Estate Planning - Module 7

James was gifted a house during the current year. At the date of the gift, the house had a fair market value (FMV) of $175,000, and the donor's adjusted basis was $105,000. The donor paid a gift tax of $12,000 on the gift. The donor did not have the annual exclusion available for this gift because of a gift earlier that year worth $18,000. What is James's basis in the house?

$109,800 Because the property was appreciated property as of the date of the gift, a portion of the gift tax paid is allocated to the donee's basis in the property. Therefore, James's basis is calculated as follows: donor's adjusted basis + [(unrealized appreciation ÷ FMV at date of gift) × gift tax paid]. Or, here, $105,000 + [($70,000 ÷ 175,000) × $12,000] = $109,800. $105,000 + $4,800 = $109,800.

A grandfather is considering making gifts to his grandchildren in 2022. Assuming the grandfather has made no previous generation-skipping transfers, the generation-skipping transfer tax (GSTT) lifetime exemption amount available to him in 2022 is

$12,060,000.

Bill gifts his daughter bonds with a fair market value (FMV) of $1,000. Bill's basis in the bonds is $1,800. Bill's daughter subsequently sells the bonds for $2,000. What is her recognized gain or loss?

$200 gain On the date of the gift, the FMV of the property was less than the donor's basis. Therefore, the double-basis rule applies. The daughter's gain basis is $1,800. She has a recognized gain of $200, which is calculated as follows: Amount realized$2,000 Basis for gains(1,800) Realized gain$200 Recognized gain$200

Matt gives Jim securities in the current year. Matt's adjusted basis for the securities is $48,000, and the fair market value (FMV) is $40,000. Matt pays gift tax of $16,000. What is Jim's basis in the stock for gain and for loss?

$48,000 for gain and $40,000 for loss On the date of the gift, the FMV of the property was less than the donor's basis. Therefore, the double basis rule applies. The donee's gain basis for the property received is the same as the donor's basis. The donee's loss basis is the lesser of the donor's adjusted basis or the FMV on the date of the gift. If the FMV of the property is less than the adjusted basis at date of gift, no basis adjustment is made for gift tax paid.

Bill Martian would like to benefit the University of Florida at Orlando (the University), his alma mater. Due to a temporary cash flow problem, the only property Bill can use is a vacant lot (which he purchased six years ago for $5,000) located next to a site on which the University plans to build a new central library. The University would like to acquire this land for a parking lot at a reduced price. The present fair market value (FMV) of the lot is $25,000. Due to his cash flow problem, Bill would not only like to get any income tax benefits from a charitable contribution but also would like to receive some cash as soon as possible. Given Bill's objectives and the situation stated above, which one of the following is the most appropriate charitable giving technique for Bill to use?

A charitable bargain sale A charitable bargain sale will allow Bill to (1) benefit the University, (2) get a charitable income tax deduction, and (3) obtain immediate cash to help his cash flow by selling the lot to the University at below current FMV, which would make the transaction part sale and part charitable gift. None of the other alternatives would get cash to Bill as quickly, and the lead trust would get him no cash at all.

Adam, age 72, is in the final stages of a terminal illness and wants to ensure that he has a continued fixed income to take care of his medical needs. He also wants to receive a lifetime charitable income tax deduction. Adam is considering making a charitable gift to the American Kidney Fund, so long as his stated objectives are met. As his financial planner, which of the following charitable gifting techniques should you recommend?

A charitable remainder annuity trust (CRAT) A charitable remainder annuity trust (CRAT) is the only option that would provide Adam with a fixed income amount. The unitrust form would provide lifetime income to Adam, but it will be a variable income stream. An outright gift to a charity when the client needs income from the asset will never be the correct answer.

John Cie, before he was sworn in as governor of his state, established a trust to manage his property through a corporate trustee, without his direction or input, for an irrevocable period of six years—the length of his term of office. As he intends to live solely from his salary as governor, none of the trust income is to be distributed to him. At the end of the six-year term, the principal of the trust will revert to John, but all accrued income is to be distributed equally to John's spouse and to his children, who are currently five and nine years of age. Which one of the following is a correct statement regarding this trust?

At least one-third of the income of this trust will be taxable to John even though he will never receive it. This trust is subject to one of the grantor trust rules since the trust income is accumulated and one-third of the income will be distributed to the grantor's spouse (and possibly all of the income will be taxed to John because of his reversionary interest). The grantor trust rules apply to at least part of the income. John's spouse has retained nothing, and John has not retained such powers.

Which of the following statements concerning the calculation of the generation-skipping transfer tax (GSTT) is CORRECT? The GSTT is determined by multiplying the taxable amount by the applicable GSTT rate. The applicable GSTT rate is the highest federal estate and gift tax rate multiplied by an inclusion ratio.

