee's rights to the use, possession, and enjoyment of the property and income from the property will not begin until some future date. Future interests include reversions, remainders, and other similar interests or estates.

Note: A contribution to a qualified state tuition plan on behalf of a designated beneficiary is considered a gift of a present interest.

A gift to a minor is considered a present interest if all of the following conditions are met:

1. Both the property and its income may be expended by, or for the benefit of, the minor before the minor reaches age 21;
2. All remaining property and its income must pass to the minor on the minor's 21st birthday; and
3. If the minor dies before the age of 21, the property and its income will be payable either to the minor's estate or to whomever the minor may appoint under a general power of appointment.

The gift of a present interest to more than one donee as joint tenants qualifies for the annual exclusion for each donee.

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