B.16 Gift/income tax strategies

Question 1

Which of the following is NOT considered a gift for gift tax purposes?

A. A present interest gift
B. A future interest gift
C. A gift of a partial interest
D. A gift of services

Answer 1

D. A gift of services

A gift of services is not considered a gift for gift tax purposes because it does not involve a transfer of property.

B.16 Gift/Income Tax Strategies

Question 2

When does the gift tax annual exclusion apply?

A. To gifts of any amount
B. To gifts up to a certain dollar amount per year per donee
C. To gifts made to charitable organizations only
D. To gifts made to family members only

Answer 2

B. To gifts up to a certain dollar amount per year per donee.

The gift tax annual exclusion applies to gifts up to a certain dollar amount per year per donee. This amount is adjusted yearly.

B.16 Gift/Income Tax Strategies

Question 3

Which of the following gifts is NOT eligible for the gift tax annual exclusion?

A. Cash gifts
B. Gift of property
C. Gifts to a qualified charity
D. Gifts to a political organization

Answer 3

D. Gifts to a political organization

Gifts to a political organization are not eligible for the gift tax annual exclusion.

B.16 Gift/Income Tax Strategies

Question 4

Which of the following strategies allows a taxpayer to transfer wealth to future generations while avoiding estate and gift taxes?

A. Installment sale to a grantor trust
B. Charitable lead trust
C. Dynasty trust
D. Grantor retained annuity trust

Answer 4

C. Dynastry trust

A dynasty trust allows a taxpayer to transfer wealth to future generations while avoiding estate and gift taxes.

B.16 Gift/Income Tax Strategies

Question 5

Which of the following strategies allows a taxpayer to make a gift to a charity and receive an income stream in return?

A. Charitable remainder annuity trust
B. Charitable lead trust
C. Private foundation
D. Donor-advised fund

Answer 5

A. Charitable remainder annuity trust

A charitable remainder annuity trust allows a taxpayer to make a gift to a charity and receive an income stream in return.

B.16 Gift/Income Tax Strategies

Question 6

John wants to gift $20,000 to his niece, Sarah. How much of this gift is eligible for the gift tax annual exclusion, considering the annual limit set by the IRS, which may be adjusted periodically?

A. $0
B. $5,000
C. $10,000
D. Current annual exclusion limit

Answer 6

D. Current annual exclusion limit

For 2023, the gift tax annual exclusion is $17,000 per year per donee, so $17,000 of John’s gift to Sarah is eligible for the annual exclusion.

B.16 Gift/Income Tax Strategies

Question 7

Jane wants to make a gift of $50,000 to her son, Jack, to help him purchase a home. Which of the following strategies could Jane use to minimize her gift tax liability?

A. Make the gift as a cash gift
B. Use her unified credit to offset the gift tax liability
C. Make the gift as a loan instead of a gift
D. None of the above

Answer 7

B. Use her unified credit to offset the gift tax liability

The unified tax credit defines a dollar amount that an individual can gift during their lifetime and pass on to heirs before gift or estate taxes apply. The tax credit unifies the gift and estate taxes into one tax that decreases the tax bill of the individual or estate, dollar for dollar.

B.16 Gift/Income Tax Strategies

Question 8

Tom wants to transfer $1,000,000 of assets to his grandchildren. Which of the following strategies would allow him to transfer the assets while minimizing estate and gift taxes?

A. Make the gift as a cash gift
B. Use his unified credit to offset the gift tax liability
C. Make the gift as a future interest gift
D. Use a dynasty trust

Answer 8

D. Use a Dynasty Trust

Tom could use a dynasty trust to transfer the assets to his grandchildren while minimizing estate and gift taxes.

B.16 Gift/Income Tax Strategies

Question 9

Which of the following types of trusts allows a grantor to retain an income stream from the trust assets while removing the assets from their estate for estate tax purposes?

