Chapter 5: Overview of Federal Gift Taxation

Annual Exclusion

$15,000 (2018)

Direct Gifts

(1) one person transfers stock to another, (2) when a father deeds land to a son, (3) when a husband purchases a car in his wife's name, it is usually clear that a gift has been made

A woman is the income beneficiary of an irrevocable trust. Which of the following powers she holds with respect to the trust will cause all the assets in the trust to be included in her gross estate for federal estate tax purposes? (A) the power to direct the trustee to pay her the greater of 5 percent of the trust principal or $5,000 (B) the power to direct the trustee to use the trust assets to pay her estate taxes if there are any (C) the testamentary special or limited power to direct the trustee to distribute trust assets to her children (D) the power to use trust assets for her health, education, maintenance, or support

(B). (A) is incorrect because even if the decedent holds a general power of appointment, it will not be included in her gross estate if her power is limited to a noncumulative right to withdraw the greater of $5,000 or 5 percent of the aggregate value of the property each year. (C) is incorrect because a special or limited power of appointment does not cause inclusion. (D) is incorrect because a power limited by an ascertainable standard is considered a special or limited power of appointment and does not cause inclusion.

Which of the following statements concerning the generation-skipping transfer tax (GSTT) is correct? (A) The GSTT is imposed only if no federal estate or gift tax applies to a transfer. (B) The annual exclusion is available for direct skip gifts to a grandchild. (C) The GSTT is limited to transfers to related individuals who are two or more generations below the transferor. (D) The GSTT applies solely to transfers at death.

(B). (A) is incorrect because the GSTT is imposed in addition to federal gift and estate tax. (C) is incorrect because the GSTT applies to any individual, not just family members, who is two or more generations below the transferor. (D) is incorrect because the GSTT applies to either lifetime or at-death transfers to individuals who are two or more generations below the transferor.

Bernard has an estate with a fair market value of $20,000,000. Bernard would like to transfer assets to his five grandchildren. He seeks your advice to avoid paying the generation-skipping transfer tax (GSTT). In the year when the exclusion is $15,000 and the GSTT exemption is $11,180,000, what is the maximum amount of property that can be transferred to the grandchildren without incurring the generation-skipping transfer tax? (A) $10,430,000 (B) $11,255,000 (C) $15,000 (D) $75,000

(B). Bernard can use the lifetime exemption on the first $11,180,000 of his estate he wishes to transfer. He may also transfer $15,000 per grandchild per year ($75,000 total) without the transfer being subject to the GSTT. So, this year he can transfer $11,180,000 + $75,000 = $11,255,000 GSTT-free.

The following are facts concerning a decedent's estate:Taxable estate: $7,900,000Post-1976 adjusted taxable gifts: $150,000Post-1976 gifts made to a qualified charity: $300,000The tentative tax base of this estate is: (A) $7,900,000 (B) $8,050,000 (C) $8,200,000 (D) $8,450,000

(B). Once the taxable estate is determined, the amount of adjusted taxable gifts made after 1976 ($150,000) is added to the taxable estate ($7,900,000). The sum of these two figures ($8,050,000) is the tentative tax base.

A wife makes outright gifts of $110,000 to her son in 2019, and her husband agrees to split the gifts with her. Which of the following correctly states the amount of the taxable gifts? (A) wife-$47,500, husband-$47,500 (B) wife-$40,000, husband-$40,000 (C) wife-$55,000, husband-$55,000 (D) wife-$95,000, husband-$0

(B). The calculation of taxable gifts is as follows: wife/husband, total gifts $55,000 / $55,000, less 2019 annual exclusion $15,000 / $15,000. Total taxable gifts: $40,000 / $40,000.

All of the following statements concerning the federal estate tax marital deduction are correct EXCEPT: (A) The property must be included in the decedent-spouse's gross estate. (B) The property must pass to the surviving spouse. (C) The deduction is allowed for property passing to a surviving spouse by intestacy. (D) The surviving spouse must be a U.S. citizen or U.S. resident alien.

