Module 2: The Federal Gift Tax Quiz 1

Jean died in a common-law state in 2019 and was survived by her spouse, Loren, and three adult children. Jean's gross estate, all of which was owned solely in her name, was composed of the following assets and date-of-death fair market values: Assets Values Common stock $2,900,000 Residence 750,000 Personal property 60,000 IRAs 1,450,000 Hummel figurines 175,000 Total assets $5,335,000 Jean's only liabilities, together with their date-of-death balance, were as follows: Liabilities Balance Mortgage on residence $175,000 Car loan 8,000 Total $183,000 The following is a list of all of the gratuitous transfers that Jean made during her lifetime: 2000:Jean placed the common stock listed above in an irrevocable trust in which she retained the right to a 5% distribution of the trust account revalued annually for 25 years, with the remainder to her children at her death. The date-of-gift fair market value of the stock was $190,000; the value of Jean's retained interest on the date the gift became complete was $90,000. 2001:She made a cash gift to her niece of $30,000, which Loren agreed to split. 2005:She paid the University of Iowa $11,000 for her youngest child's tuition. 2019:She gave her brother $70,000 in cash, which Loren agreed to split. Jean's will, executed in 2000, gave the residence and personal property to Loren and the Hummel figurines to a qualified charity. Jean's three children were designated as equal beneficiaries of her IRAs. Each beneficiary of Jean's estate was to pay any transfer tax due on the portions of the estate received. Her will also stipulated that any real property was to be received without a right of exoneration. Further, her will stipulated that funeral and administrative expenses were to be paid equally by her spouse and three children. These funeral and administrative expenses amounted to $60,000 for Jean's estate. Jean's estate paid state death taxes in the amount of $4,184 and will pay off the car loan. Which of the following amounts most closely approximates Jean's gift tax liability, prior to application of the applicable credit amount, for the 2019 gift? A) $25,300 B) $6,000 C) $31,300 D) $0

B - When a question is very long, it can help to skip the background information initially and read the actual question first. In this case, none of the information about Jean's estate matters. The taxable amount of the 2000 transfer was $100,000—the value of the remainder interest ($190,000 - $90,000 she retained). The taxable amount of the 2001 gift was $5,000 ($30,000 2 = $15,000 $10,000). The 2005 transfer is exempt from gift tax. The taxable amount of the 2019 gift was $20,000 ($70,000 2 = $35,000; $35,000 $15,000 = $20,000). Therefore, total taxable gifts equal $125,000 ($100,000 + $5,000 + $20,000). The gift tax on $125,000 is $31,300. Prior taxable gifts equal $105,000 ($100,000 + $5,000). Tax on $105,000 is $25,300. Thus, the gift tax due on the 2019 gift (prior to application of the applicable credit amount) is $6,000 ($31,300 - $25,300).

Which of the following charitable trusts may NOT invest in tax-exempt securities? I. Pooled income fund (PIF) II. Charitable remainder annuity trust (CRAT) III. Charitable remainder unitrust (CRUT) A) II and III B) I, II, and III C) I only D) III only

C - The pooled income fund is the only option that cannot invest in tax-exempt securities. CRATs and CRUTs are allowed to invest in tax-exempt securities.

If a decedent's property does not pass to someone by will substitute or by will, and there are no legal heirs under the applicable state intestate succession statute, the property will A) be held by the court until a distant relative can be located and petitions the court for distribution. B) be claimed by the IRS as a death tax. C) be donated to a charitable organization. D) escheat to the state.

D - The property will be held by the state in trust for a stated number of years, and if no legal heirs under the intestacy statutes come forward, the property escheats to the state.

In 2020, Ron gives $20,000 in cash to each of his four children. What amount of taxable gifts, if any, must Ron report for 2020? A) $20,000 B) $65,000 C) $80,000 D) $0

A - Because all of the gifts are present interests and they are made to four different donees, each gift is eligible for the annual exclusion of $15,000 (in 2020). Therefore, total taxable gifts are $20,000: 4 × ($20,000 − $15,000).

Which of the following transactions are subject to the Chapter 14 valuation rules? I. Corporate recapitalizations II. Partnership capital freezes III. Grantor retained trusts, such as GRITs IV. Buy-sell agreements between non-family members A) IV only B) I, II, and III C) I and II D) I, II, III, and IV

D - All of these estate freeze transactions are subject to the Chapter 14 valuation rules.

