Module 2: The Federal Gift Tax Quiz 2

Which of the following statements concerning gifts of appreciated property are CORRECT? I. The donor's holding period carries over to the donee. II. Generally, the donor's basis carries over to the donee. III. If the donor paid gift tax on the gift, the donee's basis is increased by a portion of the gift tax paid. A) I, II, and III B) II and III C) II only D) I and III

A - All of these statements are correct.

Which of the following transfers are gifts for purposes of the gift tax statutes? I. Kurt creates an irrevocable trust providing that his son is to receive income for life and his grandson the remainder at his son's death. II. Kurt purchases real property and has the title conveyed to himself and to his brother as joint tenants. III. Kurt creates an irrevocable trust giving income for life to his spouse and providing that upon her death the corpus is to be distributed to his daughter. IV. Kurt purchases a U.S. savings bond made payable to himself and his spouse. The spouse later surrenders the bond for cash to be used for her benefit. A) I, II, III, and IV B) I, II, and IV C) II and III D) I and II

A - All of these transfers are gifts for purposes of the gift tax statutes. Statement IV falls under the gift tax statutes, but the unlimited marital deduction may be utilized to offset any possible gift tax due.

Which of the following is considered to be a gift for federal gift tax purposes that qualifies for the gift tax annual exclusion? A) A payment of cash to a favorite nephew to assist with his college tuition B) A gift to a political organization for its use C) A transfer of property to fund a revocable trust D) Property settlement transfers pursuant to a written divorce agreement

A - Because it's not made directly to an educational institution (which would be excludible as a qualified transfer), the payment of cash to a favorite nephew to assist with tuition is both a gift and one that qualifies as a present interest for purposes of the gift tax annual exclusion. The gift to a political organization is a gift, but there is no gift tax liability. The transfer of property to fund a revocable trust is an incomplete transfer; gift taxes do not apply. A property settlement transfer that is a part of a written divorce agreement or decree between divorcing spouses is not considered a gift.

What is the maximum gift that Bob and Stan, a married couple, can give to one donee in 2020 without paying any gift tax, assuming they have not made any previous taxable gifts? A) $23,190,000 B) $22,800,000 C) $11,430,000 D) $30,000

A - For 2020, the answer is $23,160,000: ($11,580,000 applicable exclusion amount × 2 donors) + ($15,000 annual exclusion × 2 donors).

Which of the following is NOT an advantage of making a lifetime gift? A) It excludes gift tax paid on the gift from the donor's gross estate regardless of how soon the donor dies after making the gift. B) It provides personal satisfaction. C) It diminishes the size of the gross estate. D) It shifts income from the gifted asset to the donee.

A - Gift tax taxes paid out of pocket are excluded from the donor's gross estate only if the donor's date of death is not within three years of the gift. In order for a donee to pay gift taxes out of pocket (instead of using the applicable gift tax credit), the donor must have already made adjusted taxable gifts of more than the exemption equivalent.

Tommy wishes to transfer his house valued at $60,000 to his son, Bob, in trust for Bob's lifetime, with the remainder to Bob's children. Tommy plans to occupy the house until his death. Which of the following statements are CORRECT? I. The gift to Bob is eligible for the annual exclusion. II. The gift of the remainder interest to Bob's children is eligible for the annual exclusion. III. Tommy has not made a gift. IV. The transfer of the house is a future interest gift. A) IV only B) II only C) I, II, III, and IV D) III and IV

A - Neither the gift to Bob nor the gift of the remainder interest gift to Bob's children is eligible for the annual exclusion. A present interest gift that qualifies for the annual exclusion generally transfers an immediate right to possession or enjoyment of the property or property interest to the donee. In this case, the gift is one of a future interest, both to Bob and his children.