(D). A qualified domestic trust (QDOT) can be used to preserve the federal estate tax marital deduction for non-citizen spousal property transfers.

All of the following are appropriate mechanisms for transferring assets if a donor, realizing she is elderly and in poor health, wants to minimize her taxable estate EXCEPT: (A) giving her friend's grandchildren gifts of $5,000 on their birthdays (B) creating an irrevocable trust in which her teenage grandchild receives income for life, and the corpus of the trust will be distributed to a qualified charity (C) directing her executor to utilize the marital deduction for all qualifying property. She and her husband have been living in separate homes for the past 7 years. (D) creating a trust in which she receives income for ten years, and at her death the trust assets pass to a qualified charity

(D). Since the donor is in poor health, creating a trust with a retained interest of 10 years is a problematic decision since there is a strong possibility she will pass away during the trust term, while she still retains an interest. This will cause the trust assets to be included in her gross estate. (A), (B), and (C) are all appropriate means of transferring assets without fear of inclusion in the gross estate.

Crummey Power

A general power over contributions to a trust for a period of a reasonable time -Typically at least 30 days -Used to qualify the trust for the annual gift tax exclusion

Martial Deduction

Allows unlimited tax free transfer of assets between spouses

Power of Appointment

An interest held in property by an individual known as the donee (holder) of the power

What is the meaning of the "unified" system of the estate and gift tax? (A) Although the tax rates for gifts and estates differ, the same federal exemption and applicable credit amount are used to calculate tax payable. (B) Estates and gifts share the same tax schedule, same applicable exclusion amounts, and same applicable credit amount, regardless of whether the transfer is made during life or at death. (C) Estates and gifts share the same tax schedule, although the applicable credit amount differs depending on whether the transfer was made at death or during life. (D) Estates and gift tax computations share the same credits and deductions as income tax calculations.

B

Indirect Gifts

Considered indirect because it may not be readily apparent that a gift has been made.

At the time a bank account is funded and titled jointly with right of survivorship, the creator of the account has made a completed gift to the other joint owner.

False. A completed gift does not occur until the donee joint tenant withdraws money from the account.

A grantor trust involves granting (donating) a testamentary asset to a flow through trust.

False. A grantor trust involves structuring a gift to a trust such that the income on the assets in the trust is taxable to the grantor instead of to the trust or the beneficiaries.

Gifts made by a decedent under the annual gift tax exclusion and prior to death are included in the calculation of a decedent's estate tax payable as adjusted taxable gifts.

False. Annual exclusion gifts are not included in the computation of a decedent's estate tax payable because such transfers are not taxable.

Because of recent changes to the federal transfer tax system, wealthy individuals, compared to others, should be more concerned about income taxes than estate and gift taxes.

False. Because of the recent changes, all but the wealthy should focus on income taxes more than estate and gift taxes. With the wealthy, estate taxes remain a major concern.

A donor's personal check becomes a competed gift once it is handed to the recipient-doneein person.

False. Generally, a noncharitable gift by check does not become complete for gift tax until it is deposited or cashed by the recipient-donee.

The general rule is that all gifts made by a decedent within 3 years of death are includible in the decedent's gross estate.

False. Generally, gratuitous lifetime transfers made within 3 years of death are not included in a decedent's gross estate no matter how significant the value of the gift(s). There are, however, some exceptions to the general rule.

In computing the amount of estate tax payable at a decedent's death, the value of lifetime gifts may be included in the decedent's gross estate and also as adjusted taxable gifts.

False. Gifts that are included in a decedent's gross estate are not also brought back into the calculation of estate tax payable as adjusted taxable gifts.

If an annuity is payable to recipient Y because Y survived decedent X and X held only a right to a payment but never received any payments under the annuity, the value of the annuity avoids inclusion in X's gross estate.