This year, Rhonda makes present interest gifts to five different donees and makes future interest gifts to three other donees. Rhonda is entitled to how many gift tax annual exclusions this year? A) Five B) Three C) Eight D) One

A - A separate annual exclusion applies to each donee who receives a gift of a present interest, so Rhonda is entitled to five annual exclusions. Each annual exclusion amount covers up to $15,000 of present interest gifts per recipient in 2019.

Which of the following statements regarding private foundations are CORRECT? I. The private foundation must distribute at least 5% of its assets annually for charitable purposes. II. Private foundations may be administratively expensive to operate because they are subject to strict IRS reporting requirements. III. Nonoperating private foundations engage in charitable activity directly. A) I and II B) I, II, and III C) III only D) II only

A - Nonoperating private foundations do not engage in any charitable activity directly but generally distribute funds for charitable purposes.

In which of the following situations must the donor file a federal gift tax return? I. The donor makes a gift of a present interest valued at $10,000 to one donee. II. The donor makes a gift of a future interest valued at $1,000 to one donee. III. The donor makes a gift of $10,000 to one donee and the donor's spouse agrees to gift splitting. A) II and III B) I only C) I, II, and III D) I and II

A - Statement I is incorrect; a gift tax return is not required because the gift does not exceed the annual exclusion and is not a gift of a future interest. Statements II and III are correct. A gift tax return is required when a gift of a future interest in any amount has been made or when gift splitting has been elected by spouses.

Which of the following most likely describes the reason for including Crummey powers in a trust? A) To ensure that gifts to the trust qualify for the gift tax annual exclusion B) To protect the trust assets against claims by the beneficiaries' creditors C) To ensure that the trust complies with the rule against perpetuities D) To relieve the trust of fiduciary obligations regarding the trust assets

A - The purpose of including Crummey powers in a trust is to ensure that gifts to the trust qualify for the gift tax annual exclusion.

Roger has made the following gratuitous lifetime transfers: $30,000 in 2000 to his mother and father; $30,000 to each of his three children in 2001 (these amounts were placed in three separate Section 2503(c) minor's trusts); and $90,000 in 2011 to a revocable trust that gives the corporate trustee the discretion to make disbursements of income or principal for the health, education, maintenance, and support of Roger's brother. Through the end of 2011, the trustee made disbursements of $14,000 from the trust to Roger's brother. Roger's spouse passed away in 1999. What amount of gift tax applicable credit does Roger have available in 2020 for subsequent lifetime transfers after reporting these transfers for gift tax purposes? A) $4,561,940 B) $984,140 C) $4,283,800 D) $330,440

A - The taxable gifts were as follows: 2000: $30,000 - [2 × $10,000 for annual exclusions (AE)] = $10,000 2001: $30,000 × 3 - [3 × $10,000 (AE)] = $60,000 2011: $14,000 - $13,000 (AE) = $1,000 (only the amount actually disbursed is a completed gift) Therefore, Roger has made total cumulative taxable gifts of $71,000, which has incurred cumulative gift taxes in the amount of $15,860, and therefore he has used $15,860 of his gift tax applicable credit amount, leaving $4,561,940 ($4,577,800 - $15,860) of gift tax applicable credit amount available for lifetime gifts in 2020.

Katie, who is unmarried, made the following gifts in 2020: Cash to her sister, Kellie, in the amount of $16,000 Stocks valued at $26,000 to her cousin, Lawrence An automobile (valued at $17,000) to her uncle, Burt $24,000 to the Compassion Center, a charitable organization Certificates of deposit worth $10,000 to her childhood friend, Marjorie What is the amount of Katie's taxable gifts in 2020? A) $14,000 B) $45,000 C) $69,000 D) $93,000

A - The total of Katie's taxable gifts is $14,000 ($1,000 to Kellie, $11,000 to Lawrence, and $2,000 to Burt). Note that with the exception of the gift to the Compassion Center, the $15,000 annual exclusion is deducted from each gift to arrive at the taxable gift. The $24,000 given to the Compassion Center is a charitable gift and is fully deductible under gift tax law, so there is no gift tax liability.

Erwin makes a gift of his vacation home to his friend, Winnie. Erwin paid $200,000 for the home 20 years ago, and the home has a fair market value of $1.5 million on the date of the gift. What is the value of the gift for gift tax purposes? A) $1.5 million B) $200,000 C) $1.3 million D) $1.7 million

A - The value of a gift for gift tax purposes is the fair market value of the property on the date of the gift less any consideration paid by the donee. The value of the gift is not affected by the donor's basis in the gifted property.

