Business Taxation Chapter 14

At his death, Tyron owned a life insurance policy on his life that paid his wife $300,000 upon his death. The policy was only valued at $25,000 prior to Tyron's death. What amount, if any, is included in Tyron's gross estate? A. $300,000. B. $25,000. C. $25,000 if Tyron transferred ownership of the policy any time prior to his date of death. D. Zero - life insurance proceeds paid to a surviving spouse are excluded from a gross estate. E. Zero if Tricia's daughter refused to accept the proceeds.

A. $300,000. Explanation: Proceeds of life insurance paid due to the death of the decedent are specifically included in the gross estate if the decedent owned the policy.

The estate and gift taxes share several common features. Which of the following characteristics is common to both the estate and gift taxes? A. An applicable credit and a marital deduction. B. A charitable deduction and an annual exclusion. C. A gift-splitting election and a deduction for income taxes paid by the fiduciary. D. A charitable deduction and the unused spousal exemption equivalent. D. All of these choices are characteristics common to both the gift and the estate tax.

A. An applicable credit and a marital deduction. Explanation: The applicable credit and deductions for marital and charitable transfers are features common to both the estate tax and the gift tax. The annual exclusion and gift-splitting election are unique to the gift tax, and the amount of the exemption equivalent for 2020 is $11.58 million for both the gift and the estate tax. The deceased spouse's unused exclusion amount only applies to the estate tax.

Which of the following statements is (are) true? A. The same transfer tax rate schedule is used to calculate both the estate tax and the gift tax. B. The transfer tax rate schedule is regressive in nature. C. The amount of the applicable credit varies according to whether the taxable transfer is inter vivos or testamentary. D. The exemption equivalent automatically offsets transfers in calculating cumulative taxable transfers. E. All of the choices are true.

A. The same transfer tax rate schedule is used to calculate both the estate tax and the gift tax. Explanation: In 2020, the applicable credit automatically offsets $11.58 million of transfer taxes representing the lower tax rates in the transfer tax rate schedule. The exemption equivalent represents an equivalent amount of taxable transfers necessary to generate transfer taxes equal to the applicable credit.

At her death, Silva owned real estate worth $500,000 and titled with her son in joint tenancy with the right of survivorship. The total cost of the property was $250,000. Silva contributed $50,000 to the total cost of the property while her son contributed the remaining $200,000. What amount, if any, is included in Silva's gross estate? A. $50,000. B. $100,000 C. $250,000. D. $500,000. E. None of the choices are correct.

B. $100,000 Explanation: For unmarried co-owners, the value of property owned in joint tenancy with the right of survivorship that is included in the decedent's gross estate is determined by the proportion contributed by the decedent to the total cost of the property. In this instance, Silva contributed 50/250 or 20%. Hence, 20% of the $500,000 value is included in her gross estate.

The estate and gift taxes share several common features. Which of the following characteristics are common to both the estate and gift taxes? A. A tax credit for transfers to a spouse. B. A charitable deduction. C. A gift-splitting election. D. An annual exclusion. E. All of the choices are characteristics common to both the gift and the estate tax.

B. A charitable deduction. Explanation: Deductions for marital and charitable transfers are features common to both the estate tax and the gift tax. The annual exclusion and gift-splitting election are unique to the gift tax.

Which of the following transactions would not utilize the "Section 7520 rate" to calculate the value of the transfer? A. A transfer of property with a retained life estate. B. A transfer of property to a spouse. C. A transfer of a remainder interest in real property. D. A transfer of a 10-year term certain in real property. E. None of these choices utilizes the "Section 7520 rate" in the calculation of the value of the property.

B. A transfer of property to a spouse. Explanation: The value of property consists of the present interest (the right to income) and the future interest (the remainder). The value of the remainder interest depends upon the time the property is held by the present interest and the interest rate. The value of the income interest is the difference between the value of the remainder and the total value of the property.