False. If a payment under an annuity contract provided a decedent (X) with a payment or even a mere right to a payment for life or for a period that did not end before X's death, the present value of that income right is includible in the decedent's (X's) gross estate.

The generation-skipping transfer tax can potentially subject an estate to additional estate taxes in situations where the decedent transfers assets directly to grandchildren.

False. The GST tax is a separate tax and can be assessed in addition to the estate tax.

An estate tax charitable deduction is allowed to be taken from a decedent's adjusted gross estate amount according to a percentage of the decedent's adjusted gross estate.

False. The amount of an estate's charitable deduction is unlimited and is based upon the fair market value of any gratuitous transfer to a qualified charity at a decedent's (donor's) death.

When someone receives a taxable gift, the donee (recipient) is responsible for paying any gift tax generated by the transfer.

False. The donor (individual making the gift) has primary liability for paying gift tax imposed on the transfer.

If a person dies having no interest in a life insurance policy on his life other than the right to change the beneficiary of the policy, the value of the death proceeds will avoid being included in the decedent-insured's gross estate.

False. The insured's right to name or change the beneficiary of a life insurance policy is considered to be an incident of ownership and will cause inclusion of the proceeds in the insured's gross estate.

The primary requirement for a gift to be treated as a completed gift is that the donor must have intended to make a gift.

False. The primary requirement for a completed gift is for the donor to have totally and irrevocably parted with any control or connection over the gifted property.

Federal estate taxes are based on the fair market value of property owned by the decedent at either the date of death or an alternate date one year after the date of death.

False. The two primary dates for valuing an estate are the date of death or the alternate valuation date, 6 months after the date of death.

Federal estate taxes are based on the fair market value of property owned by the decedent at either the date of death or an alternate date one year after the date of deaths.

False. The two primary dates for valuing an estate are the date of death or the alternate valuation date, 6 months after the date of death.

All transfers to trusts qualify for the annual exclusion if the trust has named beneficiaries and the interests are vested in those named beneficiaries.

False. Transfers of remainder interests to remainder beneficiaries are future interests that do not qualify for the annual exclusion unless the remaindermen have a present interest or Crummey withdrawal power.

If a husband contributes the entire purchase price of a home titled jointly with right of survivorship with his spouse, when a husband dies, the entire fair market value of the home is included in his gross estate.

False. When spouses own property titled joint with right of survivorship, only 50 percent of the fair market value of the jointly-owned property is included in a spouse's gross estate at death regardless of either spouse's contribution due to the mandatory 50-50 rule applicable to spouses.

Super Annual Exlusion

Gift tax law permits a spouse to utilize a super-annual exclusion each year to pass a basic amount of $100,000 (indexed for inflation, $152,000 in 2018) to a noncitizen spouse

Taxable Gifts

Gifts that are taxed on rates after applicable exclusions

Power of Appointment Trust

Gives the general POA to a spouse to dispose of trust assets in favor of the other spouse, or the other spouse's estate. Also referred to as a marital trust, or "A" trust, and will qualify for the estate tax marital deduction if it meets the following requirements: --surviving spouse is entitled to all income, distributed annually, no accumulation is permitted. --surviving spouse must be granted general POA over trust assets, but the trust may specify whether the POA takes effect during the grantor's lifetime or at his or her death. --surviving spouse must be given a general POA that can be exercised in favor of the other spouse or the other spouse's estate. --surviving spouse must be able to exercise the power under all circumstances (including remarriage). Avoids probate, protects trust assets from creditors, and can provide secure income for the surviving spouse.

Qualified Disclaimer

Is a refusal to accept property that meets the provisions set forth in the Internal Revenue Code (IRC) Tax Reform Act of 1976 allowing for the property or interest in property to be treated as an entity that has never been received.

