2. The Federal Gift Tax

Question 1

Estate 2. The Federal Gift Tax (LO 2-1)

3. Which one of the following situations does not require the filing of a federal gift tax return?
   a. 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 or her applicable credit amount to offset the tax on prior gifts.
   b. 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.
   c. A donor transfers to one donee a future interest valued at less than the annual exclusion amount.

Answer 1

a. 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 or her applicable credit amount to offset the tax on prior gifts.

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.

Question 2

Estate 2. The Federal Gift Tax (LO 2-2)

4. 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 one of the following is a correct statement 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.

Answer 2

c. Nate will have to pay gift tax only on the present value of the remainder interest.

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 intra family 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).

Question 3

Estate 2. The Federal Gift Tax (LO 2-2)

5. Rita created an irrevocable trust and funded it with securities valued at $200,000. The trustee has discretion to distribute income to Rita’s son, Wally, for his health, education, maintenance, or support until he reaches age 25, at which time the trustee is to distribute all assets in the trust to him. Rita named herself trustee.

Which one of the following statements concerning the gift tax treatment of the trust is correct?

a. This is a completed transfer to Wally of the present value of the remainder interest.
b. This is an incomplete transfer because Wally’s enjoyment of the trust assets is postponed until a future date.
c. This is an incomplete transfer because the gift to Wally is a partial interest.
d. This is an incomplete transfer because of Rita’s power to distribute income.

Answer 3

a. This is a completed transfer to Wally of the present value of the remainder interest.

This is the correct answer. Since the trust is irrevocable, the remainder interest is irretrievably given to Wally. Even though Wally may never receive anything until age 25, the transfer is complete because neither Rita nor anyone else can change his interest. Finally, Rita’s retention of a fiduciary power limited to an ascertainable standard will not cause a transfer that is otherwise complete to become an incomplete transfer. Rita’s power is subject to an ascertainable standard since it is limited to a demonstrated need of funds for “health, education, maintenance, or support.” Because Wally will get all income from the trust (either before or after he reaches age 25) the entire value of the trust assets is a completed gift. Thus, Rita must declare the present value of the remainder (and income) interest as a gift.

Question 4

Estate 2. The Federal Gift Tax (LO 2-4)

6. Which one of the following transfers does not result in a gift for federal gift tax purposes?
   a. selling a house valued at $150,000 to your child for $100,000
   b. putting another person’s name jointly with your own on a bank account from which either of you can withdraw any or all of the account at any time on either of your signatures alone
   c. canceling a $19,000 debt owed to you by your child
   d. loaning $25,000 to your nephew for three years without interest for his college education

Answer 4

b. putting another person’s name jointly with your own on a bank account from which either of you can withdraw any or all of the account at any time on either of your signatures alone

This is the correct answer because this is not a gift for federal gift tax purposes. Since the person who contributed all the money to the account can withdraw the money on his or her signature alone, the “gift” is incomplete. No gift occurs unless and until the person(s) who did not contribute to the account withdraws amounts from the account, and then the gift is the amount withdrawn.

Question 5

Estate 2. The Federal Gift Tax (LO 2-4)

7. Which one of the following transfers that would otherwise be a gift for federal gift tax purposes is exempted on public policy grounds?
   a. a check for $4,500 payable to your nephew so he will have funds to pay his book fees and tuition
   b. a payment of $5,000 to a special fund set up to pay the doctors and hospital for a neighbor’s rehabilitative surgery
   c. a contribution of $300 to a political party
   d. an outright gift of $30,000 to your spouse

Answer 5

c. a contribution of $300 to a political party

This is the correct answer because a contribution of $300 to a political party that would otherwise be a gift for federal gift tax purposes is exempted on public policy grounds.

Question 6

Estate 2. The Federal Gift Tax (LO 2-1)

8. Which one of the following is a correct statement about gift splitting between spouses for federal gift tax purposes?
   a. When spouses split gifts, in effect one spouse “loans” the other spouse his or her annual exclusion amount.
   b. Only one spouse must be a U.S. citizen or resident before gift splitting is allowed.
   c. 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.
   d. If the gift is of a present interest, more of the total gift value can be shielded from gift tax since each spouse may use his or her annual exclusion to reduce the taxable gift amount for his or her one-half of the gift.