Kent, a widower, has made lifetime gifts to his two children in an effort to reduce the size of his gross estate. In 2014, Kent made a $300,000 taxable gift, and in 2016, he made another taxable gift of $100,000. He used his gift tax applicable credit amount to offset any gift tax liability for all gifts. What amount of the gift tax applicable credit, if any, remains available to Kent for gifts he may desire to make in 2020? A) $4,456,000 B) $4,577,800 C) $4,025,800 D) $4,125,800

A - To calculate how much of the applicable credit amount remains in 2020, the amount used in prior years must be computed. Because the gifts for 2014 and 2016 are stated to be taxable gifts, nothing further needs to be deducted before computing the tax. Therefore, the tax on $400,000 ($300,000 + $100,000) is $121,800 ($70,800 + 34% of $150,000). Because the maximum gift tax applicable credit amount available in 2019 is $4,577,800 and prior gifts have used $121,800 of this amount, $4,456,000 remains.

Bruce, age 80, wants to ensure that he has a continued fixed income to take care of him for the rest of his life. Because Bruce is in a high income tax bracket he also wants to receive a lifetime charitable income tax deduction. He is considering making a charitable gift to the American Cancer Society as long as his stated objectives are met. As his financial planner, which of the following charitable gifting techniques do you recommend? A) Charitable remainder unitrust (CRUT) B) Charitable remainder annuity trust (CRAT) C) Charitable lead trust D) Outright charitable gift

B - A charitable remainder annuity trust (CRAT) is the only option that would provide Bruce with a fixed income amount. The unitrust form would provide lifetime income to Bruce, but the income stream would be variable.

Abby is a businessowner, and she wants to provide her key employee with an additional benefit in light of her stellar work performance. Abby is interested in securing a life insurance policy for her key employee. Which type of policy should Abby give to her employee? A) A first-to-die life insurance policy B) A split-dollar life insurance policy C) A key-person life insurance policy D) A second-to-die life insurance policy

B - A split-dollar life insurance policy can be used to retain the services of key employees by providing them with more insurance protection than the employee could otherwise afford.

Which of the following statements about the federal gift tax are CORRECT? I. The federal gift tax applies to all gratuitous transfers. II. Gift splitting means that spouses may elect to file a joint gift tax return. III. The unlimited gift tax marital deduction has the effect of abolishing the terminable interest rule. IV. Taxable gifts for prior years must be added to taxable gifts for the current year to determine the tax bracket(s) applicable to the current year's taxable gifts. A) I only B) I and II C) IV only D) I, II, and IV

C - Certain gratuitous transfers, such as political contributions and direct payment of medical and tuition expenses, are exempt from the gift tax. Statement II is incorrect, as there is no such thing as a joint gift tax return. A marital deduction can be taken only when the gift to the surviving spouse is not a gift of a terminable interest. Thus, one does not abolish the other.

Arthur and Tasha are a married couple, and they have three children. If they begin making gifts to their children in 2020, which of the following gifts would require the filing of a gift tax return for tax year 2020, knowing the gift tax annual exclusion remains at $15,000 for 2020? I. Arthur gives each child $10,000, for a total of $30,000 in gifts. II. Arthur gives each child $10,000, for a total of $30,000 in gifts, and he and Tasha elect gift splitting. III. Tasha gives a future interest gift worth $5,000 to one child. A) III only B) I, II, and III C) II and III D) I and II

C - Statements II and III are correct. A gift tax return must be filed whenever a married couple elects gift splitting and whenever a gift of a future interest is made. Statement I is incorrect; a gift tax return is not required in this case because no gift to any donee exceeds the annual exclusion amount.

Which of the following statements about the gift tax charitable deduction is NOT correct? A) A gift of a partial interest will qualify for a charitable deduction only if it meets the requirements of the Internal Revenue Code and IRS regulations. B) A charitable gift tax deduction is given only for the portion of the contribution in excess of any value the donor receives from the charity. C) The charitable gift tax deduction is limited by the type of property gifted, the type of charitable donee, and the donor's adjusted gross income (AGI). D) To qualify for a charitable deduction, a gift must be of cash or property.

C - The charitable gift tax deduction is unlimited for qualifying transfers. For income tax purposes, the charitable deduction has limits based on the type of charitable donee, the type of property gifted, and the donor's AGI (adjusted gross income).

