Module 2: The Federal Gift Tax Quiz 3
Which of the following intrafamily property transfers are subject to the special zero valuation rules under Chapter 14? I. Corporate recapitalizations II. Partnership capital freezes A) I only B) Both I and II C) Neither I nor II D) II only
B - Both statements are correct; corporate recapitalizations and partnership capital freezes are both subject to the special zero valuation rules under Chapter 14.
Which of the following statements about filing and payment of federal gift taxes are CORRECT? A) A donor must file a gift tax return when establishing a QTIP trust only if a QTIP election is not made. B) The donor of a gift is responsible for paying any federal gift tax due on that gift. C) The federal gift tax return is IRS Form 706. D) A donor must file a gift tax return for a gift of a future interest only if its value exceeds the maximum annual exclusion.
B - The answer is the donor of a gift is responsible for paying any federal gift tax due on that gift.
What is the gift tax lifetime exemption amount for 2020? A) $1,000,000 B) $11,580,000 C) $15,000 D) $4,577,800
B - The gift tax lifetime exemption amount for 2020 is $11,580,000.
Which of the following statements about the federal gift tax is CORRECT? A) The unlimited gift tax marital deduction has the effect of abolishing the terminable interest rule. B) Taxable gifts for prior years must be added to taxable gifts in the current year to determine the tax bracket(s) applicable to the current year's taxable gifts. C) The gift tax applies to all gratuitous transfers. D) Gift splitting means that spouses may elect to file a joint gift tax return.
B - This is the correct answer. Because the gift tax is cumulative (based on all taxable gifts since the inception of the gift tax in 1932), taxable gifts for prior years must be added to taxable gifts in the current year to determine the tax bracket(s) applicable to the current year's taxable gifts.
Which of the following is a type of trust in which the grantor has not completed a transfer for gift tax purposes, and has retained the power to rescind the trust? A) Complex B) Simple C) Revocable D) Irrevocable
C - A revocable trust is a trust in which the grantor retains access to the income and property of the trust.
All of the following are considered qualified transfers for gift tax purposes EXCEPT A) Lester paid $75,000 to Dr. Bonner for surgery he performed on his friend, David, last year. David is not Lester's dependent. B) Janet wrote a check for $30,000 to Boston College University to pay Ronnie's college tuition for the current school year. C) Lucy transferred ownership of all of her shares in a mutual fund to her ex-spouse, Annie, because the written divorce decree in their divorce directed her to do so. D) Charles owns a residence with his sister as JTWROS. He transfers his ownership share of the residence to his sister, making her the sole property owner.
D- The answer is Charles owns a residence with his sister as JTWROS. He transfers his ownership share of the residence to his sister, making her the sole property owner. Charles's transfer of his ownership share of the residence to his sister was a gift, not a qualified transfer. The other transfers are all qualified transfers and not gifts.
ABC stock does not trade on a regular basis. John Smith made a gift of ABC stock on Thursday, June 5. The most recent trades for ABC stock are as follows: Date High Low Close 6/2 27 25 25 6/4 25 23 24 6/5 27 23 24 6/9 28 25 25 6/10 29 27 28 What is the date of gift value that should be used for the federal gift tax return, Form 709? A) $26 B) $26.5 C) $27 D) $25
D - ($27 + $23) ÷ 2 = $25. The value of stock for gift tax purposes is the average of the high and low stock price for the date of the gift.
Which of the following types of gifts can be made without incurring federal gift tax? I. Tuition payments made directly to an educational institution II. Payments for health care made directly to a medical care provider III. Transfers to a political organization A) I, II, and III B) I only C) I and II D) II and III
A - All of these statements are correct.
In which of the following situations must the donor file a gift tax return (IRS Form 709)? A) A father gives his son $15,000 in cash and his spouse agrees to gift splitting. B) An uncle gives his niece $5,000 in cash. C) A man pays $100,000 directly to a hospital to pay the medical expenses of his best friend. D) A husband gives his wife a house with a fair market value of $3 million.
A - Any split gift election requires the filing of a gift tax return, even when there is no tax due, unless the gift is community property and less than twice the annual exclusion amount.
Christine transfers property worth $15 million into a grantor retained interest trust (GRIT). She retains the right to receive income from the trust for a term of 15 years. At the end of the 15-year term, the trust property will pass to her children. Christine's GRIT does not comply with the zero valuation rules contained in Chapter 14 of the Internal Revenue Code. Which of the following statements regarding the gift tax consequences of Christine's GRIT is CORRECT? I. Christine's retained income interest will be valued at zero for gift tax purposes. II. The entire $15 million in property transferred to the GRIT is considered to be a gift for gift tax purposes. A) Both I and II B) Neither I nor II C) I only D) II only
A - Both of these statements are correct.