Answer 6

d. If the gift is of a present interest, more of the total gift value can be shielded from gift tax since each spouse may use his or her annual exclusion to reduce the taxable gift amount for his or her one-half of the gift.

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 since each spouse may use an annual exclusion to reduce the taxable gift amount for his or her 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.

Question 7

Estate 2. The Federal Gift Tax (LO 2-1)

9. Which one of the following correctly describes the federal gift tax annual exclusion?
   a. 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.
   b. It applies to completed gifts of whole or partial interests and present or future interests.
   c. It allows a donor to completely avoid tax liability on a qualifying transfer of any amount.
   d. It is available only to gifts made by married donors.

Answer 7

a. 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.

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.

Question 8

Estate 2. The Federal Gift Tax (LO 2-4)

10. Which one of the following gifts will not qualify for the federal annual gift tax exclusion?
    a. a gift of securities valued at $50,000 to an irrevocable trust for the benefit of your minor child, with trust provisions that allow either trust income or corpus to be used at the trustee’s discretion for the benefit of the child prior to age 21, and that entitle your child to both accumulated income and corpus at that age.
    b. an outright gift to your spouse of a $20,000 certificate of deposit
    c. a gift to your two nieces of a $42,000 remainder interest in a Section 2503(b) trust
    d. the transfer to a minor child of a life insurance policy with an existing cash value, pursuant to the Uniform Transfers to Minors Act (UTMA)

Answer 8

c. a gift to your two nieces of a $42,000 remainder interest in a Section 2503(b) trust

This is the correct answer because the remainder interest in the Section 2503(b) trust is clearly a future interest and not a present interest. The nieces cannot immediately and without restriction use, possess, or enjoy the gifted property. They must wait until the income interest ends. Only the income interest of a gift to a Section 2503(b) trust is a present interest that qualifies for the gift tax annual exclusion.

Question 9

Estate 2. The Federal Gift Tax (LO 2-4)

11. Which one of the following does not qualify for a federal gift tax marital deduction?
    a. a gift to your spouse of a joint tenancy interest in property you previously held solely in your name
    b. a lifetime transfer of income-producing securities to an irrevocable trust, with all income going annually to your spouse for 10 years, and the remainder going to your two children equally
    c. a lifetime transfer of income-producing securities to an irrevocable trust, with all income going annually to your two adult children equally for five years, and the remainder going to your spouse
    d. a lifetime transfer of non-income-producing property to an irrevocable trust with no mandatory payment of income to your spouse during life, but with accumulated income and corpus payable to your spouse’s estate

Answer 9

b. a lifetime transfer of income-producing securities to an irrevocable trust, with all income going annually to your spouse for 10 years, and the remainder going to your two children equally

This is the correct answer because the described trust interest will not qualify for the unlimited marital deduction. The income interest in the trust that was gifted to the spouse is a terminable interest that is not eligible for the qualified terminable interest property (QTIP) election because he or she does not have a “qualifying” income interest in the property. To be a “qualifying” income interest, an interest must give a spouse the exclusive right to all income from the property for life with a mandatory payment of the income to the spouse annually or more frequently.

Question 10

Estate 2. The Federal Gift Tax (LO 2-1)

12. Which one of the following statements about the federal gift tax is correct?
    a. The gift tax applies to all gratuitous transfers.
    b. “Gift splitting” means that spouses may elect to file a joint gift tax return.
    c. The unlimited gift tax marital deduction has the effect of abolishing the terminable interest rule.
    d. 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.

Answer 10

d. 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.

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.

Question 11

Estate 2. The Federal Gift Tax (LO 2-5)

13. Kim made the following gratuitous transfers in the current year:

a $20,000 certificate of deposit to her spouse

a $50,000 remainder interest in a trust to her two adult children

a $30,000 cash donation to her church

a $14,000 custodial account to each of her four grandchildren

Kim’s spouse consented to gift splitting for the current year.

