Inter vivos transfer

Inter vivos transfer (from Latin inter vivos, "between the living") is a gift of money or property from one living person to another, as opposed to a bequest, which passes at death. At common law it takes hold only once the donor means to give, hands the property over, and the recipient accepts, and from then on it usually cannot be undone. Civil law systems set their own formal requirements. A gift causa mortis, by contrast, is made in the expectation of death, while a gift by will takes effect only afterward.

A gift may be made outright, or placed in a trust set up during the giver's life, an inter vivos trust. In estate planning they are widely used to reduce the tax owed on an estate. How the gift is taxed, though, depends on the country: the United States applies a single, unified gift and estate tax, while Canada and Australia levy no gift tax at all.

In the economics of the family, transfers from parents to adult children are a major channel of intergenerational wealth transfer, and much of the literature concerns whether they are driven by altruism or by exchange, a longstanding and unsettled question with public-policy implications. Only a minority of households make or receive such transfers. Because they pass wealth directly between generations, they are also studied as a factor in wealth inequality.

Legal elements

An inter vivos gift is a voluntary transfer of property for which the recipient gives no consideration in return, made while both parties are alive. Once it is complete, the donor cannot ordinarily take it back. Under common law the gift is valid only if three things are true. The donor must actually intend to give the property then and there, rather than promising a future gift. The property must pass to the recipient, whether by physical delivery, a symbolic act, or transfer of the means of control. And the recipient must accept it, which the law assumes when the gift is to their benefit.

It differs from a gift causa mortis, or deathbed gift, made when the donor expects to die soon. Such a gift can be revoked at any time while the donor lives, and it lapses on its own if the danger passes, taking effect only on death. Gifts causa mortis are usually limited to personal property, and the law treats them as part of the donor's estate for tax. A testamentary gift differs too, taking effect only at death because it is made by will.

Civil law systems impose their own formalities on the donation inter vivos. Under the Louisiana Civil Code, for instance, such a donation must generally be made by authentic act before a notary on penalty of nullity, though a manual gift of a corporeal movable may be made simply by delivery.

Estate planning in the United States

In the United States, the inter vivos gift is a standard estate planning device for reducing the estate tax due at death, since property given away during life, together with its later appreciation, can be kept out of the taxable estate. To limit this form of avoidance, the federal gift tax was reenacted in 1932 to reach lifetime giving. Since 1976 the gift and estate taxes have been unified under a common rate schedule, and cumulative lifetime gifts are added back to the taxable estate, so that larger transfers are taxed much as bequests are. A per-donee annual exclusion still lets a portion of gifts pass untaxed, and transfers between spouses are deductible whether made during life or at death. Because the system also aims to tax each generation's wealth, transfers that skip a generation, such as gifts to grandchildren, face an additional generation-skipping transfer tax.

Such gifts may be made outright or placed in trust. A trust created during the giver's lifetime is an inter vivos trust, or living trust, as distinct from a testamentary trust established at death under a will. To keep gifted property out of the donor's taxable estate, the donor must relinquish control of it. Retaining powers such as the ability to revoke the trust, keep its income, or alter its terms can cause the property to be taxed in the estate regardless.

Taxation by jurisdiction

Tax treatment of lifetime gifts differs considerably from one country to another. In the United Kingdom, most gifts to individuals are "potentially exempt transfers". Such a gift escapes inheritance tax if the donor lives for seven years afterward, but falls back into the taxable estate if death comes sooner. This is the seven-year rule. Canada levies no gift tax, but a gift of appreciated property is treated as a disposition at fair market value, which can make the donor liable for capital gains tax. Australia abolished death duties in 1979 and has no gift tax, although gifting an asset can still trigger capital gains tax, since the asset is treated as disposed of at its market value.

Prevalence

Inter vivos transfers are common but hard to measure, and are thought to make up at least a third of intergenerational transfers. About 20 per cent of United States households ever receive a wealth transfer of any kind, most under $50,000, though a small share receive far larger sums. Reported incidence varies with definition: one study found 20 per cent of children received $100 or more in a year (mean $297), and another that 25 per cent of families gave to at least one child (mean $3,013 over ten years). Such gifts often help recipients buy a home, reduce debt, or fund education; for example, in the United Kingdom parental housing help is nicknamed the "Bank of Mum and Dad" and is estimated to assist about half of first-time buyers.

Unlike bequests, which are usually divided equally among children even by the wealthy, inter vivos transfers are frequently unequal. More than 60 per cent of giving parents favour some children over others. Studies of wills find that most parents, from about 69 per cent up to 95 per cent depending on the strictness of the measure, divide their estates equally or nearly so.

Altruism versus exchange

Two models dominate the literature. Under the altruism model, associated with Gary Becker, parents value their children's welfare and give more to their poorer children. Under the exchange model, a transfer is an implicit payment for services such as care, contact, or attention. The two are hard to separate because both predict that transfers flow to lower-income recipients. They diverge on amounts. Altruism implies that higher recipient income reduces both the chance and the size of a transfer, whereas exchange implies it lowers the chance but raises the amount, since a better-off child commands a higher price for the services provided.

Empirical work has tended to favour exchange. Using the National Survey of Families and Households, Cox and Rank found that a recipient's earnings lowered the probability of a transfer but raised its size, that contact and help predicted receipt, and that greater distance from parents reduced transfers, which they read as evidence against no-strings giving. Norton and Van Houtven, using the Asset and Health Dynamics Among the Oldest Old survey, found that a child providing informal care was far more likely to receive a transfer of $500 or more, although care did not affect whether bequests were divided equally. A test by Altonji, Hayashi, and Kotlikoff rejected pure altruism, finding that shifting a dollar of income from child to parent raised transfers by under thirteen cents rather than the predicted dollar.

The exchange interpretation is contested. Stark and Zhang showed that equally altruistic parents may rationally give more to a higher-earning child, a "counter-compensatory" pattern, when that child shares resources back with parents or siblings, so unequal transfers need not indicate exchange. They also argued that equal bequests are themselves consistent with altruism, because bequests are public and final and an unequal will can signal a child's lower standing, prompting parents to avoid it.

The distinction carries policy weight. If transfers are altruistic, public aid may "crowd out" private support. If they reflect exchange, it need not, and may even reinforce redistribution. Cox and Rank found that public assistance lowered the probability but not the size of private transfers.

Comparison with bequests

Norton and Van Houtven argued that transfers are a stronger tool than bequests for eliciting care, for three reasons: they tie giving closely to care each year, whereas a bequest is uncertain and may be revised or consumed; they are cheap to adjust, unlike rewriting a will; and they can be made secretly, whereas a will is revealed to all heirs, so parents wishing to appear even-handed may prefer discreet lifetime gifts. They also carry tax advantages. Gifts up to an annual per-child exclusion pass without the child being taxed on them.

Wealth inequality

Because they move assets directly within families, inter vivos gifts can perpetuate wealth inequality, as even small transfers compound and may be passed on again. Keister, Benton, and Moody noted that an inheritance often arrives after a recipient's finances are already set, whereas a lifetime gift can shape them more lastingly. Across United States cohorts born between 1925 and 1981, younger cohorts were less likely to receive any transfer but received larger amounts, and shifted from inheritances and trusts towards inter vivos gifts, a concentration the authors warned could widen inequality.

See also

• Gift (law)
• Inheritance