Sarah and Jenny, a married couple, own real estate as JTWROS, and Sarah is contemplating a transfer of her interest to Jenny. Assuming the transfer occurs, which of the following statements are CORRECT? A taxable gift occurs. The transfer is eligible for the marital deduction. A) II only B) Neither I nor II C) I only D) Both I and II

A - Only Statement II is correct. A taxable gift has not occurred because of the marital deduction.

Which of the following statements regarding lifetime gifts are CORRECT? I. Annual exclusion gifts will escape gift taxation and will not be included in the donor's gross estate. II. Future appreciation in the value of gifted property will escape estate taxation in the donor's estate. III. Income from gift property will generally be taxed to the donee for income tax purposes. IV. Generation-skipping transfer taxes do not apply to lifetime gifts. A) I, II, and III B) II, III, and IV C) I and III D) II and III

A - Only Statement IV is incorrect; the generation-skipping transfer tax (GSTT) does apply to lifetime gifts. Statements I, II, and III are correct.

Which of the following transactions made in 2020 require the donor to file a gift tax return? I. The donor makes a gift of a future interest valued at $5,000 to his son. II. The donor and spouse use gift splitting and give their son $12,500 for the son's birthday. III. The donor transfers $15,000 to a revocable inter vivos trust for the son, who is both the income and remainder beneficiary. IV. The donor and his spouse gift community property worth $14,500 to their daughter for her birthday. A) I and II B) II, III, and IV C) I and III D) I, II, III, and IV

A - Statements I and II require filing. Statement III is not a completed gift, and Statement IV is a split gift of community property and is less than the annual exclusion; therefore, no filing is required.

Lionel Trane has made the following lifetime transfers: Gave his spouse a remainder interest worth $56,000 in a parcel of real estate after his death Funded a Section 2503(c) trust for the benefit of his daughter with $60,000 of common stock; his spouse did not split this gift. Paid his mother's medical bill to the community hospital in the amount of $15,000 Established a revocable trust for his only grandchild with $8,000 in cash Which of the following statements describe the tax impact of Lionel's lifetime transfers on subsequent lifetime transfers that Lionel may wish to make? I. The gift to his spouse will reduce the amount of future lifetime taxable transfers that he can make without having to pay the gift tax out of pocket. II. Establishing and funding the trust for his daughter will reduce the amount of future lifetime taxable transfers that he can make by the value of the gift, minus one annual exclusion, without having to pay the transfer tax out of pocket. III. Paying his mother's hospital bill will have no effect on subsequent lifetime transfers. IV. Establishing the revocable trust will have no effect on subsequent lifetime transfers. A) II, III, and IV only B) II only C) I, II, and IV only D) I and III only

A - The gift to his spouse will have no effect because no part of it will be taxable. The entire amount will be covered by the unlimited marital deduction because the gift of a vested remainder is not a terminable interest. Also, since it is a future interest gift, the remainder interest is not entitled to an annual exclusion. The gift to the daughter's trust is entitled to an annual exclusion by the terms of Section 2503(c) even though it technically is not a present interest gift. Direct payment of medical expenses to the provider is exempt from gift tax. A revocable trust is revocable and therefore is not a completed gift.

In which type of charitable trust does the income interest pass to a qualified charity and the remainder interest pass to one or more noncharitable beneficiaries? A) Charitable lead trust (CLT) B) Pooled income fund (PIF) C) Charitable remainder unitrust (CRUT) D) Charitable remainder annuity trust (CRAT)

A - With a charitable lead trust, income payments go to a charity and the remainder interest passes to noncharitable beneficiaries. With CRATs, CRUTs, and PIFs, the remainder interest passes to a charity.

