Taxation for Accountants

June 1998

60 Tax'n for Acct. 353

LENGTH: 5657 words

SUBJECT: GIFTS TO MINORS

TITLE: GIFTS TO MINORS CAN BE TIED UP WITH MORE THAN PRETTY RIBBONS

AUTHOR: RON WEST, CPA and Attorney

RON WEST, CPA, LL.M., is a tax professor at Fairleigh Dickinson University in Madison, New Jersey.

HIGHLIGHT: The Uniform Gifts to Minors Act and its successor, the Uniform Transfers to Minors Act, can be used to restrict a child's access to assets received as gifts--while leaving the gifts eligible for the annual gift tax exclusion.

CORE TERMS: gift, custodian, donor, custodial, taxed, gift tax, unearned income, kiddie, outright, saving, annual, custodianship, guardianship, taxable income, grantor trust, tax bracket, minor child, income tax, tax rate, transferred, shifting, spouse, donee, taxation, guardian, legal obligation, accomplished, beneficiary, terminate, annual exclusion

TEXT:

There are many reasons for making gifts to minors that have little to do with tax considerations. Yet, some specific considerations tend to weigh against giving substantial wealth to children. Chiefly, they may lack the maturity and ability to prudently manage property. The level of such concerns tends to rise as the amount of the gift increases. Thus, donors often prefer to circumscribe and defer the minor's control over the property.

Another constraint on gifts that donors might want to consider is the minor's eligibility for college aid. Generally, assets owned by a minor tend to count more heavily against the minor's eligibility for college aid than if such assets were held by the minor's parent. (A full exploration of the various aspects relating to higher education financial aid is beyond the scope of this article.)

General tax considerations

When making lifetime gifts to minors, donors are often driven by a desire to minimize taxes--income, gift, estate, and generation-skipping transfer taxes. From an income tax planning point of view, the donor seeks to maximize, to the extent possible and subject to the "kiddie tax" rules (explained below), the shifting of income from the donor, who is presumably in a higher tax bracket, to the minor/donee, who is usually in a lower tax bracket.

For estate tax planning purposes, the donor's objective is to remove from his or her estate either the value of the gift, based on the annual gift tax exclusion, or any appreciation taking place after the date of the gift. Gifts to minors can facilitate the shifting of any potential future appreciation of the property from the donor to the donee.

From a gift tax planning point of view, the donor's primary objective is to obtain the annual gift tax exclusion, which is presently $10,000 (subject to inflation adjustment under TRA '97). *<1> To qualify for the annual gift tax exclusion, a present interest must be given. When properly planned, gifts to minors that qualify for the annual gift tax exclusion will completely remove from the donor's gift and estate tax base the lesser of the annual gift tax exclusion or the value of the gift.

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*<1> Section 2503(b).

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Form of transfer

Gifts to minors can be accomplished through various forms of transfers. Common to all forms is the need to balance the tax, nontax, and emotional considerations involved in the gift-making decision.

Direct gifts.The simplest form is a direct, outright gift to the minor. Outright gifts are easily accomplished by simply transferring the physical asset to the minor or by delivering a deed or other gift document, or a bank passbook to the minor. Outright gifts avoid the need to interpose intervening entities. An outright gift, however, vests full title in the minor on completion of the gift.

While outright transfers to minors can be accomplished most readily and are the simplest form of transfer, generally the drawbacks associated with them outweigh their usefulness. The biggest drawback is the immediate and permanent loss of control over the gift property.

Another important problem with outright gifts is that the laws of many states treat minors as legally incompetent. In most states, a minor can receive and own property in his or her own name outright, but subsequent transfers of and other dealings with the gift property by the minor are either prohibited or severely limited. Generally, any contracts made by minors, other than for necessities, are voidable at the option of the minor on reaching majority, tending to make dealings with minors risky and unlikely.

Guardianship.Transfer of the gift to a guardian under guardianship arrangements is a cumbersome, inflexible, and expensive alternative. It generates ongoing yearly expenses, for items such as the required periodic accounting to a court and the process of obtaining court approval for transactions. Guardians generally must submit periodic accounts to a court of all transactions and post bond as security for the faithful performance of their duties.