UGMA

Is an act in some states of the United States that allows assets such as securities, where the donor has given up all possession and control, to be held in the custodian's name for the benefit of the minor without an attorney needing to set up a special trust fund

5 & 5 Provision

No taxable gift occurs except to the extent that the gift exceeds the greater of (a) $5,000 or (b) 5 percent of the assets out of which the lapsed power could have been exercised. The easiest way to be safe transfer tax wise is to limit the cash that can be withdrawn by any beneficiary in any given year to the greater of $5,000 or 5 % (the 5-and-5 provision) of the trust's assets.

Completed Gift

Once a donor has lost all rights to the property the gift is then completed at present interest

Sec 2503 (c) Trust

Provides that if two conditions are met, the gift to an individual under age 21 (regardless of state law, 21 is the age) can qualify as a present-interest gift

Qualified Terminable Interest Property (QTIP)

QTIP is defined as property that passes from the decedent in which the surviving spouse has a qualifying income interest for life and to which an election applies

QDOT

Qualified Domestic Trust (simple trust) Normally all property passing outright to the surviving spouse qualifies for the marital deduction unless that spouse is not a U.S. citizen. Limitations imposed on non-citizen spouses are the following: 1. There is no estate tax marital deduction 2. The exemption amount ($5.45M) is available if the spouse is a resident alien 3. The jointly-held property between spouses is not considered one-half owned (ownerships is based on consideration) 4. There is a limited (non-taxed) gift between spouses of only $100,000 (indexed) per year. It is called a "super" annual gift tax exclusion. It is $148,000. To qualify for the marital deduction, the property must pass to a qualified domestic trust. Similar to a QTIP, but it is for a non-citizen spouse.

Donor

The individual donating the gift

Present Interest

The instant the gift is made, the beneficiary has the immediate, unfettered, legal, and ascertainable right to use, possess, and enjoy the transferred cash or other property

Tenancy by the Entirety

The joint ownership, recognized in some states, of property acquired by husband and wife during marriage. Upon the death of one spouse, the survivor becomes the owner of the property.

Donee

The person receiving the gift

Remainder Interest

The remnant of an estate that has been conveyed to take effect and be enjoyed after the termination of a prior estate, such as when an owner conveys a life estate to one party and the remainder to another.

An objective underlying the use of Sec. 2503(c) trusts is to restrict a minor donee's access to gifted funds while still qualifying the gift as present interest.

True

Estate and gift taxes are imposed on the cumulative amount of taxable transfers a person makes during lifetime and/or at death.

True

In order to qualify for the marital deduction, the value of the property must be included in the gross estate of the first spouse to die.

True

It is possible for a donor to qualify for a number of gift tax annual exclusions when he or she makes a single transfer to a trust.

True

One primary requirement of having transfers to a QTIP trust qualify for the marital deduction is that the donee-spouse is entitled to all the income generated by the trust property for life.

True

Since gift tax applies only to gratuitous transfers of property or property interests, gratuitous services are not gift taxable no matter how great the value.

True

The main requirement for a gratuitous transfer to qualify for the annual exclusion is that the transferred property must constitute a present interest to the donee.

True

The value of the right to future income earned by a decedent prior to death, but which was not received before death is a property interest that is includible in the decedent's gross estate.

True

When a person dies with the retained right to interest and dividends generated by property transferred to a trust 10 years ago, the value of trust corpus (principal) will be included in the decedent's gross estate.

True

Split interest charitable gifts involve separating the rights of enjoyment of donated property between charitable and noncharitable beneficiaries.

True. For example, a family member may receive the income from the asset and the charity be the remainderman.

An estate plan can conceivably cause "double taxation" of an estate asset because of the inclusionary sections in the IRC.

True. For example, a gift with retained enjoyment of the income can qualify as a gift for gift tax purposes and yet be included in the donor's gross estate at its date-of-death value under IRC 2036.

UTMA

Uniform Transfer to Minor Act; law similar to the UGMA that extends the definition of gifts to include real estate, paintings, royalties, and patents