Both I and II

Which of the following statements regarding charitable gifts is CORRECT? Gifts to qualified charities by U.S. citizens or residents are deductible for gift tax purposes. The gift tax charitable deduction is not limited to a percentage of the donor's adjusted gross income (AGI).

Both I and II

Which of the following statements regarding the generation-skipping transfer tax (GSTT) is CORRECT? The GSTT applies to both inter vivos and testamentary transfers. A transfer that is subject to the GSTT may also be subject to gift tax or estate tax.

Both I and II

Which of the following statements regarding charitable gift annuities (CGAs) is CORRECT?

Either cash or appreciated property may be donated to charity in a CGA. A charitable gift annuity (CGA) is a contract between a donor and a qualified charity in which the donor transfers cash or appreciated property to the charity in exchange for an annuity. The donor is eligible for an income tax charitable deduction equal to the FMV of the donated property minus the present value of the annuity to be received. A CGA is unsecured and presents some risk to the donor.

Which of the following statements regarding the annual exclusion for purposes of generation-skipping transfer tax (GSTT) is CORRECT? The annual exclusion amount is $16,000 for 2022. The annual exclusion is allowed for lifetime direct skips. The annual exclusion is allowed for testamentary direct skips.

I and II Statements I and II are correct. Statement III is incorrect because the annual exclusion is not allowed for testamentary direct skips.

Harold established and funded a generation-skipping trust for the benefit of his lineal descendants by a provision in his will. The trust had no termination date as the trust was settled in a state with no rule against perpetuities. He funded the trust with assets in the amount of the estate tax exclusion amount in the year of his death, and assigned all of his generation-skipping transfer tax (GSTT) exemption to this trust as he had not used any part of this exemption previously. Distributions to beneficiaries are at the discretion of the trustee. Harold was survived by his spouse, five children, and 12 grandchildren. All other estate assets were given to Harold's spouse. Which of the following statements regarding this trust are CORRECT? This is an example of an indirect generation-skipping transfer. Harold's spouse can become the transferor of this transfer if a reverse QTIP election is made. No GSTT will ever be due on this transfer if it is reported on Harold's estate tax return, and the deemed allocation rules are allowed to allocate his GSTT exemption. The trust is considered to be a skip party for GSTT purposes.

I and III Because Harold's children are beneficiaries of the trust, this trust is an example of an indirect (option I) skip. The transferred property may go to both skip parties (Harold's grandchildren, etc.) and nonskip parties (Harold's children). Option III is correct because the maximum GSTT exemption is the same amount as the estate tax exclusion amount for the year of transfer; when this exemption is assigned to a taxable amount of transferred property of the same amount on the first gift or estate tax return on which the transfer is first reported, no amount of future distributions will be taxable regardless of the growth in the corpus. The deemed allocation rules would assign the full amount of Harold's GSTT exemption in these circumstances. Harold's spouse cannot become the transferor of this property. A reverse QTIP election (option II) can be made only when the regular QTIP election has been made. This trust is not a QTIP trust as Harold's spouse is not a beneficiary of the trust. This trust is not considered a skip party (option IV) because future distributions can be made to nonskip parties.

Which of the following statements regarding a taxable termination is CORRECT? A taxable termination cannot occur as long as at least one nonskip beneficiary has an interest in the trust property. If a taxable termination occurs, the skip person is responsible for paying any generation-skipping transfer tax (GSTT) that may be due. A taxable termination occurs when an interest in a trust is terminated because of death or lapse of time, resulting in a skip beneficiary holding interests in the trust.

I and III Statement II is incorrect; if a taxable termination occurs, the trustee is responsible for paying any GSTT that may be due.

Which of the following planning techniques allow the donor to make deductible charitable contributions without drafting a private trust agreement? Charitable gift annuity Charitable remainder trust Charitable lead trust Pooled income fund

I and IV Statements I and IV are correct; charitable gift annuities and pooled income funds do not involve the use of private trust agreements. Statements II and III are incorrect because charitable remainder trusts and charitable lead trusts involve the use of private trust agreements.

Sam Cahill died this year. His revocable living trust provided that after his death, the trustee was given discretion to distribute trust income among his spouse, children, and grandchildren for their health, education, maintenance, and support. The corpus and any undistributed income are to be distributed in equal shares to his grandchildren when Sam's youngest child reaches age 45. Sam was survived by his spouse, three children, and eight grandchildren. Which of the following are CORRECT statements regarding the application of the generation-skipping transfer tax (GSTT) to this trust? Sam's trust is an example of an indirect skip. If the trustee distributes any income to Sam's spouse, for GSTT purposes a taxable distribution will have occurred. No generation-skipping transfer from this trust can take place until the youngest of Sam's children reaches age 45. When Sam's grandchildren receive the corpus and undistributed income, a taxable termination will occur.