Trusts.A more complex form of transfer involves creating one of several types of trusts--a Section 2503(c) trust, a Crummey trust, or some other tax-or nontax-motivated trust. Trust arrangements are very flexible and versatile, and can achieve multiple tax and nontax advantages. For the great majority of donors, however, the high costs involved with setting up a trust and the ongoing costs of administration, relative to the value of the gift, may present sufficient obstacles that implementation may be limited.

Under certain circumstances, however, serious consideration should be given to the use of trusts. For instance, a trust may be appropriate for a gift of a large sum of money, a substantial portion of the donor's estate, a business interest, a personal residence, or any gift involving special considerations and needing extensive and detailed administration.

UGMA and UTMA transfers

Somewhere in the middle, between the very simple and the more complex forms of gift transfers are transfers that are made under the Uniform Gifts to Minors Act (UGMA) and its successor and replacement, the Uniform Transfers to Minors Act (UTMA). For many donors, several tax and nontax benefits can be achieved by using the UGMA and UTMA when giving gifts to minors. Although neither Act has restrictions with respect to the size of gifts (or, generally, the type of property that may given under the UTMA), a transfer pursuant to the UGMA and UTMA is most appropriate for a gift of a relatively modest dollar amount that falls within the annual gift tax exclusion amount.

All states have adopted some variation of the UGMA and its progeny the UTMA. The UGMA has increasingly been eclipsed by the UTMA, which has now been adopted in some form by more than 40 states and the District of Columbia. For example, New York State recently adopted the UTMA with an effective date of 1/1/97. Since variations exist among state UGMA and UTMA provisions, the specific state statute should be consulted before a gift is made. This article generally discusses the UGMA or UTMA that was adopted by the National Conference of Commissioners on Uniform State Laws.

Sidebar

The UGMA was first adopted in 1965 by the National Conference of Commissioners on Uniform State Laws, and amended in 1966. All the states adopted the act, with various levels of modifications. In 1983, the UTMA (the successor to the UGMA) was approved by the National Conference of Commissioners on Uniform State Laws. (See Uniform Transfers to Minors Act, 8A U.L.A. 153 (1987 Supp.).) Most states have enacted the UTMA, with various levels of modifications. Very few states still retain the UGMA.

Generally, the UTMA will apply to a gift if either the donor, the minor, or the custodian is a resident of, or the subject property is located in, a state that has adopted the UTMA at the time of transfer. A donor domiciled in a state that has not yet adopted it is not precluded from its application. To have the UTMA apply, all the donor need do is appoint a custodian, or place the property, in the state whose UTMA law is to control the custodial arrangement.

Comparison of the Acts.The central purpose of both Acts is to facilitate gifts of certain property to minors. The UTMA provides significant advantages over the UGMA. It is broader, more flexible, and more liberal. Although the UTMA has eclipsed the UGMA, generally, transfers that pre-date the effective date of a state's UTMA continue to be governed by the UGMA.

(1) Under the UGMA, a custodianship generally terminates when the minor reaches 18. The termination age under the UTMA is 21, regardless of the state's majority age. Some states let the donor elect to have the custodianship terminate at 18.

(2) The UTMA custodian has broader authority to manage the property than an UGMA custodian. The authority of an UGMA custodian is specified in the statute by an enumerated list of powers. Among the list of powers conferred on an UGMA custodian is the authority to make prudent investments. This is the "prudent man" standard, as opposed to the more restricted "legal investment" standard that is applicable to guardianship. A custodian under UTMA may generally exercise the same managerial powers over the property as can be exercised by an unmarried adult owner over his or her own property.

(3) The types of property that may be given under the UGMA are more restricted than under the UTMA (as discussed below).

Advantages.Gifts made under both Acts provide distinct advantages over outright gifts. Both Acts also offer a superior alternative to guardianship arrangements.

(1) Both Acts facilitate gift giving by eliminating the normal requirement of either appointing a guardian or setting up a trust when a minor is the intended beneficiary of a gift. Formalities, costs, and other burdens associated with guardianship are bypassed. Donors are spared the time and expense involved in having a legal guardian appointed.

(2) Although custodians, as fiduciaries, need to keep accurate records and accounts of all transactions, periodic accounting generally is not required of custodians (as it is of guardians). Neither do custodians have to post bond.

(3) The powers of a custodian to deal with the gift property are much broader under both Acts than under a guardianship. In sharp contrast to guardianships, neither the UTMA nor UGMA normally require court approval to act.

