ACC 457 - CH 5
Bernard made a gift of $500,000 to his brother in 1997. At the time of the gift, the applicable gift tax credit was $192,800, but due to Bernard's prior taxable gifts he paid $200,000 of gift tax. When Bernard died in 2020, the applicable gift tax credit had increased to $4,577,800. At Bernard's death, what amount related to the $500,000 gift to his brother is included in his gross estate? $500,000. $200,000. $153,000. $0.
$0. Gift tax paid on gifts made within three years of a decedent's date of death is included in the decedent's gross estate. In this case, Bernard made the gift more than three years before his death, so $0 is included in his gross estate related to this gift. The value of the gift, $500,000 is added to the decedent's taxable estate to determine the tentative tax base and Bernard will get credit for the gift tax paid of $200,000.
Polly is a very generous single woman. Prior to 2020, she had given $30 million in taxable gifts over the years. In 2020, Polly gave her daughter, Paula, $500,000 and promptly filed a gift tax return. Polly did not make any other gifts this year. How much gift tax must Polly pay the IRS because of this transaction? $0. $200,000. $194,000. $15,000.
$194,000. The problem states that she has given $30 million in taxable gifts. Therefore she has no unused amount of exclusion. The calculation is as follows:$500,000 - $15,000 (2020 annual exclusion) = $485,000 x 0.40 = $194,000
Jeff has always been a successful businessman. Several years ago he purchased what he thought was prime property in Louisiana for $100,000. Unfortunately, he did not realize the property was pure swamp land and completely uninhabitable by anyone. Shortly after he purchased the property, Jeff realized the investment was a flop! To hide his embarrassing investment, he decided to give the property to his cousin, Rustin, as a graduation present when Rustin graduated from LSU. When Jeff gave the property to Rustin, the value of the property had fallen to $80,000. Rustin promptly built a house in the middle of the swamp and made his home. After six months of owning the property, and sharing his bed with the alligators, Rustin decided to move back to the city. Luckily, he sold the property a week later to an old Cajun named Boudreaux for $75,000. What is Rustin's loss on the sale of the land? $25,000 long term capital loss. $5,000 long term capital loss. $25,000 short term capital loss. $5,000 short term capital loss.
$5,000 short term capital loss. In general, when a donor makes a gift of property other than cash to a donee, the donee will take the property at the donor's adjusted basis. One exception to this rule is when the fair market value of the property at the date of the gift is less than the donor's adjusted basis. In this case, the donee will have a basis for gains and a basis for losses, called the double-basis rule. The basis for losses is the fair market value as of the date of the gift (the lower value) and the basis for gains is the donor's adjusted basis. If the donee subsequently sells the property for an amount between the two bases, there is no gain or loss. The holding period will depend on which basis is used. If the donor's carryover adjusted basis is used, then the holding period includes the time the donor held the property as well as the time the donee held the property. If the fair market value at time of transfer is used, then the holding period begins at the date of transfer. Thus, in this example, Jeff gave property to Rustin that had depreciated in value and Rustin's basis is subject to the double basis rule. Since Rustin sold the property below the FMV at time of transfer, the lower number is used and the loss is $80,000 - $75,000 = $5,000. The holding period will be short term because the holding period will only include the time Rustin held the property which is less than 1 year (he held the property for 6 months).
Jordan, a single woman, is very generous. She enjoys giving gifts to others and has given taxable gifts of $1,000,000 in prior years. This year she gave the following gifts: Recipient Gift Amount Judy cash to Judy to pay Judy's med. bills $32,000 Mark new car $48,000 Kristen painting $7,000 LSU check to school for Haley's tuition $19,000 Calculate Jordan's total taxable gifts for the current year. $54,000. $106,000. $33,000. $50,000.
