gift tax. Contributions by or on behalf of a self-employed person under a qualified plan are considered contributions of his own and therefore his exercise of the election is subject to the gift tax. The election or option under the Retired Serviceman's Family Protection Plan is not subject to the gift tax.

A. General

EXCLUSIONS FROM GIFTS

The first $3,000 of gifts made to any one person during any calendar year (except gifts of future interests in property) is excluded in determining the total amount of gifts for the calendar quarter. This $3,000 annual exclusion is applied to all gifts of a present interest made during the calendar year in the order in which they were made until the $3,000 exclusion per person is exhausted. For a gift in trust, each beneficiary of the trust is treated as a separate person for purposes of the $3.000 exclusion. However, the $3,000 exclusion is not available for gifts of a future interest, such as a remainder interest in a trust. The entire value of such a gift must be included in the total amount of gifts for the calendar quarter in which the gift was made.

B. Future Interests In Property

"Future interests" is a legal term that includes reversions, remainders, and other interests or estates, whether vested or contingent, that are to commence in use, possession, or enjoyment at some future date. On the other hand, an unrestricted right to the immediate use, possession, or enjoyment of property or the income from the property is a present interest in property. A gift to a corporation is a gift of a future interest to its stockholders, and does not qualify for the $3,000 exclusion. But such a gift qualifies for the marital deduction in proportion to the interest of the donor's spouse in the corporation.

C. Transfers for the Benefit of a Minor

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A transfer for the benefit of a person who has not attained age on the date of the gift may be considered a gift of a present interest even though the minor is not given the unrestricted right to the immediate use, possession, or enjoyment of the property or the income from it. For the gift to the minor to be considered a present interest the following conditions must be satisfied:

(1) Both the property and its income may be expended by or for the benefit of the minor before he attains age 21;

(2) Any portion of the property or its income not disposed of

by his 21st birthday must pass to him at that time; and

(3) If the minor dies before he attains age 21, the property and its income will be payable either to his estate or to whomever he may appoint under a general power of appointment.

A transfer will qualify for this exception even though the trustee is given discretionary power as to when and how much of the property and its income will be distributed to or for the benefit of the minor before his 21st birthday. However, if the terms of the trust impose any substantial restrictions on the trustee's exercise of such discretion, the trust will not qualify. For instance, if the trust provided that the trustee could distribute to the minor as much of the property or income as the trustee deemed necessary, but only if the minor's needs could not be met by his parents or from his own resources, the trust would

not qualify as a present interest, because a substantial restriction was imposed on the trustee's power to use the property for the minor's benefit.

The trust instrument can provide for the continuation of the trust beyond the beneficiary's 21st birthday, as long as he has a right upon reaching age 21 either to compel immediate distribution of the trust corpus by giving written notice to the trustee or to permit the trust to continue by its own terms. The terms of the trust may also provide a taker in default if the minor fails to exercise his general power of appointment should he die before his 21st birthday.

A gift of trust income to a minor will also qualify for this exception even though the minor is given no interest in the corpus and the income may be accumulated until his 21st birthday provided the conditions listed above are met.

SPECIFIC EXEMPTION AND DEDUCTIONS

The tax applies to the total taxable gifts. The amount of the taxable gifts is arrived at by deducting from the total amount of gifts during the calendar quarter (gross gifts less applicable $3,000 exclusions) the specific exemption and deductions discussed below.

A. Specific Exemption

A lifetime exemption of $30,000 is allowed. At the option of the donor, the exemption may be taken in the full amount in a single calendar quarter, or it may be spread over a period of quarters or years in any amounts that he chooses. No further exemption may be taken after the total amount of $30,000 has been used.

B. Charitable and Similar Gifts

There may be deducted from the "total amount of gifts" made during the calendar quarter (or previous quarters if not reported previously in that year) all gifts included in the total that were made to

or for the use of:

(1) The United States, and State, or any political subdivision thereof, or the District of Columbia, for exclusively public purposes;

(2) Any corporation, trust, community chest, fund or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, if no part of the net earnings of the organization inures to the benefit of any private shareholder or individual, and no substantial part of its activities is carrying on propaganda, or otherwise attempting to influence legislation and if the organization does not participate in or intervene in any political campaign on behalf of any candidate for public office;

(3) A fraternal society, order, or association, operating under the lodge system, provided the gifts are to be used exclusively for one or more of the purposes set forth in (2); or

(4) Any post or organization of war veterans or auxiliary unit or society thereof, if organized in the United States or any of its possessions, and if no part of its net earnings inures to the benefit

The deduction is not limited to gifts for use within the United States or to gifts to or for the use of domestic corporations, trusts, community chests, funds or foundations, or fraternal societies, orders or associations operating under the lodge system.

A charitable deduction is allowed for a charitable interest in trust with remainder to a noncharitable entity, but only if the trust is in the form of a guaranteed annuity or is a fixed percentage of the property, valued and disturbed annually. The allowable deduction is the value of the income interest.

A charitable deduction will be allowed for certain future interests in property given to a charity. The future interest (except for a future interest in a personal residence or farm) must be in the form of a charitable remainder annuity trust or a charitable remainder unitrust or a pooled income fund.

A charitable remainder annuity trust is a trust from which a specified amount (not less than 5 percent of the initial net fair market value of the property placed in trust) is paid annually to a noncharitable income beneficiary (who was living at the time the trust was created). At the death of the income beneficiary or at the end of a term of years (not greater than 20 years), the remainder interest must be paid to a qualified organization described above.

A charitable remainder unitrust is like an annuity trust except that a specified percentage, rather than a specified amount, is to be paid annually. This percentage cannot be less than 5 percent of the net fair market values of the trust assets, valued annually.