Which of the following statements regarding QTIP trusts are CORRECT? I. QTIP trusts allow a terminable interest to be left to the surviving spouse and still qualify for the estate tax marital deduction. II. Assets in a QTIP trust are usually included in the gross estate of the second spouse to die. III. QTIP trusts are useful when the first spouse to die has children from a prior marriage. A) I and III B) I, II, and III C) II only D) II and III

B - All of these statements are correct. The QTIP is included in the estate of the second spouse to die at the same percentage as the first spouse took as a marital deduction. If 100% of the QTIP was taken as a marital deduction when the first spouse dies, then 100% of the QTIP is included in the second spouse to die's gross estate. If the first spouse's estate only took a martial deduction for 70% of the QTIP, then only 70% of the QTIP's value when the second spouse to die passes away is included in the estate of the second spouse to die.

Which of the following statements regarding gifts is NOT correct? A) When a gift is made during the donor's lifetime, any appreciation accruing between the time of the gift and the date of the donor's death escapes the estate tax. B) If a gift is made within four years prior to the donor's death, the amount of any gift tax paid on the transfer is included in the donor's gross estate. C) There may be income tax incentives for making an inter vivos gift, which can involve moving taxable income from a high-bracket donor to a lower-bracket donee. D) An individual can give up to $15,000 gift tax free every year (for 2020) to an unlimited number of donees.

B - Gift taxes paid on gifts made within three years prior to death are included in the donor's gross estate.

The Chapter 14 zero valuation rules focus on proper valuation of assets at the time of transfer for purposes of determining gift tax. Which of the following statements regarding the Chapter 14 valuation rules are CORRECT? I. An estate freeze involving the intrafamily transfer of corporate stock or partnership interests generally results in an immediate gift tax based on the entire value of the business held by the senior family member. II. In the case of buy-sell agreements, the Chapter 14 rules do not apply to transfers between non-family members. A) Both I and II B) I only C) Neither I nor II D) II only

B - Statement II is incorrect because in the case of buy-sell agreements, the Chapter 14 valuation rules apply to transfers between nonfamily members as well as transfers between family members.

In 2020, Michael incurs substantial medical bills at the local clinic and Esteban pays $50,000 directly to the hospital in payment of Michael's medical expenses. What is the amount of Esteban's taxable gift as a result of this transaction? A) $30,000 B) $0 C) $85,000 D) $100,000

B - 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.

In 2020, George decided to begin a program of lifetime giving to his five grandchildren and three great- grandchildren. He wants to control the amount of annual gifts to avoid the imposition of federal gift tax, and he does not desire to use any of his or his spouse's applicable credit amount. However, his spouse is willing to split each gift over a period of 10 years. Over the 10-year period, George can give a total amount of gifts (ignoring future indexing of the annual exclusion), including the gift splitting, of A) $1,200,000. B) $300,000. C) $2,400,000. D) $150,000.

C - Calculate as follows: $15,000 × 8 × 10 × 2 = $2,400,000. Each spouse can gift $15,000 (for 2020) per donee without resulting in a taxable gift. Using gift splitting over the 10-year period, they can gift a total of $2,400,000.

George and Claire are married and have four children. If they elect gift splitting, what is the maximum amount of total gifts they can make to their children in 2020 and have the gifts be covered by their annual exclusions? A) $30,000 B) $60,000 C) $120,000 D) $15,000

C - If George and Claire elect gift splitting, they can give up to $30,000 to each child (a total of $120,000) and have the gifts be covered by the annual exclusion.

Which of the following statements regarding types of gifts is CORRECT? A) The gift tax applies to incomplete gifts. B) Indirect gifts, such as the payment of another's expenses, are not subject to the gift tax. C) A gift of a future interest is not eligible for the gift tax annual exclusion. D) A gift of a future interest is not subject to gift tax.

C - Indirect gifts, such as the payment of another's expenses, may be subject to the gift tax. The gift tax does not apply to incomplete gifts. The gift tax applies to gifts of future interests as well as to gifts of present interests.

Which of the following charitable remainder trusts can be revoked by the grantor after they are established? I. Charitable remainder annuity trusts (CRATs) II. Charitable remainder unitrusts (CRUTs) A) I only B) Both I and II C) Neither I nor II D) II only

C - Neither is correct. For a trust to qualify as a CRAT or a CRUT, the trust must be irrevocable upon inception.