A. Charitable lead trust
B. Grantor retained annuity trust
C. Irrevocable life insurance trust
D. Qualified personal residence trust

Answer 9

B. Grantor Retained Annuity Trust (GRAT)

A grantor retained annuity trust (GRAT) allows a grantor to retain an income stream from the trust assets while removing the assets from their estate for estate tax purposes.

B.16 Gift/Income Tax Strategies

Question 10

Which of the following gifts would be subject to the highest tax rate under the federal gift tax?

A. A cash gift of $100,000 to a family member
B. A gift of a partial interest in a valuable piece of artwork to a friend
C. A gift of stock in a family-owned business to a child
D. A gift of $5,000 to a neighbor

Answer 10

B. A gift of a partial interest in a valuable piece of artwork to a friend

Gifts of partial interests are generally subject to higher tax rates than outright gifts because of the valuation complexities involved.

B.16 Gift/Income Tax Strategies

Question 11

Which of the following is a disadvantage of using a private foundation as a charitable giving strategy?

A. Private foundations allow donors to retain control over the use of their gifts.
B. Private foundations offer donors substantial income tax deductions.
C. Private foundations are subject to strict IRS regulations and reporting requirements.
D. Private foundations are not subject to the same payout requirements as other charitable giving vehicles.

Answer 11

C. Private foundations are subject to strict IRS regulations and reporting requirements

Private foundations are subject to strict IRS regulations and reporting requirements, which can make them more difficult to administer than other charitable giving vehicles.

B.16 Gift/Income Tax Strategies

Question 12

Which of the following is a benefit of using a donor-advised fund as a charitable giving strategy?

A. Donor-advised funds offer donors substantial income tax deductions.
B. Donor-advised funds allow donors to retain control over the use of their gifts.
C. Donor-advised funds are not subject to any IRS regulations or reporting requirements.
D. Donor-advised funds allow donors to receive an income stream in return for their gifts.

Answer 12

B. Donor-advised funds allow donors to retain control over the use of their gifts

Donor-advised funds allow donors to retain control over the use of their gifts, which can be a significant advantage for donors who want to ensure that their gifts are used in accordance with their wishes.

B.16 Gift/Income Tax Strategies

Question 13

Which of the following strategies would be most appropriate for a taxpayer who wants to transfer assets to their children while minimizing income taxes?

A. Charitable remainder annuity trust
B. Charitable lead trust
C. Installment sale to a grantor trust
D. Irrevocable life insurance trust

Answer 13

C. Installment sale to a grantor trust

An installment sale to a grantor trust can be an effective way to transfer assets to children while minimizing income taxes because it allows the taxpayer to sell the assets to the trust at a reduced value and defer recognition of the gain.

B.16 Gift/Income Tax Strategies

Question 14

Which of the following is a requirement for a gift to qualify for the gift tax annual exclusion?

A. The gift must be made in cash.
B. The gift must be made to a family member.
C. The gift must be made to a qualified charity.
D. The gift must be of a present interest.

Answer 14

D. The gift must be of a present interest

.

For a gift to qualify for the gift tax annual exclusion, it must be of a present interest. This means that the recipient must have a right to use or enjoy the gift immediately

B.16 Gift/Income Tax Strategies

Question 15

Bonnie is a widow with an estimated net worth of $45,000,000. She is terminally ill and is expected to die before the year ends. She has $4,500,000 in one IRA and $1,500,000 in another IRA. She would like to give $4,500,000 to a charity. Which of the following will minimize her income and estate tax liability?

A. Naming the charity as beneficiary of the $4,500,000 IRA
B. Leaving $4,500,000 from an IRA to the charity in her Will
C. Withdrawing $4,500,000 from an IRA and giving it to the charity before she dies
D. Naming her estate as beneficiary of the $4,500,000 IRA and giving the charity $4,500,000 in her Will.

Answer 15

A. Naming the charity as beneficiary of the $4,500,000 IRA.

By naming the charity directly as the beneficiary of the IRA, the entire amount would pass to the charity free of income and estate tax. This approach preserves the maximum value of the gift for the charity.