Assuming that the maximum annual exclusion amount for the current year was $14,000, what is the amount of Kim’s taxable gifts for the current year?

a. $5,000
b. $25,000
c. $38,000
d. $58,000

Answer 11

b. $25,000

This is the correct answer. 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. Since 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 – $14,000 = $67,000 – $6,000 = $0). Kim’s gift of $30,000 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 ($30,000 ÷ 2 = $15,000 – $14,000 = $1,000 – $1,000 = $0). Finally, Kim’s gift of $14,000 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: $13,000 ÷ 2 = $6,500 – $6,500 = $0).

Question 12

Estate 2. The Federal Gift Tax (LO 2-6)

15. Margo has made the following lifetime transfers to her husband, Jim:

She gave him a remainder interest in a parcel of real estate valued at $100,000.

She gave him a life estate in her seaside cottage valued at $50,000 and did not make a QTIP election.

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.

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. $100,000
b. $400,000
c. $600,000
d. $650,000

Answer 12

c. $600,000

This is the correct answer. 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 since 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 since it was a terminable interest and the QTIP election was not made.

Question 13

Estate 2. The Federal Gift Tax (LO 2-2)

16. A blockage discount applies to any block of stock that
    a. is publicly traded
    b. is closely held
    c. constitutes less than 50% of ownership of a corporation
    d. constitutes more than 50% of ownership of a corporation

Answer 13

a. is publicly traded

The blockage discount applies only to publicly traded stock.

Question 14

Estate 2. The Federal Gift Tax (LO 2-2)

17. Which one of the following statements is a correct statement about valuation for federal transfer tax purposes?
    a. The value placed on property by the parties involved in an intrafamily transfer or in a transfer between an employer and employee is automatically treated as the fair market value for federal gift and estate tax purposes.
    b. In most situations, the value of a gift of a whole life insurance policy with a cash value is equal to the interpolated terminal reserve (“terminal value”) plus the unearned portion of the last premium.
    c. Valuation discounts and premiums are departures from the general principle of using fair market value to establish the value of transfers for federal gift and estate tax purposes.

Answer 14

b. In most situations, the value of a gift of a whole life insurance policy with a cash value is equal to the interpolated terminal reserve (“terminal value”) plus the unearned portion of the last premium.

This is the correct answer because it correctly indicates that the value of a gift of a life insurance policy is its replacement cost, which for a whole life policy with a cash value is equal to the interpolated terminal reserve, or terminal value, plus the unearned portion of the last premium (except in the instance where the surrender value is greater, in which case the surrender value is used).

Question 15

Estate 2. The Federal Gift Tax (LO 2-1)

18. A federal gift tax return must be filed for a gift to an individual that is equal to or less than the annual exclusion amount in all of the following situations, except
    a. when the gift is of a future interest.
    b. when a gift is split with donor’s spouse.
    c. when the gift is of a present interest.

Answer 15

c. when the gift is of a present interest.

A gift tax return does not need to be filed for a present interest gift that is equal to or less than the maximum annual exclusion amount.

Where the gift is of a future interest, a gift tax return must be filed.

Where gift splitting with one’s spouse is used, a gift tax return must be filed to record the spouse’s consent to the split.

Question 16

Estate 2. The Federal Gift Tax (LO 2-3)

19. Section 2702 of the Internal Revenue Code governs federal gift taxation of lifetime intrafamily transfers. To which of the following transfers does Section 2702 not apply?

I. incomplete gifts, such as a revocable trust

II. qualified personal residence trusts (QPRTs)

III. charitable remainder annuity or unitrusts (CRATs and CRUTs)

IV. pooled income funds (PIFs)

a. I only
b. II and III only
c. II, III, and IV only
d. I, II, III, and IV

Answer 16

d. I, II, III, and IV

Section 2702 does not apply to incomplete transfers, QPRTs, CRATs, CRUTs, and PIFs. PIFs are not intrafamily transfers.

