Calculating the Gift Tax - Review Questions Flashcards
If a married individual in a common-law state gives their son a gift worth $20,000 and the requisite gift splitting election is made, for purposes of the gift tax computation, how much is that individual considered to have given?
Choose the best answer.
1) $5,000
2) $10,000
3) $20,000
4) $40,000
2) $10,000
For purposes of the gift tax computation, that individual is considered to have given only $10,000. Their spouse is treated as giving the other $10,000, even if, in fact, none of the gift was her property.
If one person has a one-half interest in a tenancy in common, how would a cash gift of $6,000 to the tenancy be treated?
Choose the best answer.
1) $3,000 gift to that person
2) $6,000 gift to that person
3) $9,000 gift to that person
4) $12,000 gift to that person
1) $3,000 gift to that person
If one person has a one-half interest in a tenancy in common, a cash gift of $6,000 to the tenancy would be treated as a $3,000 gift to that person. This would be added to other gifts made directly by the same donor to determine how much of the exclusion would be allowed.
Jerry gave his wife a remainder interest in his Italian villa. Which statement is correct?
Choose the best answer.
1) A marital deduction is not available to Jerry to reduce the value of this gift.
2) The Italian villa will be included in his wife’s estate when she dies.
3) Jerry can make a Q-TIP election on his gift tax return to qualify the gift for a marital deduction.
2) The Italian villa will be included in his wife’s estate when she dies.
The Italian villa will be included in his wife’s estate when she dies.
Explanation: Jerry did not give his wife terminable interest property because he gave his wife a remainder interest in the villa- not a life estate. Therefore, a marital deduction is available to reduce the value of this remainder interest gift. The FMV of the villa will be included in his wife’s estate when she dies.
Why the other answers are incorrect:
A marital deduction is not available to Jerry to reduce the value of this gift. This statement is not correct. Jerry can take a marital deduction because a remainder interest is not terminable interest property (TIP).
Jerry can make a Q-TIP election on his gift tax return to qualify the gift for a marital deduction. This statement is not correct. The gift of the remainder interest in the villa is not TIP therefore a QTIP election cannot be made.
Which statement is NOT correct?
Choose the best answer.
1) A unified credit is available to directly offset a gift tax liability.
2) The unified credit is reduced each time a taxable gift is made.
3) All taxable gifts from 1932 are added to this year’s taxable gifts to determine the current year’s gift tax
liability.
4) Special techniques such as gift-splitting, annual exclusions, and marital and charitable deductions reduce the taxable value of a gift before gift taxes are applied.
1) A unified credit is available to directly offset a gift tax liability.
The unified credit is available to directly offset a gift tax liability is not correct.
Explanation: The unified credit is used to offset the tax on a taxable gift so that it will reduce or even eliminate the gift tax liability.
Why the other answers are correct:
It is mandatory to use the unified credit to offset the tax on taxable gifts.
The gift tax and the estate tax are cumulative and progressive, which in turn, will increase the tax on the gifts.
A donor can use any one of these techniques or a combination of these techniques to reduce the taxable value of his gift, if applicable.
Assume a donor places $10,000 into a Section 2503(b) trust that is required to pay his 10 year-old daughter all income until she reaches age 25. Assume a 3.0% Section 7520 rate which results in an IRS Valuation Table B term certain factor amount of .358138 for 15 years. What is the present value of the income the daughter will receive for the next 15 years?
Choose the best answer.
1) $3,000
2) $3,500
3) $3,581.38
4) $6,418.62
3) $3,581.38
$3,581.38, that is, $10,000 times 0.358138. If the income were payable for her entire life, the present value would jump to $8,543.30. The donor can apply an annual exclusion equal to the PV of the income interest, or $3,581.38 in the year the trust is created.
Identify the statement(s) below that correctly identify(ies) gift giving likely to result in favorable tax consequences. (Check all that are true.)
1) An advantage of giving property with a current value that is less than its basis (“loss property”) is that when
the recipient sells the property the loss is available to offset any gains.
2) Elderly taxpayers should give highly appreciated, low basis property in preference to cash.
3) Making net gifts is a technique for clients who do not have very much in liquid assets and who want to make
taxable gifts.
4) The donee can depreciate, depreciable property based on its value for gift tax purposes.
3) Making net gifts is a technique for clients who do not have very much in liquid assets and who want to make
taxable gifts.
Lois gifted stock to her dying husband, Bradley, worth $500,000. Her basis in this stock was $200,000. Bradley’s will bequeathed all of his property to Lois. Assume Bradley died two years after receiving the stock. What was the consequence of this reverse gift?
1) The stock received a step-up in basis at Bradley’s death.
2) The stock did not receive a step-up in basis because it must be bequeathed to someone other than the
decedent’s spouse.
3) Lois inherited Bradley’s adjusted basis in the stock.
4) Lois had to pay a gift tax when the stock was transferred to Bradley.
1) The stock received a step-up in basis at Bradley’s death.
The reverse gift technique worked because Bradley lived longer than one year after receiving the gift. Therefore, the stock was included in Bradley’s gross estate and Lois inherited the stock with a step-up in basis to FMV.
