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It’s Gift-Giving Time, But Properly Please

(Article published in the Dec 8, 2003 issue of TODAY, Business Section)

The year-end is that time of year when tax advisers usually ask their clients to consider the virtues of gift-giving, or, more better still, gift-splitting.  In very dramatic fashion, it is demonstrated that making one’s gift when everyone is paying attention to the fireworks on New Year’s eve has its economic benefits.  Cutting one’s tax bill on gifts to one’s children is not a bad way to start 2004. 

The logic is compelling.  Let us say an estate owner has an estate worth P20,000,000.00 and expects that all he needs is one-half of that while he is alive.  In other words, P 10,000,000 he is resigned would pass on to his children as his legacy, inheritance, or whatever.   

If he were to do nothing at all, and his expectations come to pass, the estate tax on the P 10,000,000.00 he will by his death give to his children is P 1,215,000.00.  If, on the other hand, he were to anticipate his dying by giving the P 10,000,000 now, or, say on December 31, 2003, then the tax that would have to be paid is P 1,004,000.00.  He will therefore achieve, by giving now instead of upon his death, transfer tax savings of P 211,000. 

If, however, he wants to save some more, the estate owner could split his gift into two, one in the amount of P 5,000,000 to be given on December 31, 2003 one second before the stroke of midnight, and the balance of P 5,000,000 one second after.  The result of splitting the P 10,000,000 gift into two gifts, separated by only one gulp of a beer or a sip of champagne, is savings in gift taxes in the amount of P 196,000. 

The magic is not in the alcohol but in the method of computing the donor’s tax, annually.  The gift on December 31, 2003  is not lumped together with the gift on January 1, 2004 because they are given in separate years.  The P 5,000,000 given on December 31 will be taxed P 404,000.00.  The balance of P 500,000 will also be taxed at P 404,000, and thus the total of the transfer taxes for the two gifts, is only P 808,000. Hence, the cheers of gift-splitting, savings in gift taxes of P 196,000.  If the P 808,000 taxes due on gift-splitting is compared with the P 1,215,000 which would have to be paid upon the estate owner’s death, the savings of P 407,000 can pay  for another drink or two.   

The arithmetic is enough (there are other benefits to gift-giving rather than giving by dying) to convince estate owners to execute donations at this time of year.  Two words of caution, however, are appropriate while we are still sober. 

The first is that gift-splitting will work best if there are no gifts made during any one of the two years.  If, say, the same estate owner had gone through the same exercise the last Christmas season, and had given P 5,000,000 on January 1, 2003 (after giving P 5,000,000 on December 31, 2002), then the tax on his gift on December 31, 2003 will be P 1,004,000 less the tax he paid on the first gift of the year, namely P 400,000.  This is because, all the gifts in one year are lumped together (cumulated, the tax experts say) and the resulting tax on the last gift of the year is computed as if all the gifts during that year were made on that occasion.  Taxes on previous gifts during the year are considered tax credits, or advances of the final tax due.  One who wants to take advantage of gift-splitting several times should therefore separate his exercises by one year during which he does not make any gift. 

The other word of caution is that one must make sure that the gift is really a gift.  It generally makes no sense to simply try to save on taxes but seek to retain economic benefits from the property given.  The very common pitfall is for the estate owner to provide in his deed of donation that he is giving “out of his love and affection” for the donees (this is the language of a donation and therefore the purpose of putting it is to establish the premise that the gift was made during his lifetime) but to say, further, that it is to be effective upon the donor’s death.  If the donee should die ahead of the donor, the donation usually says the donation is to be considered automatically rescinded. 

The foregoing provisions on effectivity upon death and predecease of the donee nullifies the tax benefits of giving during one’s lifetime.  The courts have consistently held that that language indicates an intent to transfer the property upon the donor’s death.  Hence, it should be in the form of a will and must be probated to take effect.  The consequence of this is that the property (on which the donor’s tax had already been paid) must still be included in the computation of the gross estate of the decedent and subjected to the estate tax.   

In what, as far as I know, is the only case on this subjected decided this year by the Supreme Court, in Ganuelas v. Cawed, G.R. No. 123968, promulgated 24 April 2003, it was held, summarizing previous rulings, that the following are the tale-tale signs of a donation intended to take effect upon one’s death (a donation mortis cause, says your lawyer relative trying to impress your grandmother): 

1. The “donation” conveys no title or ownership to the transferee before the death of the transferor; or, what amounts to the same thing, the transferor retains ownership (full or naked) and control of the property while alive;

2. Before his death, the transfer can be revoked at will, (ad nutum, says our favorite lawyer relative again).  This revocability is sometimes indirectly reserved by means of retaining for the donor the power to dispose of the property purportedly given; and

3. The transfer is considered void if the transferor should survive the transferee. 

      All these simply means that one should plan carefully and consider one’s estate planning options way ahead of the toasting and the roasting of the Christmas season.  To fail to do so, is to simply increase the possibility of running into unwanted complications and incurring expenses to no avail, if not outright fomenting family quarrels.  Cases among family members I have always considered as “a lawyer’s delight”.