Under both Acts, the custodial powers are exercised for the exclusive benefit of the minor. A custodian may disburse or accumulate the income and principal to or for the benefit of the minor, as the custodian deems advisable in his or her sole discretion. Usually, a custodian's action or lack of action cannot be assailed. A custodian who withholds funds that are requested for support, education, and maintenance of the minor, however, may find himself or herself challenged by a parent or guardian of a minor who is over the age of 14.

A donor is also able to sidestep the need to create a trust when making a gift under either Act. By a simple custodial transfer, all of the provisions of UGMA and UTMA are automatically incorporated.

Disadvantages.There are some disadvantages to making transfers under either Act.

(1) A custodial arrangement must terminate and the minor must receive all the custodial property outright on attaining the age of majority. The majority age varies between 18 and 21. Donors unwilling to transfer large sums of money that will fall under the complete control of the donee at such an age may opt to use a trust instead.

(2) If the minor dies before attaining majority, the custodial property is distributed to the minor's estate. In most jurisdictions, a minor cannot have a valid will. Thus, the property, which the parent may have sought to remove from his or her estate, would revert back to the parent under laws of intestacy.

Gift-giving mechanics.A custodianship gift is accomplished by manifesting the intent to make a gift under the particular state's relevant Act, accompanied by transfer of the property to a custodian for the minor. The custodian manages, holds, administers, and cares for the property for the benefit of the minor until the minor attains majority.

By a simple statement in the transfer instrument that the transfer is made to a custodian "as custodian for" the minor donee under the state's UTMA, accompanied by a physical transfer of the property, all the provisions of the state UTMA are incorporated by reference. There is no further need to execute any other instruments. Thus, gifts under both Acts avoid the need for formal trust documents, the intervention of courts to obtain orders, surety bonds associated with guardianships, or formal accounting submitted to a court.

Registered securities, for instance, can be transferred by having title to the securities placed in the name of the custodian followed by "as custodian for [named minor] under the [name of state] Uniform Transfers to Minors Act." Similarly, bank accounts, insurance beneficiary designations, and other property can be transferred to a custodial arrangement.

Types of property.Typically, only cash, cash equivalents (bank accounts, savings accounts, certificates of deposit), life insurance, and securities may be transferred under the UGMA. Personal property, general partnership interests, and realty cannot be transferred under the UGMA. Common to all types of property that may be transferred under the UGMA is the relatively passive nature of the property. Very little ongoing managerial and administrative oversight is required of the custodian. Property requiring more custodial oversight, such as real estate, is viewed as best handled through a trust transfer, where appropriate provisions can be crafted to handle the added administrative and managerial oversight.

Under the UTMA, any type of property may be transferred, whether real or personal, tangible or intangible. Transfers may be made of various types of interests in property, including joint interests with rights of survivorship, general partnership interests, and contingent and expectancy interests. Besides lifetime transfers, the UTMA permits transfers from trusts, estates, and guardianships.

Provisions were added to the UTMA to address the various legal issues inherent in the ownership by the custodian of different types of property. As a result, the UTMA is much more versatile and useful in a wider range of situations than the UGMA.

Tax issues

The income, gift, and estate taxation of transfers made under the UGMA have been largely settled for many years. *<2> Because the UTMA is a newer statute, less published authority exists with respect to its income, gift, and estate tax consequences. Nonetheless, because of the many similarities between the two Acts, the same analysis and rules applicable to UGMA transfers should apply equally to UTMA transfers.

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*<2> Rev. Rul. 59-357, 1959-2 CB 212.

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Income tax considerations.A custodianship transfer does not create a trust for tax purposes. The custodian is not a trustee (and, therefore, need not file a fiduciary income tax return) and the transfer is ignored for income tax purposes. Instead, subject to the grantor trust rules, *<3> the income generated by the custodial property is generally reported by the minor beneficiary on his or her individual tax return. All income is reported by the minor, whether or not distributed to the minor. The minor's Social Security number is the identification number that should be provided for all custodial assets and accounts.

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*<3> Sections 671-678.

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Kiddie tax.Individuals are generally taxed on their income at their own tax rates. Relying on this basic rule, prior to 1986, intra-family tax savings could be achieved by shifting income to a minor child. Parents were advised and encouraged to give income-producing assets to their children. The income generated by the gift property, now held by the child, was taxable to the child at the child's tax rate, which invariably was lower than the parent's tax rate. Also, until 1986, a child was able to shield taxable income with the child's personal exemption and standard deduction.