Which of the following is a true statement about the federal gift tax return (Form 709)? A. Form 709 is due by the 15th day of the ninth month following the date of the gift. B. Form 709 must be filed if a taxpayer wishes to elect gift-splitting. C. Form 709 need not be filed unless a taxpayer's taxable gifts exceed the exemption equivalent. D. Form 709 is due nine months after the death of the decedent. E. None of the choices are true.

B. Form 709 must be filed if a taxpayer wishes to elect gift-splitting. Explanation: The gift tax is levied on a calendar-year basis and individual taxpayers who make a gift in excess of the annual exclusion or wish to elect gift-splitting must file a gift tax return (Form 709) by April 15 of the year following the gift(s).

The applicable credit is designed to: A. apply only to taxable transfers included in the gross estate. B. prevent taxation of cumulative transfers that do not exceed a certain minimum amount. C. apply to amounts not already eliminated by the exemption equivalent. D. exclude up to $15,000 per individual per year on any individual transfer. E. None of the choices are correct.

B. prevent taxation of cumulative transfers that do not exceed a certain minimum amount. Explanation: The applicable credit was designed to prevent taxation of all but the largest cumulative transfers called the exemption equivalent.

Which of the following is a complete taxable gift? A. $20,000 in cash contributed to the committee to reelect Senator BlowHard. B. $15,000 in cash given directly to Valley Hospital for the care of a neighbor who was in an auto accident. C. $18,000 in cash given directly to a needy student to pay for college tuition. D. $55,000 in cash transferred to a former spouse under a written property settlement shortly after a divorce. E. None of the choices is a complete taxable gift.

C. $18,000 in cash given directly to a needy student to pay for college tuition. Explanation: Political contributions are not gratuitous transfers, and the payment of medical or educational expenses on behalf of an unrelated individual is not considered a gift if the payments are made directly to the health care provider or to the educational institution. A transfer of property in conjunction with a divorce is treated as a transfer for adequate consideration if the property is transferred within three years of the divorce under a written property settlement.

This year Drake and his son purchased real estate for an investment. The price of the property was $1,200,000, and the title named Drake and his son as joint tenants with the right of survivorship. Drake provided $900,000 of the purchase price and his son provided the remaining $300,000. What is the amount of the taxable gift? A. $300,000. B. $600,000. C. $285,000. D. $1,200,000. E. None of the choices are correct - Drake did not make a taxable gift.

C. $285,000. Explanation: [($1,200,000 / 2) − $300,000] − $15,000 = $285,000. An individual who creates a joint tenancy (either a tenancy in common or joint tenancy with right of survivorship) with someone who does not provide adequate consideration is deemed to make a gift at that time. The gift is the amount necessary to pay for the other party's interest in the property.

The estate and gift taxes share several common features. Which of the following characteristics is common to both the estate and gift taxes? A. A marital deduction and a deduction for casualty losses. B. A marital deduction for transfers of all terminable interests. C. The tax rate schedule for calculating gross transfer taxes. D. A charitable deduction and an annual exclusion. E. None of these choices list characteristics common to both the gift and the estate tax.

C. The tax rate schedule for calculating gross transfer taxes. Explanation: The applicable credit and deductions for marital and charitable transfers are features common to both the estate tax and the gift tax. Terminable transfers do not qualify for the marital deduction and an annual exclusion is only available for gratuitous transfers.

A withdrawal of money from a bank account held in joint tenancy with the right of survivorship can constitute a completed gift. T/F

True

For 2020 the exemption equivalent for the gift tax is $11.58 million. T/F

True

Ozzie and Harriet are married and live in Michigan, a common-law state. For the holidays Ozzie gave cash gifts of $50,000 to his son, and Harriet gave $36,000 to her daughter. What is the total amount of Ozzie's taxable gifts if Ozzie and Harriet elect to split the gifts? A. $86,000. B. $43,000. C. $28,000. D. $13,000. E. None of the choices are correct.