In which of the following situations is a holder's power to appoint property to himself considered to be a general power of appointment over the entire property for gift tax purposes? I. The holder's power is limited by an ascertainable standard so that the power is exercisable only for the holder's health, education, maintenance, or support (HEMS). II. The holder may exercise the power only with the consent of the grantor or a third party who has an interest that is adverse to the holder's. III. The right to exercise the power each year is limited to the greater of $5,000 or 5% of the total value of the property subject to the power. A) I only B) I, II, and III C) None of these D) II and III

C - None of the statements describe situations in which a holder's power to appoint property to himself is considered a general power of appointment over the entire property. For gift tax purposes, the power of the holder to appoint property to himself is not a general power of appointment in any of these situations.

Which of the following situations would NOT constitute a transfer that comes within the gift tax statutes? A) Carla creates an irrevocable trust that provides that her daughter, Amy, is to receive income for life and that Carla's granddaughter, Hayley, is to receive the remainder at Amy's death. B) Kai creates an irrevocable trust giving income for life to his spouse, Mina, and providing that at her death the corpus is to be distributed to their son, Jace. C) Mary Sue creates a joint bank account for herself and her daughter, Rachel. Rachel has made no withdrawals from the account. D) Bill purchases real property and has title conveyed to himself and to his brother, Joe, as joint tenants.

C - Rachel has made no withdrawals from the account. A gift does not occur regarding the joint bank account until Rachel withdraws funds for her own benefit.

When do the Chapter 14 rules of estate valuation generally apply? A) To discount the listed value of publicly held securities B) To arrive at the actuarial value of a life estate or remainder interest C) To determine the amount of the taxable gift in certain estate freeze transactions D) To determine the value of real property owned by a closely held business

C - The Chapter 14 rules of estate valuation generally apply in certain estate freeze transactions, such as corporate recapitalizations, between family members. These rules also apply in the valuation of interests in certain trusts, such as grantor retained income trusts (GRITs).

The Chapter 14 valuation rules of the Internal Revenue Code apply to which of the following types of techniques between family members? I. Corporate recapitalizations II. Partnership capital freezes III. Grantor retained trusts IV. Buy-sell agreements A) IV only B) I and II C) I, II, III, and IV D) III only

C - The Chapter 14 valuation rules apply to all of these techniques among family members. They also apply to buy-sell agreements among non-family members.

On January 1, 2020, Paul gifts a piece of land (basis of $100,000, FMV of $300,000) to his father. Which of the following statements is CORRECT? A) If Paul's father dies on December 1, 2019, and leaves the land to Paul, Paul will receive a stepped-up basis in the property. B) If Paul had sold the land to his father for $50,000 instead of gifting it, he would have had a deductible loss of $50,000. C) Paul's father's basis in the property will be $100,000. D) If Paul dies, the property will be included in his gross estate at the date-of-death value.

C - The gift basis to a donee is the carryover basis of the donor ($100,000). The boomerang rule of Section 1014(e) precludes Paul from receiving a stepped-up basis at his father's death if his father dies within one year of receiving the property from Paul.

In 2020, Walter gave his 20-year-old son, Rufus, stock valued at $320,000. Walter's spouse, Frances, consented to split this gift with Walter for gift tax purposes. What amount of taxable gift must Walter report on his gift tax return for 2020? A) $305,000 B) $160,000 C) $145,000 D) $320,000

C - Walter must report a taxable gift of $145,000 on his 2020 gift tax return [($320,000 ÷ 2) − $15,000 annual exclusion]. The annual exclusion is considered after the gift is split between spouses.