The only lifetime gifts made by your client and their spouse have been cash gifts, as follows, to which they each contributed equally: Total Gifts to Daughter Total Gifts to Son Total Gifts to Qualified Charities 2020 $80,000 $70,000 $12,000 What amount of federal gift tax liability must be reported for 2020 gifts alone by the client only, before application of the client's unified credit amount? A) $9,400 B) $10,600 C) $0 D) $18,000
A - For the gifts in 2020, $25,000 of the gift to the daughter is taxable to the client and $20,000 of the gift to the son is taxable to the client. The tax on the total of $45,000 is $9,400 ($8,200 + 24% of the $5,000 excess).
Phillipe established a revocable living trust naming himself, his spouse, and his two children as income beneficiaries, and his grandchildren as remainder beneficiaries. He funded the trust with $300,000. What is the value of this trust for gift tax purposes? A) $0 B) $100,000 C) $50,000 D) $250,000
A - Funding a revocable living trust has no effect on gift taxes as no gifts are made to oneself.
Which of the following statements regarding the concept of gift splitting in federal gift tax law is CORRECT? A) In non-community property states, the donor spouse must file a gift tax return even if the split gift value is less than the annual exclusion. B) Gifts of community property require a gift splitting election. C) Spouses can elect to split some gifts but not split other gifts made within the same calendar year. D) The gift splitting election may be made by any related party who joins in the making of the gift.
A - If a married couple elects to split gifts, a gift tax return must be filed by the donor spouse even if the split brings the total gift to less than the annual exclusion amount. One exception to this is where the married couple lives in a community property state. In that instance, each spouse is considered to already own a one-half interest in the property gifted (meaning that the filing of a return to indicate spousal consent is not required). The purpose of filing the gift tax return, even though the gift is less than the annual exclusion for either spouse, is to document the gift splitting to the IRS.
If Arthur and Tasha Bell begin making gifts to their three children in 2020, which of the following gifts would require the filing of a gift tax return for tax year 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 their daughter Danielle. A) II and III B) I, II, and III C) I and II D) III only
A - 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.
How are publicly traded stocks and bonds valued for gift tax purposes? A) The average of the high and low trading price on the date of the gift B) The bid price on the date of the gift C) The opening price on the date of the gift D) The closing price on the date of the gift
A - The gift tax value is the average of the high and low trading price on the date of the gift.
Which of the following statements regarding gift splitting are CORRECT? I. Gift splitting is permitted only between spouses. II. If gift splitting is elected, gift splitting applies to all gifts in a given year. III. Gift splitting doubles the annual exclusion for gifts of a present interest. IV. Gift splitting requires the filing of a gift tax return. A) II and III B) I, II, III, and IV C) III and IV D) I, II, and III
B - All the statements are correct.
Margo has made the following lifetime transfers to her spouse, Jim: I. She gave him a remainder interest in a parcel of real estate valued at $100,000. II. She gave him a life estate in her seaside cottage valued at $50,000 and did not make a QTIP election. III. She created an irrevocable trust that gave him a qualifying income interest and a general power of appointment over the trust asset and funded it with securities valued at $300,000. IV. She created a QTIP trust, which she funded with securities valued at $200,000, gave him a qualifying income interest, and named her sister as the remainder beneficiary; she elected the marital deduction for the entire amount of the transfer. How much have Margo's lifetime transfers increased Jim's gross estate tax if Margo predeceases him, he does not remarry, and he retains the assets until death and they do not increase in value? A) $400,000 B) $600,000 C) $650,000 D) $100,000
B - Jim's gross estate will be increased by $600,000. All of the interests transferred will be included, except the life estate interest in the seaside cottage ($100,000 remainder interest, $300,000 marital trust interest, and $200,000 QTIP trust interest). The transfer of the three interests escaped gift taxation when made by Margo because they qualified for the unlimited marital deduction. Even though Jim has no control over who will receive the QTIP trust interest (as he does with the other two interests), the amount that escaped taxation because of the marital deduction will be part of his gross estate. Like the QTIP trust interest, Jim has no control over who will receive the seaside cottage at his death because his life estate rights end at his death, but the $50,000 value will not be included in his gross estate. This is because, unlike the QTIP trust, when Margo made the transfer of the life estate in the cottage, it was taxed as a gift due to it not qualifying for the marital deduction because it was a terminable interest and the QTIP election was not made.
George is concerned that he will owe estate tax upon his death, and would like to make a transfer to reduce his gross estate. Which of the following transfer techniques would achieve his goal? A) Retitling his residence with his children as JTWROS. B) Making annual gifts of an amount equal to, or in excess of, the annual exclusion. C) Designating his children as payable on death beneficiaries of his bank accounts. D) Creating and funding a revocable trust for the benefit of his children.