The gift tax and the estate tax are cumulative and progressive. Taxable gifts made since 1976 are added to a decedent’s estate tax return as an adjusted taxable gift. Why?
1) To reduce the decedent’s estate tax liability.
2) To keep the estate tax rate at a level 18%.
3) To position the estate tax into a higher rate bracket.
4) To impose different tax rates on transfers made during life and at death.
3) To position the estate tax into a higher rate bracket.
Lifetime taxable gifts are brought back into the decedent’s estate tax calculation as an adjusted taxable gift to increase the tax rate on the estate tax by pushing it into a higher rate bracket.
Identify transfers that are not included in a gift tax calculation on IRS Form 709.
1) You wrote a check directly to your alma mater for $2,000.
2) You forgave the loan you made to your son last year which has outstanding payments and interest of
$25,000.
3) You contributed $500 to your favorite political candidate’s campaign.
4) You changed the deed to your vacation home in Delaware to give your son the remainder interest worth
$80,000.
3) You contributed $500 to your favorite political candidate’s campaign.
A political contribution is not subject to gift tax law. A charitable contribution to your alma mater is a gift but
not a taxable gift. Forgiveness of a loan is subject to gift tax. A gift of a remainder interest is subject to gift
taxes and cannot be reduced by an annual exclusion.
Tim made taxable gifts of $30,000 in 2022, 2023, and 2024 after applying annual exclusions. What is Tim’s gift tax liability in 2024?
Tax on $30,000 = $6,000
Tax on $60,000 = $13,000
Tax on $90,000 = $21,000
1) $21,000
2) $6,000
3) $8,000
4) $13,000
3) $8,000
Tim made total taxable gifts of $90,000 over 3 years. Annual exclusions were subtracted from each gift first to arrive at the total taxable gift amount of $90,000. The tax on $90,000 is $21,000. But you need to subtract out the taxes for 2022 and 2023 gifts of $60,000 which equal $13,000. So Tim’s gift tax liability in 2024 is $8,000 ($21,000 − $13,000) Notice the 1st year Tim made a taxable gift in 2022 the tax on $30,000 was only $6,000. In 2024 the tax is higher ($8,000) because the tax rate is progressive and cumulative.
Justine transferred $100,000 to a § 2503(c) trust for her daughter Mattie last week. Mattie will receive the accumulated income and corpus when she reaches age 21. Which statement is not correct?
1) Justine can take an annual exclusion to reduce the taxable gift to $90,000.
2)The gift is a future interest gift because income will not be distributed to Mattie until she turns 21.
3) If Mattie dies before the assets are distributed, they are included in her estate
4) Mattie can request in writing that the trustee continue the trust once she reaches age 21.
2)The gift is a future interest gift because income will not be distributed to Mattie until she turns 21.
What techniques represent some tax-oriented advantages of gifting?
1) A donor can use an annual exclusion to reduce the value of a taxable, present-interest gift.
2) Gift-splitting is available to a married couple to reduce the value of a taxable gift.
3) The unified credit must be used to offset taxes on inter-vivos taxable gifts that do not exceed the exemption
equivalent amount.
4) All of the above.
4) All of the above.
Rodney gave his wife Whitney a necklace worth $5,000 and bought her a new car for $50,000 for their wedding anniversary. What is the amount of the marital deduction that is available to Rodney to offset the tax on these taxable gifts?
1) $17,000
2) $37,000
3) $45,000
4) $55,000
2) $37,000
Both gifts are present interest gifts therefore Rodney can take an annual exclusion of $18,000 from the total gifts of $55,000 for a marital deduction of $37,000.
Jack, who had never married, died last year. Two years before his death he paid gift tax of $15,000 as a result of making the following gifts (these were the only gifts he made that year).
stock worth $40,000 to Mickey
a $300,000 (proceeds value) life insurance policy on his life to Molly. (The policy was worth $5,000 at the time of transfer.)
At Jack’s death, the stock had increased in value to $70,000 and the life insurance company paid the $300,000 to Molly. Consider the two transfers and the gift taxes paid when answering the following questions.
By how much will Jack’s gross estate be increased?
Choose the best answer.
1) $15,000
2) $60,000
3) $315,000
4) $355,000
3) $315,000
Jack’s gross estate included the $300,000 life insurance policy and the $15,000 gift taxes paid two years before his death.
ack, who had never married, died last year. Two years before his death he paid gift tax of $15,000 as a result of making the following gifts (these were the only gifts he made that year).
stock worth $40,000 to Mickey
a $300,000 (proceeds value) life insurance policy on his life to Molly. (The policy was worth $5,000 at the time of transfer.)
At Jack’s death, the stock had increased in value to $70,000 and the life insurance company paid the $300,000 to Molly. Consider the two transfers and the gift taxes paid when answering the following questions.
If the two gifts had been made four years before Jack’s death, how much would his gross estate have been increased by?
Choose the best answer.
1) zero
2) $15,000
3) $30,000
4) $300,000
1) zero
Neither the life insurance policy nor the gift taxes paid four years prior to Jack’s death would be included in his gross estate.