Humphrey recently gave his nephew several shares of ABC stock, a listed security. On the date of the gift, this stock closed at $12 per share and traded between a high of $14 per share and a low of $8 per share. In valuing ABC stock for gift tax purposes, what is its appropriate per share value? A) $14 B) $12 C) $11 D) $8

C - The fair market value of listed securities for gift tax purposes is the mean between the highest and lowest quoted selling price on the date of the gift. This is calculated as $11 per share: ($14 + $8) ÷ 2.

Assume that in 2020 Marleen incurs substantial medical bills at the local hospital and Tasha pays $100,000 directly to the hospital in payment of Marleen's medical expenses. What is the amount of Tasha's taxable gift as a result of this transaction? A) $30,000 B) $100,000 C) $0 D) $85,000

C - The payment of another person's medical expenses directly to the medical provider is a qualified transfer and is not considered a gift for gift tax purposes.

The purpose of including Crummey powers in a trust is to A) protect trust assets against claims by the grantor's creditors. B) prevent the trust from having to pay tax on the trust income. C) ensure that gifts to the trust qualify for the gift tax annual exclusion. D) allow the grantor to revoke the trust upon 30 days' notice.

C - The purpose of including Crummey powers in a trust is to ensure that gifts to the trust are considered gifts of a present interest that qualify for the gift tax annual exclusion.

Alan created and funded an irrevocable trust with $150,000 for the benefit of his two minor children with income to be accumulated for five years, at which time the trust will terminate and all the income and corpus are to be distributed equally between the two children. Which of the following is a CORRECT statement about the impact of this lifetime transfer on any subsequent lifetime transfers Alan might make? A) Alan could not take any annual exclusions in the year he created the trust, but he will be able to do so at the time the trust is distributed to the children. B) This transfer will have no impact on any subsequent transfers. C) Any subsequent taxable lifetime transfers will be taxed at a higher rate. D) Any annual exclusions that Alan applies to the transfer creating the trust will decrease the annual exclusions available for transfers to the same children in the future.

C - The taxable amount of this transfer is $150,000 because no annual exclusions can be taken (there are no present interest gifts because the income will be accumulated for five years); $150,000 is at the top of a bracket on the unified rate chart. Therefore, the next taxable transfer will be taxed at a higher rate. There is no gift at the time of distribution to which to apply an annual exclusion. No annual exclusions can be taken at the creation of the trust. Annual exclusions are available each year.

The Bells have decided to establish a charitable trust. Their goal is to receive an annual income from the trust during their lives, with the trust assets passing to charity when they die. Because they both expect to live a long time, they want the income from the trust to provide them with a potential hedge against inflation. Which of the following charitable trusts will best meet the Bells' objectives? A) Charitable lead annuity trust (CLAT) B) Charitable lead unitrust (CLUT) C) Charitable remainder annuity trust (CRAT) D) Charitable remainder unitrust (CRUT)

D - A charitable remainder unitrust (CRUT) will best meet the Bells' needs because it provides an annual income payment based on the market value of the trust assets as revalued each year and will provide a potential hedge against inflation. A CRAT provides a fixed annual income payment. A CLAT or CLUT will not meet the Bells' needs because charitable lead trusts provide an income interest to a charity and a remainder interest to noncharitable beneficiaries. This is the opposite of what the Bells want.

Which of the following property transfers between family members are subject to the special zero valuation rules under Chapter 14? I. Corporate recapitalizations II. Partnership capital freezes III. Buy-sell agreements A) III only B) I and II C) II and III D) I, II, and III

D - All of these property transfers between family members are subject to the special zero valuation rules under Chapter 14. In other words, these types of transfers must comply with the rules under Chapter 14 of the Tax Code or the transfer will have negative gift tax consequences.

Which of the following statements regarding the gift tax lifetime exemption amount (applicable exclusion amount) and applicable credit amount are CORRECT? I. The gift tax lifetime exemption amount in 2020 is $11,580,000. II. The gift tax applicable credit amount in 2020 is $4,577,800. A) I only B) Neither I nor II C) II only D) Both I and II

D - Both of these statements are correct.

Which of the following statements regarding gift splitting is NOT correct? A) The gift tax annual exclusion may be doubled if gift splitting is elected. B) If a donor elects to split gifts, the election must be applied to all gifts made during that calendar year. C) Gift splitting is available only to spouses. D) Gifts of community property require a gift splitting election.