I and IV This trust is an indirect skip because there are nonskip parties (Sam's spouse and children) who have a current interest in the trust assets. Sam's spouse is considered to be in the same generation as Sam, and therefore, a distribution to her will not even be considered to be a generation-skipping transfer, let alone a taxable distribution. A taxable distribution will occur if the trustee distributes income to any of the grandchildren. A taxable termination will occur when the grandchildren receive the corpus because there will no longer be any nonskip party who has an interest in the assets.

Which of the following statements regarding charitable contributions is CORRECT? Charitable contributions may qualify for a charitable deduction if made during the donor's lifetime or at death. A decedent's estate qualifies for an estate tax charitable deduction if the decedent's beneficiaries make a contribution to a qualified charity.

I only Statement II is incorrect because a charitable contribution is deductible for estate tax purposes if it is made by the decedent via the will or by contract but not if made by the beneficiaries.

Which of the following statements regarding the generation-skipping transfer tax (GSTT) for 2022 is CORRECT? The annual exclusion is allowed. Gift splitting is permitted. Qualified transfers are excluded from GSTT. Each transferor is allowed a lifetime exemption of $12,060,000.

I, II, III, and IV

Jason wants to contribute $10 million to a charitable trust. He expects to receive a large inheritance in a few years, so he wants to receive an income interest from the trust for only 15 years and not for life. Which of the following charitable trusts will meet his needs? Pooled income fund Charitable remainder annuity trust (CRAT) Charitable remainder unitrust (CRUT)

II and III Statement I is incorrect because in a pooled income fund, the donor (or one or more named beneficiaries) must retain a life income interest. Retained term interests are not allowed. Statements II and III are correct.

Bob Daniels and his brother, Jack, own a parcel of rental real estate as tenants in common. They inherited the property from their grandmother, who specified in her will that Bob was to have a 60% ownership interest and Jack the remaining 40%. The property generated an income of $10,000 last year. Since Jack was unemployed, Bob let Jack keep the entire $10,000. The property was worth $100,000 when Bob and Jack inherited it and is now worth $120,000. Their grandmother's basis in the property was $30,000. Bob recently died. Which of the following are CORRECT statements concerning the income tax implications of this form of property ownership and these transactions? Jack's basis in the property after Bob's death is $100,000. Bob's fiduciary must report $6,000 of income from this property for last year. Jack must report $10,000 of income from this property for last year. Jack's basis in the property after Bob's death is $40,000.

II and IV Option I is incorrect because option IV is correct. Jack does not automatically get Bob's interest in the property since tenancy in common does not have a right of survivorship feature. Option III is incorrect because income for tenants in common is divided according to each tenant's proportional interest. Therefore, Bob was entitled to $6,000 of the income last year. Bob's income tax return for last year must show the income to which he was entitled. Since he allowed Jack to take that income, he will be deemed to have made a gift to Jack of $6,000. However, this gift will not be taxable because of the annual exclusion. Option II is correct for the same reasons option III was incorrect. Option IV is correct because Jack's basis is 40% of the estate tax value in his grandmother's estate (the fair market value of the property at the date of her death). Whoever inherits Bob's 60% of the property will have a basis of $72,000 ($120,000 x .60). If the question would have said that Jack inherited the property from Bob, Jack's new basis would have been $112,000 (his original $40,000 + $72,000 of stepped-up basis from that was in Bob's gross estate).

Which of the following is the only exception(s) to an estate transfer being subject to the generation-skipping transfer tax (GSTT) when a gratuitous completed inter vivos transfer is a generation-skipping transfer? The transferor makes payments directly to the recipient for medical expenses. The transferor makes direct payments of medical expenses on behalf of the recipient. The transferor makes payments directly to the recipient for educational expenses. The transferor makes direct payments for tuition expenses on behalf of the recipient.

II and IV The transferor can qualify within the limited exception if direct payment is made for medical expenses in addition to making direct payments for tuition expenses.

Which of the following are CORRECT statements about the responsibility for payment of the federal generation-skipping transfer tax? When a taxable termination occurs, the beneficiaries receiving distributions from the trust are responsible for paying any generation-skipping transfer tax that may be due. The estate of a decedent is responsible for paying any generation-skipping transfer tax due on a direct skip transfer made by the decedent's will. When a taxable distribution occurs, the trustee of the trust making the distribution is responsible for paying any generation-skipping transfer tax that may be due. The donor is responsible for paying any generation-skipping transfer tax due on a direct skip made during life.

III and IV Option I is incorrect because upon a taxable termination, the trustee is responsible for paying any GST tax due; also, there may not be any distributions with a taxable termination. Option III is incorrect because upon a taxable distribution, the beneficiary receiving the distribution is responsible for paying any GST tax due.