Question 17

Estate 2. The Federal Gift Tax (LO 2-2)

20. Efrin establishes and funds an irrevocable trust that names his aunt as the lifetime income beneficiary and his daughter as the remainder beneficiary, and he reserves the power to change when his aunt will receive trust income. Will this gift be subject to gift tax?
    a. Yes, this is a complete transfer subject to gift tax. Efrin’s right to change the time and manner of his aunt’s enjoyment of the property does not constitute sufficient retention of dominion and control to create an incomplete transfer.
    b. No, this is in incomplete transfer and is not subject to gift tax. Efrin’s right to change the time and manner of his aunt’s enjoyment of the property does constitute sufficient retention of dominion and control to create an incomplete transfer.
    c. No, the trust is an incomplete transfer and is not subject to gift tax because Efrin’s daughter has a future interest as a remainder beneficiary.

Answer 17

a. Yes, this is a complete transfer subject to gift tax. Efrin’s right to change the time and manner of his aunt’s enjoyment of the property does not constitute sufficient retention of dominion and control to create an incomplete transfer.

Efrin’s reservation of the right to change the time and manner of his aunt’s enjoyment of the property does not constitute sufficient retention of dominion and control to create an incomplete transfer.

Question 18

Estate 2. The Federal Gift Tax (LO 2-4)

21. Suzie was given a general power of appointment exercisable during the month of December that gives her the right to name the recipients of funds that were added to an irrevocable trust during the prior 11 months of the year. The trust was created and funded by her father and Suzie names her brother as the recipient. Will Suzie be subject to federal gift tax?
    a. No, Suzie will not be subject to gift tax because she released her power of appointment by naming her brother as the beneficiary.
    b. No, Suzie will not be subject to gift tax because she exercised her power of appointment by naming her brother as the beneficiary.
    c. Yes, Suzie will be subject to gift tax because she exercised her power of appointment by naming her brother as the beneficiary.

Answer 18

c. Yes, Suzie will be subject to gift tax because she exercised her power of appointment by naming her brother as the beneficiary.

Suzie exercised her general power of appointment by naming her brother as recipient, which will subject Suzie to federal gift tax. By exercising the power, Suzie is deemed to have made a gift to her brother since the transaction is equivalent to Suzie naming herself as appointee and then gifting the property to her brother.

Question 19

Estate 2. The Federal Gift Tax (LO 2-4)

22. Which one of the following is a correct statement concerning whether a transfer is a gift for federal gift tax purposes?
    a. The gift tax applies only when a donor intentionally and voluntarily transfers property to another and does not receive equal value for what was given.
    b. The gift tax does not apply to the forgiveness of one or two loan payments if the loan is from a parent(s) to an adult child to use for education or for the down payment on a house, the loan is evidenced by a promissory note, and there is a reasonable expectation that the child will make the remaining payments.
    c. The gift tax does not apply to a situation where a donee disclaims his or her right in the property in favor of someone else that he or she names.
    d. In most states, there is no immediate gift tax consequence of adding a child’s name to a parent’s existing bank accounts so that the child can assist in paying the parent’s bills.

Answer 19

d. In most states, there is no immediate gift tax consequence of adding a child’s name to a parent’s existing bank accounts so that the child can assist in paying the parent’s bills.

This is the correct answer because, in most instances, the signature card creates an account that is held as joint tenants with right of survivorship with either party to the account having the right to withdraw all funds in the account without the consent of the other party. Since the parents could withdraw all the money in the account, the transfer is revocable for federal gift tax purposes, and no taxable transfer takes place unless and until the child—who did not contribute any money to the account—withdraws account funds for his or her own use. However, in a few states, where state law prohibits either party from withdrawing more than their proportionate share of funds from the account, the parents—who contributed all the funds to the account—will be deemed to have made a gift of half the funds in the account to the child. Unless covered by the applicable annual exclusion, the gift will be taxable.