D - Gifts of community property or JTWROS property do not require a gift splitting election. All of the other statements are correct.

Which of the following results from Arthur creating a charitable remainder annuity trust (CRAT) or charitable remainder unitrust (CRUT) and donating his ownership of Bell's Animal Care Center to such a trust, as opposed to a direct sale of the business? I. He avoids capital gains tax upon the transfer of the business to the trust. II. He gets an immediate charitable income tax deduction. III. He may select a joint life annuity. IV. He can receive annuity income. A) I, II, and IV B) II only C) II and IV D) I, II, III, and IV

D - He avoids capital gains tax upon the transfer of the business to the trust. He gets an immediate charitable income tax deduction for transferring assets to the CRAT or CRUT (subject to the rules on the type of charity and AGI limits). He is able to get a retirement annuity from the CRAT or CRUT. He can choose a joint life expectancy for either the CRAT or CRUT.

Ted and Betty are spouses. In 2020, Betty makes a gift of $25,000 to her mother, and Ted agrees to treat the gift as a split gift. Who must file a gift tax return for 2020 if this is their only gift? A) Neither Betty nor Ted B) Both Betty and Ted C) Ted D) Betty

D - Only Betty must file a gift tax return. If spouses agree to split gifts for the year and make no gifts in excess of $30,000 (2019), only the donor spouse is required to file a gift tax return. The consenting spouse must sign the donor's gift tax return to consent to the gift splitting. Filing a gift tax return in this situation documents the splitting of the gifts. It also documents the value of the gift.

Ginger sells some antique jewelry with a fair market value of $50,000 to her daughter for $10,000. Ginger's basis in the jewelry is $5,000. What is the value of Ginger's gift for gift tax purposes? A) $45,000 B) $25,000 C) $0; this is a sale, not a gift D) $40,000

D - This is a gift for gift tax purposes because it is a transfer of property in exchange for less than full and adequate consideration. The value of the gift is the fair market value of the property on the date of the gift ($50,000) reduced by any consideration paid by the donee ($10,000). The adjusted taxable gift in this situation was $25,000 in 2020 ($40,000 - $15,000), but the question asked about the value for gift tax purposes, not the adjusted taxable gift.

Cheryl has made the following lifetime gifts: 2000: $25,000 in cash to her brother 2001: a life estate valued at $80,000 in a vacation cabin to her spouse (assume no QTIP election was made) 2017: $22,000 to the Muscular Dystrophy Association 2020: $34,000 to each of her three children Cheryl's spouse has consented to split the gifts for 2020 and filed a timely gift splitting election for the 2000 gift. Cheryl's spouse made a gift of $30,000 to his brother in 2000. Which of the following amounts most closely approximates Cheryl's gift tax liability for 2020 prior to application of any applicable credit amount? A) $3,100 B) $1,630 C) $3,310 D) $3,000

The taxable amounts for each year (computed below) are as follows: 2000—$7,500; 2001—$70,000; 2017—$0; 2020—$6,000. As the following calculation shows, the taxable gifts for all years must be cumulated. The taxable amount for 2020 cannot be taken to the tax table alone. In 2000, when both Cheryl and her spouse made gifts to third parties, if one gift is split, all gifts must be split. The marital deduction was not taken for the 2001 gift because the QTIP election was not made. The life estate is a terminable interest that is not entitled to an automatic marital deduction. However, the life estate is a present interest and thus is eligible for the annual gift tax exclusion. Finally, remember that the maximum gift tax annual exclusion increased from $10,000 to $11,000 for years 2002-2005; to $12,000 beginning in 2006; to $13,000 for 2009-2012; to $14,000 for 2013-2017; and to $15,000 for 2017 and 2020. (This information will be available on the final.) 2000 2001 2017 Gross amount of gift $25,000 $80,000 $22,000 ½ assumed by spouse (12,500) (0) (0) Adjusted gifts by Cheryl 12,500 80,000 22,000 ½ of spouse's gifts assumed by Cheryl 15,000 0 0 Total calendar year gifts 27,500 80,000 22,000 Annual exclusions (20,000) (10,000) (10,000) Marital deduction (0) (0) (0) Charitable deduction (0) (0) (12,000) Taxable gifts 7,500 70,000 0 Total taxable gifts (2000-2019) = $83,500, which yields a tax of: $19,180 Prior taxable gifts (2000, 2001 and 2017) = $77,500, which yields a tax of: 17,550 The difference is Cheryl's gift tax liability for 2020 $1,630