Which of the following meet the basic requirements for a charitable gift to be deductible for income, gift or estate tax purposes? When Grandpa died, his estate tax was enormous. To lower his estate tax, his heirs decided to contribute $1 million in his name to the Red Cross. A qualified appraisal must generally accompany a tax return reflecting donations of property valued in excess of $3,500. Contributions are only deductible if they are made to a charity as defined by the Internal Revenue Code. Contributions of a split interest must be made in the form of a specified trust or remainder interest.

III and IV Statement I is incorrect. Contributions from an estate directed by the heirs are not deductible for estate tax purposes. Only charitable contributions directed by the decedent are deductible for estate tax purposes. Statement II is incorrect. Qualified appraisals are required when a donated property is in excess of $5,000. Statement III is correct. Only contributions to an organization defined by the Internal Revenue Code are deductible. Statement IV is correct. There are rules about split interest gifts which must be followed

Donna received a gift of rental real estate with an adjusted basis of $75,000 to the donor and a fair market value (FMV) of $50,000 on the date of gift. The donor paid gift tax of $3,000. Donna subsequently sold the property for $60,000. What is her recognized gain or loss?

No gain or loss is recognized. The double basis rule applies to this gift. Donna's basis for gain is $75,000, and her basis for loss is $50,000. Because the sales price is between $50,000 and $75,000, no gain or loss is recognized. The gift tax paid is irrelevant because there was no unrealized appreciation as of the date of the gift. If FMV is less than the adjusted basis at date of gift, no basis adjustment is made for gift tax paid.

Which one of the following statements regarding the purpose and basic features of the generation-skipping transfer tax (GSTT) is CORRECT?

The GSTT exemption allows each person to make generation-skipping transfers in the applicable amount, during life or at death, without having to pay a GSTT. The GSTT exemption allows a transferor to escape paying GSTT on taxable transfers up to the exemption amount. The GSTT exemption equals the estate tax applicable exclusion amount in the year of the transfer. The GSTT is in addition to (not a replacement of) the gift or estate tax that is also due on the same transfer. Any person who is in a generation that is less than two generations younger than the transferor is known as a nonskip party. The transaction will be deemed to be an indirect skip only if at least one current beneficiary of the trust is a nonskip party (not a skip party).

Catherine Rich established trusts under Internal Revenue Code Section 2503(c) for each of her eight grandchildren this year and funded each trust with $926,000. Earlier this year, Catherine also paid $25,000 to the local community hospital for medical bills incurred by her niece. Assuming that all of Catherine's children are living at the time of these transfers, which one of the following statements are CORRECT regarding application of the generation-skipping transfer tax (GSTT) to these transfers?

The transfers to the trusts are direct skips. The transfers to the trusts for the grandchildren are direct skips because each grandchild is a lineal descendant of a grandparent of Catherine and is two generations further removed from this grandparent than is Catherine. The trusts are skip parties because each trust has only one beneficiary who is a skip party in relation to Catherine. The payment of the medical bills is exempt from GSTT because the provider is paid directly.

All of the following statements regarding charitable gift annuities (CGAs) are correct except

a CGA presents no risk to the donor-annuitant because the agreement is secured A charitable gift annuity presents some risk to the donor-annuitant because it is unsecured—that is, backed by the assets of the charity. The donor of a gift tax annuity receives an income tax charitable deduction for the difference between the FMV of the assets transferred and the present value of the annuity.

Robert gifted a duplex to his brother Harold, who is terminally ill. Harold is not married and has no children. Robert purchased the duplex 20 years ago for $175,000. Today, the property is worth $450,000. Harold's will leaves his entire estate to Robert upon his death. This means that the duplex may ultimately be passed back to Robert. This type of transfer is called

a reverse gift. This type of transfer is called a reverse gift. A net gift is a situation in which the donee pays the gift taxes rather than the donor. A bargain sale involves selling appreciated property to a donor at below the market value. A split gift is one that is split between donor spouses, effectively doubling the annual exclusion for lifetime gifts. For a reverse gift to be effective, the donee must have the property for more than a year. If the donee passes away within a year of the gift, the property reverts back to the donor, but it does not get a stepped-up basis.

All of the following statements regarding direct skips for purpose of the generation-skipping transfer tax (GSTT) are correct except

gift-splitting by spouses is not permitted for direct skips.

If a trust is a grantor trust, the income from the trust is taxed to

the grantor. If a trust is a grantor trust, the income from the trust is taxable to the grantor. Retaining control over an asset in the trust will cause the donor to have to include the trust earnings in gross earnings as they are taxable. The right to pay life insurance premiums, however, is not an incident of ownership and does not subject the donor to income taxes on the trust earnings.