D. $13,000. Explanation: ($25,000 − $15,000) + ($18,000 − 15,000). The option to split gifts allows a couple to treat all gifts made in a year as if each spouse had made one-half of each gift. Hence, Ozzie is treated as giving his son $25,000 ($10,000 taxable gift after the annual exclusions) and making a $18,000 gift to Harriet's daughter ($3,000 after the annual exclusion).

Which of the following statements is (are) true for both gratuitous and testamentary transfers? A. An applicable credit of up to $15,000 per donee per year reduces the tax on any transfer. B. An annual exclusion offsets any transfer up to $15,000. C. An election can be made to split a transfer between spouses. D. A charitable and a marital deduction are allowed in computing the taxable transfer. E. All of the choices are true.

D. A charitable and a marital deduction are allowed in computing the taxable transfer. Explanation: Both gratuitous and testamentary transfers are reduced by marital and charitable deductions. The annual exclusion and gift-splitting election are unique to gratuitous transfers, and the applicable credit is based on the tax on $11.58 million in 2020.

Which of the following transfers is a complete gift? A. Payment of child support by a former spouse. B. Transfer of property to a revocable trust. C. Transfer of cash to a bank account held in joint tenancy with the right of survivorship. D. Income paid to the beneficiary of a revocable trust. E. None of the choices is a complete gift.

D. Income paid to the beneficiary of a revocable trust. Explanation: If the grantor releases the powers, then the gift will generally be complete at that time, because the property is no longer subject to the donor's control. For example, a distribution of property from a revocable trust is a complete gift because the grantor no longer has the ability to revoke the distribution.

The generation-skipping tax is designed to accomplish which of the following? A. Generate additional revenues to supplement the gift tax. B. Replace the estate tax on transfers to trusts. C. Eliminate the possibility that the gift tax can be avoided by gifts in contemplation of death. D. Prevent the avoidance of both estate and gift taxes through transfers that skip a generation of recipients. E. None of the choices are correct.

D. Prevent the avoidance of both estate and gift taxes through transfers that skip a generation of recipients. Explanation: The GST merely plugs a hole in the transfer tax system.

The Federal transfer taxes are calculated using both transfers in the current year and transfers in previous years. T/F

True

The calculation of the value of a life estate in a trust generally does not depend upon which of the following factors? A. The age of the life tenant. B. The Section 7520 interest rate. C. The value of the property at the time of the transfer. D. The manner in which the trust corpus is invested. E. All of these factors are utilized in the calculation of the value of a life estate in a trust.

D. The manner in which the trust corpus is invested. Explanation: Generally, the value of a present interest, such as a life estate, does not depend on how the trustee invests the corpus (in growth stock or high-yield money market) because the fiduciary (the trustee or executor) has a duty to invest the property for the benefit of both the income beneficiary and the remainderman.

To qualify as a completed gift, property must be irrevocably relinquished by the donor and accepted by the donee. T/F

True

A gratuitous transfer of property made during the lifetime of the donor is called: A. an incomplete gift. B. a testamentary transfer. C. a taxable gift. D. an inter vivos transfer. E. All of the choices are correct.

D. an inter vivos transfer. Explanation: nter vivos comes from Latin meaning "during the life of."

The applicable credit is designed to: A. apply only to taxable transfers included in the gross estate. B. is set at $11.58 million for any single transfer. C. apply to amounts not already eliminated by the exemption equivalent. D. prevent taxation of cumulative transfers below a specified minimum amount E. None of the choices are correct.

D. prevent taxation of cumulative transfers below a specified minimum amount Explanation: The applicable credit was designed to prevent taxation of all but the largest cumulative transfers.

A serial gift strategy consists of arranging gifts to minors to maximize the value of the applicable (unified) credit. T/F

False

The annual exclusion eliminates any gratuitous transfer of a present interest in property. T/F

False

The gross estate includes the entire value of real property owned by a decedent and spouse in joint tenancy with the right of survivorship. T/F

False

The probate estate includes all real and personal property owned by the decedent at the time of death.

False