Question 20

Estate 2. The Federal Gift Tax (LO 2-1)

23. What does “gift splitting” mean?
    a. “Gift splitting” means that spouses may file a joint gift tax return.
    b. “Gift splitting” means that for a given year, each spouse consents to assume the tax responsibility for and to report one-half of all gifts made by either spouse (except to each other).
    c. “Gift splitting” means that for a given year, each spouse consents to assume the tax responsibility for and to report one-half of any gifts that the spouses agreed to split.
    d. “Gift splitting” means that only one spouse must file a gift tax return.

Answer 20

b. “Gift splitting” means that for a given year, each spouse consents to assume the tax responsibility for and to report one-half of all gifts made by either spouse (except to each other).

Gift splitting means that for a given year, each spouse consents to assume the tax responsibility for and to report one-half of all gifts made by either spouse (except to each other).

There is no joint gift tax return.

Both spouses must file a gift tax return.

Question 21

Estate 2. The Federal Gift Tax (LO 2-4)

24. Which one of the following is not a correct statement about gift tax deductions for federal gift tax purposes?
    a. A gift from one spouse to the other of the right to all income from an irrevocable trust for the next 15 years does not qualify for the unlimited marital deduction.
    b. To qualify for the unlimited marital deduction, the donor must be a U.S. citizen.
    c. The gift of the rent-free use of a suite of offices to a qualified charity does not qualify for the unlimited charitable deduction.
    d. If a donor makes a gift to a qualifying charitable remainder trust, the only taxable gift may be the gift to the noncharitable beneficiaries.

Answer 21

b. To qualify for the unlimited marital deduction, the donor must be a U.S. citizen.

This is the correct answer because it falsely states that a donor must be a U.S. citizen as a requirement for qualifying for the unlimited marital deduction. Requirements to be eligible for the unlimited marital deduction are (1) the spouses must be married at the time the gift becomes complete, (2) the donee spouse must be a U.S. citizen, (3) the gift must be included in the donor’s total calendar year gifts, and (4) the donee spouse must not be given a terminable interest in the property, or he or she must receive qualified terminable interest property (QTIP), and the QTIP election must be made.

Question 22

Estate 2. The Federal Gift Tax (LO 2-5)

25. In 2017, Earl made a $50,000 cash gift to his son. It was “seed” money to help his son start a business. Earl’s wife, Nancy, agreed to gift splitting.

Which one of the following correctly describes the effect of this gift on Nancy’s estate tax calculation?

a. The gift will have no effect on her estate tax calculation.
b. Her gross estate will be increased by $25,000.
c. Her gross estate will be increased by $11,000.
d. Her estate tax base will be increased by $11,000.

Answer 22

d. Her estate tax base will be increased by $11,000.

This is the correct answer because the completed gift will increase Nancy’s estate tax base by $11,000 since it will increase her adjusted taxable gifts by $11,000 [$50,000 ÷ 2 = $25,000 – $14,000 (the maximum annual exclusion in 2017) = $11,000].

Question 23

Estate 2. The Federal Gift Tax (LO 2-2)

26. Donor reserves certain powers over property that have been irrevocably transferred to a donee. Which of the following powers, if reserved, would make this an incomplete transfer causing the property to remain in the donor’s estate for federal estate tax purposes?

I. the right to name additional beneficiaries

II. the power to change beneficiaries

III. the power to alter the proportionate shares of the beneficiaries

a. I only
b. II and III only
c. I and II only
d. I, II, and III

Answer 23

d. I, II, and III

Retained rights that will cause the transfer to be treated as incomplete include the right to name additional beneficiaries, the power to change beneficiaries, and the power to alter the proportionate shares of the beneficiaries.

Question 24

Estate 2. The Federal Gift Tax (LO 2-2)

27. 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. Is this good advice, and why?
    a. Yes. If a return is not filed when a gift is made, the IRS can contest the value of the gift at any future time.
    b. Yes. If the property is appraised and a return is filed, the IRS cannot contest the value of the gift.
    c. Yes. If the property is appraised and a return is filed, the IRS has only one year to contest the value of the gift.

