Ch5 - Overview of Federal Gift Taxation

Question 1

Explain the THREE powers held by a trust beneficiary that will cause all the assets in the trust to be included in the beneficiary’s gross estate.

Answer 1

(A) 5 and 5 Power - power to direct the trustee to pay her the GREATER of $5k or 5% of the trust principal annually

(B) Ascertainable Standard - power to use trust assets for HEMS (aka _H_ealth, _E_ducation, _M_aintenance, or _S_upport)

(C) Adverse Party Consent - power only exercisable with the consent of an adverse party

Question 2

What is considered a completed gift?

Answer 2

When a donor has irrevocably parted with dominion and control over the gift. This includes irrevocable transfers to a trust.

Question 3

Is the annual gift exclusion for a present interest or a future interest?

Answer 3

present interest

Question 4

What is the aggregate limit for lifetime gifts before any gift taxes will be paid by the transferor?

Answer 4

must exceed $11.18 million

(This amount can be doubled when gift splitting for married couples.)

Question 5

This is a formal refusal of a completed gift from the original donor.

Answer 5

qualified disclaimer

Question 6

A qualified disclaimer is for anyone receiving a gift of inheritance. What are the THREE requirements for Qualified Disclaimer?

Answer 6

disclaimant must notify the donor/executor in writing within 9 months of the notification.

disclaimant cannot have benefitted from the property.

disclaimant cannot direct who the property should go to instead

Question 7

What is the crummy powers?

Answer 7

Crummey powers turn a future interest gift into a present interest gift by allowing beneficiary to withdraw some portion of the trust assets at least once per year. The beneficiary does NOT have to exercise his or her crummey power, but only needs to have the option to.

Question 8

Why can’t the annual gift exclusion ($15K) be used with crummey powers?

Answer 8

Because the beneficiary does NOT have to exercise the crummey power, but only needs to have the option to do so.

Question 9

How much is the MARITAL DEDUCTION when gifting to a U.S. citizen spouse?

Answer 9

The marital deduction is allowed for unlimited taxable gifts between spouses.

Question 10

What is the gift tax calculation formula?

Answer 10

Gross Gift $24,000,000

- Less: (Gift Splitting, Marital Deduction, Annual Exclusion, Charitable Deduction)

= Equals: Taxable Gift

+ Plus: Post-1976 Taxable Gifts

= Equals: Tentative Tax Base

Tentative Tax (Gift Tax Payable Before Credits 40%)

- Less: Basic Credit Amount

= Equals: Gift Tax Due

Question 11

What is gift splitting?

Answer 11

When married couples elect to treat a gift as though each of the spouses made one-half of the gift. Basically, DOUBLING the couple’s annual gift exclusion for that calendar year.

Question 12

Who elects gift splitting for a married couple?

Answer 12

the executor

Question 13

A qualified disclaimer is for anyone meant to receive a gift of inheritance. What happens without a qualified disclaimer?

Answer 13

The transaction would be treated as a qualified gift, from the original recipient to the next recipient.

Question 14

The primary concern of transferring gifts to minors is restricting the minor’s ability to squander the funds. What are the TWO custodial accounts frequently used when planning for gifting to a minor?

Answer 14

Uniform Transfers to Minors Act (UTMA)

Uniform Gifts to Minors Act (UGMA)

Question 15

With a Uniform Transfers/Gifts to Minors Act (UTMA/UGMA), the property is placed and registered in a…

Answer 15

custodial account for the benefit of the minor beneficiary.

Question 16

What happens to the assets in a Uniform Transfers/Gifts to Minors Act (UTMA/UGMA), if the minor beneficiary dies before receiving he funds?

Answer 16

The funds go into the minor’s estate.

Question 17

Can a revocable trust enable the grantor to save on income taxes? Why or why not?

Answer 17

A revocable trust allows the grantor to make changes to the trust and get the property back at any time. Therefore, all the income from the trust is taxable to the grantor and they can’t save on income taxes.

Question 18

What is the difference between a revocable and an irrevocable trust?

Answer 18

revocable = grantor can reclaim the property

irrevocable = grantor CANNOT reclaim the property

Question 19

Generally, gratuitous lifetime transfers made within 3 years of death are NOT included in a decedent’s gross estate no matter how significant the value of the gift(s). There are, however, some exceptions to the general rule. What are the THREE senarios where the exceptions applies?

Answer 19

• There’s retained interests within 3 years of death
• Grantor had meaningful control of the trust distributions or property within 3 years of death
• Grantor has rights to the trust and did not survived the trust term

Question 20

What happens if a beneficiary does not exercise his or her Crummey power and allows it to lapse?

Answer 20

The funds over time will be become gifts to the trust and will be included in the beneficiary’s estate.

Question 21

A grantor-retained trust (eg - revocable trust) involves structuring a gift to a trust such that the income on the assets in the trust is taxable to…

Answer 21

the grantor INSTEAD of to the trust or the beneficiaries.

Question 22

When the trust terminates, the remainding assets in the trust gets distributed to _______. If the grantor is the remainder beneficiary, this is called a _______.

Answer 22

a) the remainder beneficiaries as a gift.
b) reversionary interest

Question 23

When is gift tax calculated for assets being transferred into a trust?

Answer 23

At the time the assets are transferred into the trust