B - The answer is making annual gifts of an amount equal to, or in excess of, the annual exclusion will reduce the value of the gross estate.
On July 13, Michael gave his brother, James, one share of XYZ stock, which was traded on an exchange. July 13 was a Thursday and the following are quoted prices on Wednesday the 12th and Friday the 14th. The market was closed on Thursday the 13th. Date High Low Closing 7/12 60 56 58.5 7/14 62 58.5 59 What is the value of Michael's gift for gift tax purposes? A) $58.00 B) $59.13 C) $58.75 D) $59.50
B - The value of Michael's gift is the mean of the stock ([high + low] ÷ 2) on the date of gift. Because the market was closed on Thursday, it is the mean average (high and low) selling price for Wednesday and Friday. It is not the closing price (60 + 56 + 62 + 58.5) ÷ 4 = 59.13. Thus, we can average the values because the sale date is equidistant from the valuation date, or (60 + 56 + 62 + 58.5) ÷ 4 = 59.13.
Which of the following statements regarding the federal gift tax return IRS Form 709 is(are) CORRECT? I. For a calendar-year taxpayer, an extension of time for filing IRS Form 1040 also extends the time for filing IRS Form 709. II. George gives $5,000 of separate property to his son. If Mary, George's spouse, elects to split the gift with George, they must file a gift tax return. III. George and Mary give $20,000 of community property to their son. No gift tax return need be filed. IV. An extension of time for filing the gift tax return does not extend the time for payment of the gift tax. A) I and II B) I, II, and III C) I, II, III, and IV D) III and IV
C - All of the statements are correct.
Some financial advisers recommend hiring an appraiser and filing an informational gift tax return of certain property, even when the donor believes that the property has a value that is less than the allowable annual exclusion amount. Why is this good advice? A) If the property is appraised and a return is filed, the IRS has only one year to contest the value of the gift. B) If a return is not filed, but the property is appraised, the IRS cannot contest the value of the gift. C) If a return is not filed when a gift is made, the IRS can contest the value of the gift at any future time. D) If the property is appraised and a return is filed, the IRS cannot contest the value of the gift.
C - If a gift tax return is filed, the IRS can only contest the valuation of the gift disclosed on the return within three years.
Kim made the following gratuitous transfers in 2019: $20,000 certificate of deposit to her spouse $50,000 remainder interest in a trust to her two adult children $32,000 cash donation to her church $15,000 custodial account to each of her four grandchildren Kim's spouse consented to gift splitting for the current year. What is the amount of Kim's taxable gifts for 2020? A) $5,000 B) $38,000 C) $25,000 D) $58,000
C - Kim's taxable gift amount for the current tax year is $25,000. Only the gift of the remainder interest to her two adult children results in a taxable gift. Because Kim's spouse consented to gift splitting, Kim remains responsible for half of this taxable gift, or $25,000, which is fully taxable because it cannot be offset with the gift tax annual exclusion. Kim's gift of the $20,000 certificate of deposit to her spouse is reduced to a taxable gift of zero by the annual exclusion amount and the unlimited marital deduction ($20,000 - $15,000 = $5,000 - $5,000 = $0). Kim's gift of $32,000 in cash to her church is reduced to a taxable gift of zero by gift splitting, the annual exclusion amount, and the unlimited charitable deduction ($32,000 2 = $16,000 - $15,000 = $1,000 - $1,000 = $0). Finally, Kim's gift of $15,000 to custodial accounts for each of her four grandchildren also is reduced to a taxable gift of zero by gift splitting and the annual exclusion amount (for each child: $15,000 2 = $7,500 - $7,500 = $0). The other answer choices are incorrect because only gifts of present interests qualify for the annual exclusion.
Which of the following statements regarding qualified transfers for tuition or medical expenses for gift tax purposes are CORRECT? I. The transfer is limited to the amount of the annual exclusion. II. The transfer reduces the annual exclusion dollar-for-dollar. III. The transfer must be paid directly to the medical provider or educational institution. IV. The transfer can be made on behalf of anyone, without regard to the relationship of the donor, to the person benefitting from the gift. A) I and II B) II and III C) III and IV D) I, III, and IV
C - Statements I and II are incorrect. A qualified transfer for tuition or medical expenses is unlimited in amount and is independent of the annual exclusion or the person's relationship to the donor. Statements III and IV are correct.