$50,000. Gift Tax Calculation Total Gifts 106,000 Plus GSTT Tax Paid Less Annual Exclusions ($37,000) [$15,000 + $15,000 + $7,000] Less qualified transfers ($19,000) Less marital deductions $0 Equals: Total Taxable Gifts $50,000
Lois, an elderly, single woman, recently came to you, an estate planning professional, to discuss her estate plan. After a lengthy discussion you determine that Lois completed several transactions last year that may be subject to gift tax. The transactions you uncovered include: 1. Lois had a bank account in the amount of $15,000 that was owned fee simple. She wanted to make sure her son, Ronnie, could access the money "just in case" so she changed the ownership of the account to JTWROS in her and Ronnie's name equally. Ronnie has not made any withdrawals. 2. Feeling guilty about retitling her checking account JTWROS with her son, Lois decided to change the titling of her vintage automobile as JTWROS with her daughter, Joyce. Lois purchased the property for $15,000 and the fair market value of the property on the date of retitling was $30,000. Due to a high demand for this particular vintage model the value of the car today is $40,000. 3. Lois received a beneficiary designation in the mail for her $1,000,000 life insurance policy. The policy never had a beneficiary, so she designated her son, Ronnie and daughter, Joyce, as joint beneficiaries. Lois's basis in the policy is $200,000. 4. Lois has two stock portfolio accounts with a local brokerage firm valued at $200,000. Upon her advisor's suggestion, she retitled the account as a Transfer on Death account to "save taxes." Upon her death, the assets will transfer equally to her son, Ronnie, and her daughter, Joyce. 5. Lois's daughter Joyce has always been a little poor with budgeting her money. So it was no surprise to Lois that Joyce could not afford her daughter Katelyn's braces. Feeling sorry for Katelyn, Lois gave Joyce $50,000 for the braces. Lois later found out that the braces only cost $15,000 and Joyce spent the remaining money on elective cosmetic surgery. 6. Lois was beginning to become very concerned because her son Ronnie had never married. She was so happy he finally got married she gave Ronnie $40,000 so the couple could take a two month trip to Australia. When you inform her that you are concerned about some of these transactions and that she may need to file a gift tax return she states, "you obviously must not be a very good planner because none of my other planners ever told me that, besides it would be ridiculous for me to pay tax on things I want to give to my family that I purchased with my hard earned money that was already taxed." After more discussion, Lois confesses to you that you are highly recommended and frankly, she has already used almost every planner in town and since they have all declined to represent her, she is confident that you will do the right things. Calculate Lois's taxable gifts for the current year. $105,000. $60,000. $40,000. $55,000.
$60,000 The retitling of the bank account is not a completed gift. It will not be completed until Ronnie actually withdrawals from the account. The retitling of the vintage automobile is a completed gift of one-half of the value. The beneficiary designation is not a gift. A totten trust, or a Transfer on Death account, is a form of beneficiary designation and is not a completed gift. Taxable gifts is a term of art meaning gross gifts minus annual exclusions, which in this case are three (Joyce, Ronnie, and Katelyn), totaling $45,000. 1. Retitling of bank account $0 2 Retitling of vintage automobile $15,000 3 Change of beneficiary designation $0 4 Retitling of stock account $0 5 Transfer of cash to Joyce for braces $50,000 6 Transfer of cash to Robbie for honeymoon $40,000 Total gifts made $105,000 Less Annual Exclusion (3 people x $15,000) ($45,000) Total Taxable Gifts $60,00
Brody and Tanya recently sold some land they owned for $150,000. They received the land and a check equal to the amount of the then-current annual exclusion five years ago as a wedding gift from Brody's Aunt Jeanette. They also received a check equal to the annual exclusion on their wedding date. Aunt Jeanette purchased the land many years ago when the property was worth $20,000. At the date of the gift, the property was worth $100,000 and Aunt Jeanette paid $47,000 in gift tax. What is the long term capital gain on the sale of the property? $42,400. $130,000. $50,000. $92,400.
$92,400. In general, when a donor makes a gift of property other than cash to a donee, the donee will take the property at the donor's adjusted basis. The holding period of the donee will include the holding period of the donor for purposes of subsequent transfers and the determination of long or short-term capital gains. An exception to the general basis rule occurs when the donor gives property with a fair market value in excess of his adjusted basis and the donor pays gift tax. The gift tax associated with the appreciation is added to the donor's original adjusted basis to determine the donee's basis. Thus, the basis would be: $20,000 + ($47,000 x $80,000 ) = $57,600 $100,000 The gain on the asset would be $150,000 - $57,600 = $92,400.
Jose decides to set up a trust for the benefit of his two sons, Raul and Jorge. He makes an initial contribution to the trust in the amount of $30,000 and gives each son the right to withdraw up to $15,000. In the current year, when the total trust assets are $52,000, Raul decides to withdraw $15,000, but Jorge does not withdraw anything. What is the result of Jorge's decision to not withdraw any of Jose's contribution to the trust? taxable gift to Jorge of $15,000. A taxable gift to Raul of $15,000. A taxable gift to Raul of $5,000.
