October 19, 2022
A recent story in the news contains some important lessons about how the Federal Gift Tax works.
The story concerned Will Wilkerson, one of the founders of Truth Social, the company behind the Truth Social website. Mr. Wilkerson was fired from the company’s Board of Directors, and the apparent reason was his refusal to make a gift of some number of his shares of the company to Melania Trump, as the former President requested.
Mr Wilkerson stated that the reason that that he was unwilling to make the gift to Mrs. Trump was that he could not afford the tax hit.
Lesson #1. The Donor (the giver) bears the tax burden of a gift, not the Donee (the recipient). Mr. Wilkerson was correct that if he gave shares to Melania Trump at a time when the shares had significant value, he would have been liable to pay the Gift tax on that transfer, not Mrs. Trump.
Lesson #2. The value of the gift is the fair market value of the asset gifted at the time of the gift. While Trust Social seems to have lost much of its perceived value over the past several months as it failed to attract many users, there was a time when the company was thought to be worth in excess of one billion dollars ($1,000,000,000). If Mr. Wilkerson had made the gift in the company’s early days, his tax liability would have been based on the fair market value of the shares given at that time even though the company lost value soon after Mr. Trump made his request.
Lesson #3. The Gift Tax can be expensive. The Gift Tax rate is a flat 40% after the Donor’s lifetime exemption is exhausted. Mr. Wilkerson has a lifetime exemption of Twelve Million Sixty Thousand Dollars ($12,060,000.00). If we assume that Mr. Trump had requested a gift worth Twenty Million Sixty Thousand Dollars ($20,060,000), then the first Twelve Million Sixty Thousand Dollars ($12,060,000) could have been made gift tax-free but the next Eight Million dollars (($8,000,000) would have been taxed at 40% resulting in a gift tax liability of Three Million Two Hundred Thousand Dollars ($3,200,000).
Lesson #4. Waiting a few months can make a dramatic difference in Gift Tax liability. One of the recommendations often made by tax planners is to make the gift before the asset becomes valuable. For example, if a client owns a dilapidated parcel of real estate near Downtown Kansas City, Missouri, and there is a possibility that the Kansas City Royals may one day want to purchase the parcel (along with many other parcels) to build a new stadium Downtown, the client would be well advised to gift the parcel before any announcement is made that the Royals intend to move forward with a Downtown stadium. By the same token, if Mr. Wilkerson wanted to make a gift to the former President’s spouse but he did not want to incur a big tax liability, he could have waited the few months that it took for the company to lose most of its value before making the transfer.
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