A grandfather decides to implement a systematic annual gifting program to make annual exclusion gifts to each of his 10 grandchildren every year. Which of the following statements regarding this gifting program are CORRECT? I. The grandfather will need to file a federal gift tax return each year. II. The program will require the grandfather to use a portion of his gift tax applicable credit amount. III. The program will allow the grandfather to reduce the size of his gross estate for estate tax purposes. A) I only B) I, II, and III C) III only D) II and III
C - Statements I and II are incorrect. Because the grandfather's gifts will not exceed the annual exclusion amount, he will not be required to file annual gift tax returns and he will not use any of his gift tax applicable credit amount. Statement III is correct because any amounts gifted by the grandfather during his life will be excluded from his gross estate at death.
Last year, Nate established an irrevocable trust and funded it with his portfolio of income-producing stock valued at $440,000. The trust provides that the trustee is to pay Nate 6.5% of the initial value of the trust annually for a period of 15 years. After the 15-year term, the trustee is to pay the remaining assets in the trust to Nate's daughter, Karen. Which of the following is CORRECT regarding the gift tax implications of this trust arrangement? A) IRC Chapter 14 does not apply because this is an intrafamily transfer. B) Nate's retained interest is not a qualified interest for IRC Chapter 14 purposes. C) Nate will have to pay gift tax only on the present value of the remainder interest. D) Nate must file a federal gift tax return indicating that he has made a taxable gift of $440,000 to his daughter, Karen.
C - This is the correct answer because Nate will report a taxable gift of only the present value of the remainder interest, not the entire fair market value of the trust assets. Even though this is an intrafamily transfer, the usual valuation rules apply because the annuity interest retained by Nate is deemed to be a qualified interest. It is qualified because he will receive a fixed amount that will not fluctuate with the amount earned by the trust annually and cannot be manipulated—the trust is a grantor retained annuity trust (GRAT).
A gift of which of the following property interests will qualify for the gift tax annual exclusion? I. Present interest II. Future interest III. Remainder interest A) I and III B) I, II, and III C) II only D) I only
D - Only a gift of a present interest qualifies for the annual exclusion. A remainder interest is an example of a future interest.
Which of the following transfers made by your client will be excluded from the client's total gifts in the year made? A) Made a $20,000 contribution to the Shriner's Hospital, which provides free medical care to children B) Paid a family member $15,000 so she could go to school C) Made a $30,000 gift to the donor's spouse D) Paid a hospital $21,000 for medical services rendered to a friend
D - The answer is paid a hospital $21,000 for medical services rendered to a friend as direct payment of medical expenses or tuition payments are exempt from gift taxes.
Which of the following situations does not require the filing of a federal gift tax return? A) A donor and spouse agree to split a present interest gift to one donee valued at more than the annual exclusion, but less than twice the annual exclusion amount. B) A donor makes a transfer to one donee of a present value for more than the annual exclusion, but has not used any applicable credit amount. C) A donor transfers to one donee a future interest valued at less than the annual exclusion amount. D) A donor makes a transfer to one donee of a present interest valued at less than the annual exclusion, but has used all of his applicable credit amount to offset the tax on prior gifts.
D - This is the correct answer because there is no requirement to file a federal gift tax return if the gift by a donor is of a present interest valued at less than the annual exclusion amount. The donee's applicable credit amount situation is irrelevant to whether a return must be filed.
Which of the following is CORRECT regarding gift splitting between spouses for federal gift tax purposes? A) Only one spouse must be a U.S. citizen or resident before gift splitting is allowed. B) If one spouse consents to gifts made by the second spouse in a particular calendar year, but the second spouse does not reciprocate, gift splitting is allowed as long as the second spouse has consented in one or more prior calendar years. C) When spouses split gifts, one spouse "loans" the other spouse their annual exclusion amount. D) If the gift is of a present interest, more of the total gift value can be shielded from gift tax because each spouse may use their annual exclusion to reduce the taxable gift amount for their one-half of the gift.
D - This is the correct answer. It correctly states that if the gift is of a present interest, more of the total gift value can be shielded from gift tax because each spouse may use an annual exclusion to reduce the taxable gift amount for their one-half of the gift. Thus, up to twice the maximum annual exclusion amount can be sheltered with gift splitting, whereas only the amount up to the maximum annual exclusion amount may be sheltered without gift splitting.
Which of the following correctly describes the federal gift tax annual exclusion? A) It allows a donor to completely avoid tax liability on a qualifying transfer of any amount. B) It applies to completed gifts of whole or partial interests and present or future interests. C) It is available only to gifts made by married donors. D) It is the maximum amount of present interest gifts allowed per donee per year or the actual amount given to the donee, whichever is less.
D - This is the correct answer. It correctly states that the federal gift tax annual exclusion is the maximum amount of present interest gifts allowed per donee per year or the actual amount given to the donee, whichever is less. If the amount given is less than the maximum annual exclusion amount, the donor can only exclude the actual amount given. For example, if the amount given is $8,000, only $8,000 is excluded. The maximum amount is indexed annually for inflation, but only changes in $1,000 increments.