Unit 16 (6 questions)
Under current tax law (2022), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation?
$64,000 The current gift tax exclusion (2022) is $16,000 per donor to each recipient. A married couple can give $32,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $32,000 to their son and $32,000 to their daughter-in-law without paying any gift tax.
estate tax exemption
11.4 M
For heirs other than spouse what is the estate tax offset amount
11.7 million
Mr. Peabody Fawcett and his sister, Ms. Gwenyth Paige-Newberry open a brokerage account at your firm with an initial deposit of $11 million. The account is opened as tenancy in common (TIC) with Peabody owning 40% and Gwenyth the balance. Several years later, Peabody is fatally injured while playing polo. As a result
40% of the value of the account will be transferred to an estate account in his name and 60% will be transferred into an individual account in her name
The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations?
A loan is taken equal to 95% of the policy's cash value Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the withdrawal. Although the death benefit will always be free of income tax, it could be subject to estate tax.
XYZ, Inc. is a C corporation in the 21% federal income tax bracket. Which of the following investments offers the company the highest after-tax return?
ABCD, Inc. preferred stock paying a 6% dividend The key to this answer is that corporations have a 50% dividend exclusion on dividends received from other companies. The math looks like this: Only half of the 6% dividend is taxable. That means 3% per year is tax free and the other 3% is subject to tax at the 21% rate. So, we have 3% + 79% of the taxable 3% = 3% + 2.37% = 5.37% after-tax return. The municipal bond is not taxed, but that only produces 5% after tax. The corporate bond is subject to 21% tax so the corporation gets to retain the other 79%. That computes to 6.75 x 79% = 5.33%, just a bit less than the preferred stock. In most cases, dividends paid to corporations by REITs are fully taxable. That makes the after-tax return on the 6.5% dividend only 5.14%.
marital deduction
All property left to a surviving spouse passes free of estate tax marital deduction is not allowed for non-citizens but personal estate tax can
C corp
Distinguishes the company as a separate entity from its owner
If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability?
He pays no estate tax. Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.
estate income tax computation is done on which form
IRS Form 1041
he computation of the estate tax is done on which form
IRS form 706
Three sisters are interested in forming a business together. They have three initial concerns maximizing their benefits from the fact that the business is not expected to earn money for at least the first two years; making sure that the business will be able to continue in the event that one or two of the sisters dies; and minimizing their personal liability for the obligations of the business. On the basis of the sister's concerns, which form of business is appropriate for the situation?
LLC The limited liability company (LLC) will allow losses to flow through to the sisters, continue in the event one or two sisters should die, and have the same type of liability protection as offered by a C corporation.
Partnership, LLC, S corp Income tax filing date
March 15
Mr. Hawkins sets up a revocable trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to
Mr. Hawkins as the donor Because Mrs. Hawkins has an economic interest, this is a grantor trust. Thus, all income will be taxed to the donor, Mr. Hawkins.
There are a number of different ways in which a business may be structured. For tax purposes, which form is taxed on its income?
Sole proprietorship
S corporation
Tax like partnerships, offers investors the Limited Liability associated with corporations in genera the profits and loses are passed through directly to the shareholders in proportion to their ownership in the S corp. One of the limitations places is it may not have more than 100 shareholders non of whome maybe nonresident Alien
Which of the following accounts can only be opened by spouses?
Tenants in the entirety The unique characteristic of a tenants in entirety account is that it can only be opened by spouses. Each of the others can be opened jointly by any legal persons.
Schedule K-1
The form supplied by a partnership, LLC, or S corporation to owners indicating their proportionate share of income/loss to be reported on their Form 1040 tax returns.
A wealthy individual has set up a GRAT. Should she die during the time the trust is active, how are the remaining assets in the trust taxed?
The original value plus any appreciation is taxed as part of the grantor's estate. One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3-10 years), the assets put in the GRAT, plus any appreciation, are included in her estate.
remaindermand
When a trust has run its course and all expenses and distributions have been made, the person who receives the remaining balance
If 150 investors want to form a corporation to limit their financial liability to the amount of money they invest and do not want to be responsible for any debt that the corporation incurs, they would most likely form
a C corporation The investors would form a C corporation. The advantages of the C corporation are that stockholders are not liable for corporate debt; that it is easier to raise money by issuing stock; that it is easier to transfer ownership; and that unlike a partnership or a proprietorship, a C corporation has a continuous life because it does not terminate on the death of shareholders, officers, or directors. An S corporation doesn't work here because it is limited to 100 investors.