A taxable gift to Raul of $5,000. This question addresses the 5/5 Lapse Rule. The 5/5 Lapse Rule states that a taxable gift has been made where apower to withdraw in excess of $5,000 or 5% of the trust assets is lapsed by the powerholder. In this case, Jorge hasallowed his power to withdraw $15,000 to lapse. As a result, Jorge has made a gift to himself of $5,000 ($7,500-($5,000/2)) and a gift to Raul of $5,000 ($7,500-($5,000/2)).
Which of the following gifts permanently removes the property from the donor's gross estate? An outright gift. A gift where the donor has a right to continue to use and enjoy the property. A gift where the donor owner continues to earn income from the property. gift where the donor owner has the right to get the property back at some point in the future.
An outright gift.
Donald has created a trust for the benefit of his three nephews, Huey, Dewey, and Louie, who are all minors. Donald plans on making annual contributions to the trust. Donald would like at least some of his annual contributions to the trust to qualify for the annual exclusion. What would be the best way to accomplish this goal? Donald should make sure that he does not contribute more than $15,000 for each nephew, or $45,000 in total, each year. Donald should give his nephews an unlimited ability to remove funds from the trust. Donald should give his nephews the right to remove some or all of the annual contribution from the trust for a limited period of time. Donald's annual contributions to the trust will not qualify for the annual exclusion under any circumstances.
Donald should give his nephews the right to remove some or all of the annual contribution from the trust for a limited period of time. A Crummey provision converts what otherwise would have been a gift of a future interest, which would not be eligible for the annual exclusion, into a gift of a present interest, which is eligible for the annual exclusion. Without a Crummey provision, the annual contribution does not qualify for the annual exclusion, regardless of the amount. Even though this would qualify for the annual exclusion, giving minors the unfettered right to remove funds from the trust is not as good of a solution as a Crummey power.
Jordan, a single woman, is very generous. She enjoys giving gifts to others and has given taxable gifts of $1,000,000 in prior years. This year she gave the following gifts: Recipient Gift Amount Judy cash to Judy to pay Judy's med. bills $32,000 Mark new car $48,000 Kristen painting $7,000 LSU check to school for Haley's tuition $19,000 Calculate Jordan's gift tax liability due for the current year. $15,170. $16,120. $0. $18,900.
Gift Tax Calculation Total Gifts 106,000 Plus GSTT Tax Paid Less Annual Exclusions ($37,000) [$15,000 + $15,000 + $7,000] Less qualified transfers ($19,000) Less marital deductions $0 Equals: Total Taxable Gifts $50,000 (answer to # 23) Add: Previous Taxable Gifts (post 1976) $1,000,000 Equals: Tentative Tax Base (TTB) $1,050,000 Tentative Tax (TT) $365,800 [$345,800 + 0.40 ($50,000)] Less: Previous Gift Tax Paid $0 Less: Unified Credit ($365,800) Equals: Gift Tax Liability $0
Which of the following statements about gift tax annual exclusion is incorrect? The gift must be of a present interest. Gifts to Section 2503(c) trusts for minors are ineligible for the gift tax annual exclusion because they are future interest gifts. Each individual is allowed to give up to the indexed amount to as many donees as he or she wishes each year. The gift tax annual exclusion is indexed for inflation.
Gifts to Section 2503(c) trusts for minors are ineligible for the gift tax annual exclusion because they are future interest gifts. To secure the gift tax annual exclusion, the gift must be of a present interest. Gifts to Section 2503(c) trusts for minors are an important exception to this rule.
Which of the following is NOT a reason for a father to make a lifetime gift of his home to his daughter? He can continue to enjoy the property even after it is titled to his daughter. The gift would reduce the total assets in his gross estate. Any income from the property will be taxed to his daughter. He would be relieved of property management and maintenance.
He can continue to enjoy the property even after it is titled to his daughter. The father cannot retain the right to enjoy the property.
Bill loans $99,000 to his daughter Maura. Why would interest not be imputed on this loan? Interest would not be imputed because Maura has unearned income of less than $1,000. Interest would not be imputed because loans of $100,000 or less are exempt from both income tax and gift tax consequences. Interest would not be imputed because the loan is less than the amount of the annual exclusion. Interest would not be imputed because Maura's earned income is less than $1,000.