In response to this perceived abuse, effective as of 1986, Congress passed what is commonly referred to as the "kiddie tax" provisions. *<4> These provisions deal with the taxation of investment or unearned income of children. In addition, provisions were added to the Code restricting and eliminating the standard deduction and dependency exemption available to such children. *<5> Under these provisions, a child is subject to the kiddie tax if, on the last day of the tax year, the child has not reached age 14 and has at least one living parent. Special rules apply to children whose parents are divorced or whose married parents file separately.

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*<4> Section 1(g).*<5> Sections 63 and 151(d).

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Under the kiddie tax rules, the tax imposed on any unearned income of a child, such as dividend, interest, or rental income, is computed by applying the parent's marginal rate. Thus, the possibility of reducing the family's tax burden by shifting income to minors has been restricted. The kiddie tax does not apply, however, to any earned income from the child's personal efforts, such as compensation, which continues to be taxed at the child's own tax rates.

Overly broad and inclusive, but perhaps for the sake of administrative ease, the kiddie tax applies to all unearned income of the child, regardless of whether the underlying property producing the income was given to the minor or acquired by the minor with his or her own earned income. Unearned income may be derived from direct or indirect sources. Indirect sources of unearned income include property held by a legal guardian, a custodian, a trust in which the child is a beneficiary, a partnership, or an S corporation. Thus, the kiddie tax applies whenever a gift to a minor is made. The form that the gift takes is irrelevant.

Although aggressive intra-family shifting of income to lower the family's overall taxes has been curtailed, a modest and worthwhile income tax saving for the family is still available. Under the kiddie tax provisions, the first $700 of any unearned income (interest, dividends, capital gains, rental income) of the minor is not taxed at all. The next $700 of any unearned income of the minor is taxed at the child's tax rate. *<6> Both the first and second $700 are amounts keyed to the minor's standard deduction amount, and like the standard deduction are adjusted for inflation each year. Only the excess unearned income, i.e., amounts in excess of $1,400, will be taxed at the top marginal rate of the parent.

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*<6> Section 1(g)(4)(A); Temp. Reg. 1.1(i)-1T, Q&A-6.

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If a minor's only source of income for the year is unearned income of $1,400, the tax will be $105. The same unearned income, if taxed to the parent and assuming a 31% tax bracket, results in additional tax to the parent of $434. Therefore, a savings of $329 can be achieved per child per year by shifting ownership of the income-generating property to the minor child. The annual saving would be $399 if the parent is in the 36% tax bracket.

To maximize the income-shifting potential and to avoid the kiddie tax, it is often advised that the gift, if cash, be invested so as to generate taxable income up to $1,400. The balance, if any, should be invested in assets that do not produce any current taxable income. Such assets include tax-free securities (e.g., municipal bonds), high-growth, low-dividend-paying stock, or other types of appreciating assets that do not generate present taxable income.

Older children.Once the minor child attains age 14, the kiddie tax no longer applies. This is when shifting of income from the parent to the minor child takes on greater significance. The first $700 of the minor's unearned income is still not taxed at all. Any excess of unearned (and earned) income above $700 is taxed to the minor child at the child's own tax rate.

In 1998, a single taxpayer is in the 15% tax bracket for taxable income up to $25,350. A minor over the age of 14 whose only income is unearned income is taxed $105 on the first $1,400 of unearned income, the same as for a minor under the age of 14 to whom the kiddie tax applies. Unearned income in excess of $1,400, however, is taxed at the older minor's own tax rate. Thus, unearned income not derived from the disposition of capital assets (e.g., interest and dividends) is taxed at only 15% as long as the minor's taxable income is not over $25,350.

Parent/donors in the 36% tax bracket can achieve intra-family tax savings at the federal level of 21 cents for every dollar of unearned income (that is not long-term capital gains) shifted to a minor child over the age of 14. Every $1,000 of such shifted taxable income yields $210 of federal income tax savings. Similarly, a parent in the 31% tax bracket can achieve tax savings of 16 cents per shifted dollar of income. Additional income tax savings may also be available at the state level.