To qualify as an annuity trust or unitrust, a trust must not make discretionary with anyone the amount to be paid to the noncharitable beneficiary. This rule applies even if the discretion is limited by ascertainable standards prescribed by the trust instrument. A pooled income fund is a trust set up by a public charity to which a donor transfers property and retains an income interest in the property for the life of a noncharitable beneficiary living at the time of the donor's gift.

C. Gift to Spouse (Marital Deduction)

Subject to certain limitations and conditions, a deduction is allowed for one-half the value of any property interest transferred by gift to a person who, at the time of the gift, was the donor's spouse. The deduction may not exceed the amount of gifts to the spouse less the allowable annual exclusion. This means that the marital deduction is equal to the lesser of:

(1) One-half the gift to the spouse before deducting the allowable annual exclusion; or

(2) The full amount of the gift after the allowable annual exclusion.

Certain property interests, called "terminable interests," that are given to the spouse may not qualify for a marital deduction. A terminable interest is one that will terminate or fail after the passage of time or when some contingency occurs or some event fails to occur. Examples of terminable interests are: life estates, annuities, estates for a term of years, and patents. A terminable interest will not qualify for the marital deduction if a reversionary or remainder interest in the property is given for less than adequate consideration to any person

other than the donee spouse and such other person may possess or enjoy any part of the property after the termination of the donee spouse's interest.

There is, however, an exception to the terminable interest rule. A property interest, whether or not in trust, qualifies for the marital deduction, if the following five conditions are met:

(1) The donee spouse is entitled for life to all the income from the entire interest;

(2) Such income is payable annually or at more frequent intervals;

(3) The donee spouse has the power, exercisable in favor of herself or her estate, to appoint the entire interest;

(4) Such power is exercisable by her alone and (whether exercisable by will or during life) is exercisable by her in all events; and

(5) No part of the entire interest is subject to a power in any other person to appoint any part of it to any person other than the surviving spouse.

If either the right to income or the power of appointment given to the donee spouse pertains only to a specific portion of a property interest, the marital deduction is allowed only to the extent that the rights in the donee spouse meet all the five conditions set forth above with respect to entire interests. A partial interest in property is not treated as a specific portion of an entire interest unless the right of the donee spouse to income or the power constitute a fractional or percentile share of the entire property interest, so that such interest or share of the donec spouse reflects its proportionate share of the increase or decrease in the whole of the property interest to which the income right and the power relate. If the annual income of the spouse is limited to a specific sum, or if she has a power to appoint only a specific sum out of a larger fund, the interest is not deductible.

The election of a survivor annuity under the Civil Service Retirement System by a retiring Federal employee is a transfer for which the marital deduction is not allowable.

No marital deduction is allowable for a gift by the donor to his spouse if the property transferred was, at the time of the gift, held by the spouses as community property under the law of any state or possession of the United States, or any foreign country.

GIFT BY HUSBAND OR WIFE TO THIRD PARTY (GIFT SPLITTING)

A gift made by a person to someone other than his spouse may be considered, for Federal gift tax purposes, as having been made onehalf by each spouse. To "split the gift," the spouses must be legally married to each other at the time of the gift. If they divorce each other later in the calendar quarter, they may still split the gift so long as neither marries anyone else during that quarter. They both must signify on their separate gift tax returns their consent to have all gifts made in that calendar quarter split between them. In addition, both must be citizens or residents of the United States on the date of the gift and one spouse may not create a general power of appointment

spouse to the other spouse cannot be split between them, but may be partially deductible.

When each spouse consents to the splitting of a gift between them, each can apply his own $3,000 annual exclusion per person and his own lifetime exemption against his share of the gift. If neither have made previous gifts to the donee that year, both can exclude $3,000 from their gift. In addition, if neither spouse previously used their $30,000 lifetime exemption, they can each deduct $30,000 from their gift. Both must file separate gift tax returns and must signify their consent on both returns to have the gift split between them.

If only one spouse made gifts during the year, the other spouse is not required to file a gift tax return merely because such spouse consented to gift splitting, provided that the value of the gifts made by the donor spouse to any donee, for whom the gift splitting provision has been elected, does not exceed $6,000 during the year. However, if any gift is a gift of a future interest, regardless of value, and the spouses consent to gift splitting, then a gift tax return must be filed by each spouse. There is no provision for joint gift tax returns.

If one spouse has exhausted his $30,000 lifetime exemption, but the other spouse has not, the spouse with no remaining lifetime exemption may not reduce his share of a split gift by any part of the other spouse's remaining lifetime exemption.

VALUATION OF PROPERTY

The value of a gift is the fair market value of the property given on the date the gift is made. There is no alternate valuation date for the Federal gift tax as there is for the Federal estate tax.

The "fair market value" is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of all relevant facts. It may not be determined by a forced sale price, nor by the sale price of the item in a market other than that in which that item is most commonly sold to the public, taking into account the location of the item wherever appropriate. Thus, in the case of an item that is generally sold at retail, the fair market value is the price at which the item or a comparable item would be sold. If tangible personal property is sold as the result of an advertisement in the classified section of a newspaper, and the property is of a type often sold by such means, or the property is sold at a public auction, the price for which it is sold will be presumed to be the retail sales price of the item at the time of the sale. This retail sales price also will be presumed to be the retail sales price of the item on the date of the gift if the sale is made within a reasonable period following the gift and there is no substantial change in market conditions or other circumstances affecting the value of similar items between the time of the sale and the date of the gift.

If a gift is made on the express or implied condition that the donee pay the gift tax, the payment of this tax may be deducted from the value of the gift made as partial consideration for the gift. It should be noted that such an agreement does not release the donor from the principal liability of paying the gift tax, if in fact the tax is not paid.