Interest would not be imputed because Maura has unearned income of less than $1,000. Gift loans do not qualify for the annual exclusion. Loans of less than $10,000 are exempt from both income tax and gift tax consequences. Whether interest is imputed on this loan is based on Maura's level of unearned income, not earned income.
Which of the following transfers would not be considered a qualified transfer? Judy pays $50,000 to her friend Satchel to pay for his medical expenses. Judy pays $15,000 to Prestigious Preparatory School for her nephew's tuition. Judy pays $10,000 to ABC Hospital for her granddaughter's medical expenses. Judy paid $55,000 to XYZ University for her niece's tuition.
Judy pays $50,000 to her friend Satchel to pay for his medical expenses.
Which of the following transfers would result in gift tax? Pete transfers $20,000 to his ex-wife, Patricia. Pete and Patricia were divorced five years ago. Elroy gifts $50,000 to his wife, Elizabeth, who is a U.S. citizen. Adam gives his favorite employee, Aaron, a new car at Aaron's retirement worth $20,000. Bob gifts $11,000 to his daughter Barbie.
Pete transfers $20,000 to his ex-wife, Patricia. Pete and Patricia were divorced five years ago. The gift of $11,000 does not exceed the annual exclusion. A person can gift an unlimited amount to his or her spouse, who is a U.S. citizen, without incurring gift tax. Transfers in a business setting are presumed to be compensation. If Pete had transferred $20,000 to Patricia pursuant to a divorce decree, there would be no taxable gift, but transfers to an ex-spouse five years after the divorce was final are not considered "transfers pursuant to a divorce decree."
Julie recently hit it big at the casino. Because of her good fortune, Julie would like to begin a gifting program in which she will give her family and friends yearly gifts equal to the annual exclusion. She would like to learn more about the gift tax system and how gifts are valued. All of the following statements regarding the valuation of a gift are true, except: The value of a bond is the present value of the expected future payments. Publicly traded securities are valued at the average of the opening and closing market price for the day of the gift. Real estate is generally valued utilizing an appraisal. Certain valuation discounts may be available due to lack of marketability, lack of liquidity, and lack of control.
Publicly traded securities are valued at the average of the opening and closing market price for the day of the gift. Publicly traded securities are valued at the average of the high and the low trading price for the day of the gift.
The practice of gift splitting is available only as between: A parent and natural child. A parent and an adopted child. Spouses. Siblings.
Spouses. Spouses can give up to $30,000 together to each donee
Which of the following is true concerning the 5/5 Lapse Rule? Amounts that lapse under the 5/5 Lapse Rule qualify for the annual exclusion. Gifts under the 5/5 Lapse Rule do not have to be disclosed on a gift tax return. The 5/5 Lapse Rule only comes into play with a single beneficiary trust. The 5/5 Lapse Rule deems that a taxable gift has been made where a power to withdraw in excess of $5,000 or five percent of the trust assets is lapsed by the powerholder.
The 5/5 Lapse Rule deems that a taxable gift has been made where a power to withdraw in excess of $5,000 or five percent of the trust assets is lapsed by the powerholder. The 5/5 Lapse Rule deems that a taxable gift has been made where a power to withdraw in excess of $5,000 or five percent of the trust assets is lapsed by the powerholder is the definition of the 5/5 Lapse Rule. The 5/5 Lapse Rule does not come into play with a single beneficiary trust because a person cannot make a taxable gift to himself. Amounts that lapse under the 5/5 Lapse Rule do not qualify for the annual exclusion. Gifts under the 5/5 Lapse Rule do have to be disclosed on a gift tax return.
Which of the following is NOT a completed gift? Tommy sets up a revocable trust with his two daughters as beneficiaries. Tomicina creates and contributes $1,000,000 to an irrevocable trust which will begin makin Tommy transfers ownership of a vacation home to his son. Tomicina pays her 36-year-old daughter's $2,000 monthly rent for the entire year.
Tommy sets up a revocable trust with his two daughters as beneficiaries. A revocable trust is not a completed gift because the donor has not given up dominion and control over the transferred property.
Mike created a joint bank account with his son, James. At what point has a gift been made to James? When Mike dies. When the account is created . When James withdraws money from the account for his own benefit. When James is notified that the account has been created.
When James withdraws money from the account for his own benefit. A completed gift does not occur until the donee withdraws money from the account for her own benefit.