B.16 Gift/income tax strategies

Question 16

John, aged 75, is considering making a large charitable donation from his traditional IRA. Which strategy allows him to both fulfill his charitable intentions and receive tax benefits?

A. Withdraw an amount and then donate it to charity, claiming a tax deduction.
B. Use a Qualified Charitable Distribution (QCD) to directly transfer funds to the charity.
C. Donate appreciated stocks from another account instead of using the IRA.
D. Name the charity as a beneficiary in his will.

Answer 16

B. Use a Qualified Charitable Distribution (QCD) to directly transfer funds to the charity.

A Qualified Charitable Distribution allows IRA owners over 70½ years old to directly transfer up to $100,000 per year to a qualified charity. This amount is not included in taxable income, nor does it count against the standard deduction, making it a tax-efficient strategy.

B.16 Gift/income tax strategies

Question 17

Maria wants to gift her son $50,000 to help him buy a home. What should Maria consider to optimize her gift and income tax strategy?

A. Gift the full $50,000 and pay any required gift tax.
B. Loan the $50,000 to her son with a formal agreement and forgive the loan annually under the gift tax exclusion limit.
C. Spread the gift over several years to stay within the annual exclusion limit.
D. Recommend her son takes a mortgage loan.

Answer 17

C. Spread the gift over several years to stay within the annual exclusion limit.

By spreading the gift over several years to stay within the annual gift tax exclusion , Maria can avoid using her lifetime exemption or paying gift taxes, thus maximizing her tax savings while still helping her son.

B.16 Gift/income tax strategies

Question 18

David, a high-income earner, wants to gift $30,000 to his daughter who is in a lower tax bracket. What strategy could be used to minimize both David’s and his daughter’s tax liability?

A. Gift $15,000 this year and $15,000 next year.
B. Pay medical expenses directly on behalf of his daughter.
C. Gift the entire amount and pay the gift tax.
D. Have his daughter claim the gift as income.

Answer 18

A. Gift $15,000 this year and $15,000 next year.A.

By splitting the gift into two parts of $15,000 each over two different years, David can utilize the annual gift tax exclusion for both years, avoiding any gift tax and not using his lifetime exemption.

B.16 Gift/income tax strategies

Question 19

Susan wants to minimize her income tax through charitable giving. She is considering several options. Which of the following would be most effective?

A. Donate $10,000 in cash to a public charity.
B. Donate $10,000 worth of long-term appreciated securities to a public charity.
C. Sell long-term appreciated securities and then donate the cash proceeds.
D. Set up a private foundation and transfer $10,000 in securities.

Answer 19

B. Donate $10,000 worth of long-term appreciated securities to a public charity.

Donating long-term appreciated securities directly to a charity allows Susan to avoid paying capital gains tax on the appreciation while still receiving a tax deduction for the full market value of the securities. This is more tax-efficient than selling the securities first and then donating the cash proceeds.

B.16 Gift/income tax strategies

Question 20

Tom, aged 45, is considering making a significant gift to his two children to help with their college tuition. He wants to gift $40,000 to each child this year. What strategy should Tom consider to optimize his gift and reduce potential tax liabilities?

A. Gift $40,000 to each child and pay the gift tax.
B. Use the annual gift tax exclusion and split gift rules to effectively gift $30,000 from each parent without triggering the gift tax.
C. Gift $15,000 this year and $25,000 the following year to each child.
D. Set up a 529 college savings plan and front-load five years’ worth of gifts under the special exemption rule.

Answer 20

D. Set up a 529 college savings plan and front-load five years’ worth of gifts under the special exemption rule.

A 529 college savings plan offers a unique tax advantage where an individual can front-load up to five years’ worth of gifts under the annual exclusion ($15,000 per year) without incurring gift taxes. This allows Tom to contribute $75,000 per child in one year ($15,000 x 5) without gift tax consequences, thereby exceeding his original plan of $40,000 while optimizing his tax benefits.

B.16 Gift/income tax strategies