Capital gains.The lower capital gain tax rates of TRA '97 present the opportunity for additional tax savings. Under the new law, the maximum capital gain tax rate is 20% for investments held more than 18 months. *<7> Even better, if a taxpayer is otherwise in the 15% tax bracket, the capital gain rate is 10%. *<8> Beginning in the year 2001, taxpayers who are otherwise in the 15% tax bracket will be eligible for an even lower 8% capital gain tax rate if the investments are held for at least five years. *<9>

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*<7> Section 1(h)(1).*<8> Section 1(h)(1)(D).*<9> Section 1(h)(2).

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As a result of these changes, making gifts of appreciated assets--such as stocks, bonds, and mutual funds--to a custodial account or investing custodial funds in capital assets may shift gain that would otherwise be taxed to the donor at a 20% rate to a donee taxed at a 10% rate.

Grantor trust rules.The ability to shift taxation on income to a minor, under and over 14, may be altogether lost if the gift falls under the grantor trust rules. *<10> If applicable, these rules supersede the general rule that income from custodial property is taxed directly to the minor. Generally, a custodianship arrangement is not a trust for tax purposes. The Service has ruled, however, that under certain circumstances, income from custodial property may be taxable to the donor parent under the grantor trust rules. *<11> When income derived from custodial property is used to discharge, in whole or in part, a legal obligation of any person (donor, custodian, or another) to support or maintain a minor, such income is deemed taxable to that person having the obligation to the extent so used. When the legal obligation of support falls on the donor of the custodial property, that result is supported by Section 677(b). Under Section 677(b), a grantor is taxed on any trust income that is actually applied or distributed for the support or maintenance of a beneficiary whom the grantor is legally obligated to support or maintain.

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*<10> Sections 671-678.*<11> Rev. Rul. 56-484, 1956-2 CB 23.

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When the support obligation is the custodian's, imposing tax on the custodian under the grantor trust provisions is supported by Section 678(b), under which a trustee is taxed on any income applied to the support or maintenance of a person whom the trustee is obligated to support or maintain. More difficult to rationalize is the situation in which a person is taxed under the grantor trust rules on income derived from custodial property that is used for the support or maintenance of a minor child even though the person being taxed is neither the donor nor the custodian.

The laws of some states prohibit the use of custodial funds to discharge the legal obligation of support by a parent. In such states, Section 677(b) will not apply to tax income generated by the custodial property to the donor parent. Other states do not prohibit use of custodial funds to discharge legal support obligations. To avoid the grantor trust taxation in those states, parent/donors may wish to instruct the custodian either to withhold expending funds towards support obligations of the parent, to apply funds only for luxuries that are not covered by the support obligations, or to retain the funds and withhold any outlays until the minor reaches majority age when the parental support obligations cease.

Since a custodian, however, is empowered with full discretion to deal with the property within the custodial arrangement, any instructions given to the custodian are only precatory in nature and cannot be legally binding on the custodian. Generally, under both Acts, the custodian cannot be required to follow the donor's wishes as to how, when, and whether monies should be expended for the benefit of the minor.

Estate tax considerations.Ownership of custodial property vests indefeasibly in the minor and not in the custodian. Neither Act prohibits or restricts a donor from acting as the custodian of his or her own gifts. In fact, it is quite common for a donor, who may be the minor's parent, to transfer property to him or herself as custodian for the minor. Yet, adverse estate tax consequences arise if a donor nominates him or herself as custodian and dies while serving in that capacity.

Under both Acts, a custodian is authorized to pay or withhold the income and the principal from the custodial property until the minor attains majority. These custodial powers to control the amounts and timing of income or principal distributions have been held to be a Section 2038(a)(1) power to alter, amend, revoke, or terminate. *<12> When a donor transfers property while retaining Section 2038(a)(1) powers, the value of the transferred property is includable in the donor's gross estate if the donor dies while the custodial arrangement is in effect. It is immaterial that the minor has a vested interest in the custodial property that would pass to the minor's heir in the event of the minor's demise before reaching the age of majority.

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*<12> Rev. Rul. 59-357, supra note 2.

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It may be equally inadvisable for the donor to nominate his or her spouse to act as custodian in place of the donor, since the subject property may be includable in the spouse's estate if the spouse predeceases the minor. This will occur if the donor's spouse (the designated custodian) has a legal obligation to support the minor and if state law does not restrict the spouse/custodian from using custodial funds to discharge that obligation. The right of a custodian to use custodial funds to discharge the custodian's support obligation is equivalent to a general power of appointment, which causes inclusion of the custodial property in the estate of the custodian who predeceases the minor transferee. *<13>

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*<13> Reg. 20.2041-1(c)(1). See also GCMs 37299, 10/21/77, and 37590, 6/29/78.