Answer 24

a. Yes. If a return is not filed when a gift is made, the IRS can contest the value of the gift at any future time.

If a return is not filed when a gift is made, the IRS can contest the value of the gift at any future time, including on the donor’s estate tax return.

If a gift tax return is filed, the IRS can contest the valuation of the gift disclosed on the return for three years.

Question 25

Estate 2. The Federal Gift Tax (LO 2-4)

28. A donee chooses not to accept a gift and mistakenly makes a defective disclaimer. Which of the following is a gift tax consequence of a defective disclaimer?
    a. The donee must assume the donor’s gift tax liability.
    b. The donee will incur a gift tax liability that is separate from the gift tax liability incurred by the donor.
    c. The donee will incur a gift tax liability that is equal to 40% of the gift tax liability incurred by the donor.

Answer 25

b. The donee will incur a gift tax liability that is separate from the gift tax liability incurred by the donor.

If a donee makes a defective disclaimer, the donee will incur a gift tax liability that is separate from the gift tax liability incurred by the donor.

Question 26

Estate 2. The Federal Gift Tax (LO 2-4)

29. Payment of expenses incurred for medical care for another individual are not exempt from federal gift tax when
    a. the expense is paid directly and exclusively to the care provider.
    b. the expense was incurred for prevention of disease.
    c. the expense was reimbursed by the benefitted individual’s insurance company.

Answer 26

c. the expense was reimbursed by the benefitted individual’s insurance company.

Payment of a medical expense is not exempt for amounts paid that are reimbursed by the benefitted individual’s insurance.

Question 27

Estate 2. The Federal Gift Tax (LO 2-6)

30. Which of the following results can be caused by a taxable gift?
    a. A taxable gift can cause an increase in the amount of tax paid on each dollar of future taxable gifts.
    b. A taxable gift can cause the loss of the annual exclusion.
    c. A taxable gift will never affect the amount of tax paid on each dollar of future taxable gifts.

Answer 27

a. A taxable gift can cause an increase in the amount of tax paid on each dollar of future taxable gifts.

The unified rate table has a progressive rate structure. Because a taxable gift adds to the cumulative tax base, it may force the total gift amount into a higher tax bracket, which would cause future taxable gift amounts to be taxed at a higher rate.

Question 28

Estate 2. The Federal Gift Tax (LO 2-1)

1. Which one of the following is a characteristic of the unified tax system that is not common to both federal gift taxation and federal estate taxation?
   a. availability of the marital deduction
   b. availability of an applicable credit amount
   c. availability of the charitable deduction
   d. availability of the annual exclusion amount

Answer 28

d. availability of the annual exclusion amount

This is the correct answer because the annual exclusion only applies to qualifying lifetime transfers of wealth (i.e., for federal gift taxation).There are no similar exclusions for wealth transfers at death, only deductions for certain transfers and credits that apply against any tax that is due.

Question 29

Estate 2. The Federal Gift Tax (LO 2-2)

2. Eddie Edsel owns the following assets:

750 shares (valued at $55,000) of common stock in a large public utility that trades more than 14,000 shares per day

certificates of deposit (valued at $100,000)

commercial buildings (valued at $825,000) located where values have begun to decrease rapidly because of a new noxious land use in the area

200 shares (valued at $600,000) of the 1,000 common stock shares in the EFG family corporation

If Eddie were to make an outright gift of each of these assets, which one of the following valuation techniques would Eddie be able to use in computing his gift tax?

a. a blockage discount for the public utility shares
b. special valuation (Chapter 14) of the certificates of deposit
c. valuation of the commercial buildings six months after the date of the gift
d. a minority discount on the EFG family corporation shares

Answer 29

d. a minority discount on the EFG family corporation shares

This is the correct answer because, to qualify for a minority discount, the number of closely held shares being transferred must be less than a controlling interest. Here, Eddie’s 200 shares represent a minority interest in the EFG family corporation.