A Schedule K-1 would be received by an individual with an ownership interest in all of the following except
a C corporation. C corporations pay tax on their earnings; the other business types listed here flow through the income to their owners. The owner's share of income (or loss) is reported to them on the Schedule K-1. A shareholder in a C corporation who receives dividends will have that reported on a Form 1099.
Your clients, a married couple, are trying to decide whether to open an account as joint tenants with right of survivorship or tenants by the entirety. You might point out to them that one of the differences to consider is that:
a JBE account requires the consent of both parties to make a trade. One of the unique characteristics of the joint by the entirety (JBE) account is that the consent of the other party is necessary in order for one of the parties to enter a trade. With a JTWROS account, either party can enter trades independently. Both JTWROS and JBE avoid probate and the JBE is limited to married couples only.
Walter and Wanda Willingham are new client's. While reviewing their holdings, you notice an account at a local bank titled, "Walter Willingham, in Trust for Walter Willingham, Jr." The account provides that, upon Walter's death, the assets in the account will pass to his son. This is an example of
a Totten trust. A Totten trust is an informal trust that is set up as a bank account. The person who sets up the Totten account is the trustee of the account and can name any person as the beneficiary of the account. Upon the death of the trustee, the money will immediately be made available to the named beneficiary.
Gross Estate
all interests in property held by an individual at the time of death.
LLC
allow losses to flow through to the sisters, continue in the event one or two sisters should die, and have the same type of liability protection as offered by a C corporation.
Mary Whiting has been a customer of yours for several years. Now that her oldest child is out of the house and living on his own, she wants to open a joint account with her son. If the account is opened tenants in common and Mary contributes 75% of the funding, it is correct to say that
both Mary and her child have an undivided interest in the account.
A living will is used to
express the author's end-of-life wishes.
A long term client contacts you to inform you that his lawyer has drafted a trust agreement and wants to name you trustee. You accept, and several months later, the beneficiary of the trust approaches you with a request for a disbursement that is contrary to the provisions of the trust document. In accordance with the provisions of the Uniform Prudent Investor Act, you should
follow the terms of the trust.
Tenancy in Common
form of co-ownership in which the shares may be unequal and there is no right of survivorship
One of your customers has been told that an irrevocable trust is something to consider. Probably the most significant reasons for this type of trust is that
it generally avoids estate tax. A properly constructed irrevocable trust removes the grantor's assets from the estate thereby eliminating estate tax on them. The grantor no longer has the power to change the beneficiary and cannot serve as trustee. The assets pass directly to the beneficiary without going through probate.
Wade Kimmons purchased 200 shares of ABC common stock on March 9, 2009, paying $32 per share. Since the date of the purchase, Mr. Kimmons has received $518 in dividends. With the stock selling for $89 per share on July 27, 2016, Wade gives all 200 shares to his niece, Kendra. One week later, Kendra sells all of the ABC stock for $85 per share. The tax consequences of this are
long-term capital gain of $10,600. When securities are the subject of a gift, the donee (recipient) acquires the donor's cost basis and holding period. That means that Kendra's cost was $32 per share and the holding period was over 7 years. That is a gain of $53 per share or a total of $10,600, and it is long term. The dividends have nothing to do with the question.
A high net worth individual wishes to know when a gift can be made this year without being obligated to pay gift tax. You would respond that there is no gift tax when the gift is made to
the American Red Cross. Gifts to recognized 501(c)(3) charities, such as the American Red Cross, are never subject to the gift tax. If the spouse is a non-citizen, there is a limit ($164,000 in 2022) and anything in excess of $16,000 to a grandchild or sibling is taxable unless the donor elects to use the excess against the lifetime exclusion ($12.06 million in 2020).
testamentary trust
the settlor retains control over assets until death (think "last will and testament").