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Selecting custodian.If the objective is to minimize exposure to estate taxation, the custodian nominated should be a family member who is not burdened with a legal obligation to support the minor. Alternatively, a trusted family friend should be considered. As a practical matter, institutions are not readily sought because the fees charged for this type of service are too high for what are often modest-size accounts.

At times, two or more donors attempt to bypass inclusion of custodial property in their own estates by setting up custodianship accounts with each naming the other as custodian. The idea behind such reciprocal arrangements is that control is built into the arrangement because each donor is the custodian of the other's account. Donors should be counseled against such an arrangement.

Under the reciprocal trusts doctrine, reciprocal custodianship can be undone or uncrossed with the result that each donor is treated as the custodian of his or her own account and, therefore, subject to estate inclusion. The more interrelated and substantially identical the two custodianships, the greater the likelihood that the reciprocal trusts doctrine will be applied to undo the arrangement.

There are times when, notwithstanding careful planning, the property reverts back to the parent/donor. This can happen if the minor dies before attaining majority. The custodial property is then includable in the minor's estate. Since a minor cannot have a valid will in most jurisdictions, the property is transferred back to the parents.

Gift tax considerations.Donors are subject to gift tax on all gratuitous transfers, whether made directly, indirectly, in trust, or otherwise. A transfer of property into custodianship is a completed gift. *<14> The gift is the full FMV of the property transferred. In 1998, under the unified estate and gift tax regime, a cumulative exemption of $625,000 is available for lifetime and testamentary transfers. (This figure is scheduled to rise to $1 million in 2006.) The 1998 exemption amount is equivalent to a $202,050 credit against the gift and estate tax liability.

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*<14> Rev. Rul. 59-357, supra note 2.

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Annual exclusion.In addition to the cumulative exemption amount for transfers that can be made during life or at death free from gift and estate taxation, an annual exclusion is provided for the first $10,000 (adjusted for inflation) given to any donee per year. *<15> To qualify for the exclusion, the gift cannot be of a future interest. A future interest is an estate, remainder, or reversion interest in property, vested or contingent, that is to commence at some future time. *<16> A gift is not a future interest merely because the recipient is a minor. *<17>

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*<15> Section 2503(b).*<16> Reg. 25.2503-3.*<17> Rev. Rul. 54-400, 1954-2 CB 319.

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UGMA transfers are transfers of present interests that qualify for the gift tax annual exclusion. *<18> Therefore, such gifts of up to $10,000 are not subject to gift tax and do not necessitate any return filing. Also, there is no further gift if the custodian resigns or the custodianship terminates.

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*<18> Rev. Rul. 59-357, supra note 2.

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A special election lets a husband and wife double the annual gift tax exclusion to $20,000 per donee per year, when either the husband or wife gives $20,000 from his or her own separate property and the other spouse consents to have the gift treated as if it was made one-half by each spouse. *<19> This election is made on a gift tax return, which must be filed to elect the split-gift provision.

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*<19> Section 2513(a).

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Conclusion

Gifts to minors can be accomplished through a variety of legal forms. The form of transfer can range from the simplest, involving a direct and outright gift, to the more complex in which a trust is used. All states have adopted one version or another of the UGMA or its successor, the more flexible UTMA. There are many tax and nontax advantages to using the UGMA or UTMA for transferring gifts to minors. Gifts that are made under either Act provide distinct advantages over outright gifts, gifts to guardians, and in many instances, gifts in trust. Both Acts, and especially the UTMA, provide a simple and convenient mechanism to transfer most types of property to minors.

Although there are no restrictions on the size of the gift under either the UGMA or UTMA, in the author's view, they are most appropriate for relatively modest amounts that fall within the annual gift tax exclusion. Although gifts of up to $10,000 ($20,000 for married couples) per year may appear a relatively modest amount to some donors, a program of making gifts within the annual exclusion over many years can permit the transfer of sizeable sums.

Properly structured, gifts to minors under both Acts within the $10,000 annual gift tax exclusion provide the opportunity to remove the property from the donor's estate and gift tax base and also reduce income tax. Thus, gifts within the annual gift tax exclusion can, over time, achieve significant gift, estate, and income tax savings.