Which of the following statements regarding gift splitting are CORRECT? I. The annual gift tax exclusion allows spouses who consent to split their gifts to transfer up to $30,000 (for 2020) to any one person during any calendar year without gift tax liability, if the gifts are of a present interest. II. To qualify for gift splitting, a couple must be married at the time the gift is made. III. For gift tax purposes, spouses must file a joint income tax return to qualify for the gift splitting benefits. IV. Both spouses must consent to the use of gift splitting and at least one gift tax return must be filed. A) I and II B) I only C) II, III, and IV D) I, II, and IV

D - Spouses do not have to file a joint income tax return to elect gift splitting. The other statements are correct.

Which of the following are examples of gift giving that are likely to result in favorable tax consequences? I. An advantage of giving property with a current value that is less than its basis (loss property) is that when the recipient sells the property the loss is available to offset any gains. II. Elderly taxpayers should give highly appreciated, low basis property in preference to cash. III. Making net gifts is a technique for clients who do not have very much in liquid assets and who want to make taxable gifts. IV. The donee can depreciate depreciable property based on its value for gift tax purposes. A) II, III, and IV B) I, III and IV C) I and IV D) III only

D - Statement I is incorrect; the double basis rule would not permit this favorable treatment. Statement II is incorrect; at the date of death, the property basis would be adjusted to fair market value. Statement III is correct. Statement IV is incorrect; the property would be depreciated on the basis of its adjusted basis, not its fair market value.

Jeanine and Scott are married. Jeanine gifted $100,000 to their son and $100,000 to their daughter in 2020. Scott also gifted $50,000 to their son in the same year. They made no other gifts during the year. Jeanine and Scott elected to split the gifts on their gift tax returns. What is the total amount of taxable gifts made by Jeanine and Scott, respectively, for 2020? A) Jeanine: $110,000; Scott: $110,000. B) Jeanine: $185,000; Scott: $35,000. C) Jeanine: $170,000; Scott: $20,000. D) Jeanine: $95,000; Scott: $95,000.

D - Taxable gifts = $95,000 each ($250,000 − $60,000 annual exclusions) ÷ 2.

Which of the following transfers is a taxable gift? A) John pays $25,000 of medical expenses to a hospital for his invalid niece. B) John donates $10,000 to his church. C) John pays the University of South Texas $12,000 in college tuition for his 22-year-old niece. D) John gives a $20,000 necklace to his fiancée 9 months before they are married.

D - The necklace is a taxable gift. Because John was not married at the time of the gift, he cannot take advantage of the marital deduction on gifts to his fiancée. Payments of tuition or medical expenses directly to a provider are NOT considered taxable gifts for gift tax purposes. The donation to the church is eligible for the gift tax charitable deduction.

Bob Dickson established a Uniform Transfers to Minors Act (UTMA) account for each of his 10 children in 2019. He funded each account with $580,000. Bob had made $200,000 of taxable gifts in prior years. The gift tax due on these prior gifts was paid by his gift tax credit amount. Bob did not make any other gifts to his children in 2020. Which of the following is the net federal gift tax due for the 2020 gifts? A) $185,400 B) $67,525 C) $232,000 D) $0

D - Transfers to an UTMA are eligible for an annual exclusion. Therefore, $565,000 of each transfer is taxable, for a total of $5,650,000. Bob's prior taxable gifts must be added to this amount to determine total taxable gifts of $5,850,000 ($5,650,000 + $200,000). This figure is taken to the gift tax rate table to compute a tax due of $2,285,800 ($4,850,000 × 40% = $1,940,000 + $345,800 [tax on $1 million]). From this amount, the tax on $200,000 (the prior taxable gifts) is deducted. The tax on $200,000 is $54,800. Therefore, $2,285,800 - $54,800 = $2,231,000. Because Bob has used $54,800 of his $4,577,800 gift tax credit amount on prior gifts, he has $4,523,000 of this credit left to apply to current gifts. Therefore, Bob's net federal gift tax due for the current transfers is $0 because he can use a portion of his remaining applicable credit amount.