Chap 4 - Estate, trust and gift taxation Flashcards
A distribution to an estate’s sole beneficiary for the current calendar year equaled $15,000, the amount currently required to be distributed by the will. The estate’s current year records were as follows:
Estate income :
$40,000 Taxable interest
Estate disbursements :
$34,000 Expenses attributable to taxable interest
What amount of the distribution was taxable to the beneficiary?
a. $40,000
b. $0
c. $15,000
d. $6,000
$6,000.
Choice “d” is correct. The amount of income an estate beneficiary reports from the estate is limited by the estate’s distributable net income, $6,000 in this case. Because the estate distributed $15,000 to the beneficiary, all $6,000 of its distributable net income is taxed to the beneficiary, and the estate will have no taxable income to report. The $9,000 ($15,000 - $6,000) the beneficiary received in cash over the amount of taxable income is treated as a nontaxable distribution of principal.
Choice “a” is incorrect. The estate income must be reduced by the estate disbursements.
Choice “c” is incorrect. The entire distribution to the beneficiary is not taxable to the beneficiary. Some of the distribution is treated as a distribution of principal.
Choice “b” is incorrect. Some of the distribution to the beneficiary is taxable to the beneficiary. Only part of the distribution is treated as a distribution of principal.
Steve and Kay Briar, U.S. citizens, were married for the entire calendar year. During the year, Steve gave a $30,000 cash gift to his sister. The Briars made no other gifts in the year. They each signed a timely election to treat the $30,000 gift as made one-half by each spouse. Disregarding the unified credit and estate tax consequences, what amount of the current year gift is taxable to the Briars?
a. $28,000 b. $2,000 c. $30,000 d. $0
$2,000.
Choice “b” is correct. A married couple can elect to treat taxable gifts as made half by each spouse for gift tax purposes. Every donor receives a $14,000 per person, per year, exclusion from the gift tax. Mr. and Mrs. Briar split Mr. Briar’s $30,000 gift to his sister, for an effective gift of $15,000 each. Then each of them receives a $14,000 exclusion to reduce the taxable gift to $1,000. Because there are two deemed gifts, one from each spouse, the total taxable gift, ignoring the unified tax credit and the potential estate tax consequences, is $2,000.
Choice “c” is incorrect. The entire gift is not taxable to the Briars. An exclusion is available to the Briars.
Choice “a” is incorrect. Because the Briars split the gift to his sister, each of them receives a $14,000 exclusion to reduce the taxable gift.
Choice “d” is incorrect. Since the gift is greater than $28,000, some of the gift is taxable to the Briars.
Lyon, a cash basis taxpayer, died on January 15 of the current taxable year. The estate executor made the required periodic distribution of $9,000 from estate income to Lyon’s sole heir. The following pertains to the estate’s income and disbursements in the current year:
Estate Income:
$20,000 Taxable interest
$10,000 Net long-term capital gains allocable to corpus
Estate Disbursements:
$5,000 Administrative expenses attributable to taxable income
For the current taxable calendar year, what was the estate’s distributable net income (DNI)?
a. $15,000
b. $25,000
c. $30,000
d. $20,000
$15,000.
Choice “a” is correct. A trust’s distributable net income includes the taxable income of the trust ($20,000 interest income less $5,000 expenses, or $15,000). By definition, it does not include the $10,000 net long-term capital gains allocated to corpus.
Choice “d” is incorrect. The administrative expenses reduce the DNI.
Choice “b” is incorrect. Net long-term gain allocable to corpus is not included in DNI. The administrative expenses reduce the DNI.
Choice “c” is incorrect. Net long-term gain allocable to corpus is not included in DNI.
Lyon, a cash basis taxpayer, died on January 15, Year 50. The estate executor made the required periodic distribution of $9,000 from estate income to Lyon’s sole heir. The following pertains to the estate’s income and disbursements in Year 50:
Estate Income:
$20,000 Taxable interest
$10,000 Net long-term capital gains allocable to corpus
Estate Disbursements:
$5,000 Administrative expenses attributable to taxable income
Administrative expenses attributable to taxable income
Lyon’s executor does not intend to file an extension request for the estate fiduciary income tax return. By what date must the executor file the Form 1041, U.S. Fiduciary Income Tax Return, for the estate’s Year 50 calendar year?
a. Monday, April 15, Year 51.
b. Thursday, June 15, Year 51.
c. Friday, September 15, Year 51.
d. Wednesday, March 15, Year 51.
Monday, April 15, Year 51.
Choice “a” is correct.
Rule: Form 1041 is due on the 15th day of the fourth month after the close of its taxable year.
Lyon’s calendar Year 50 return would be due on April 15, Year 51.
Choices “d”, “b”, and “c” are incorrect, per the above rule.
A distribution from estate income, that was currently required, was made to the estate’s sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiary’s gross income is limited to the estate’s:
a. Capital gain income. b. Distributable net income. c. Ordinary gross income. d. Net investment income.
Distributable net income.
Choice “b” is correct. Distributable net income is the upper limit on the amount of income that a beneficiary has to include in income from a trust distribution.
Choice “a” is incorrect. The beneficiary might have ordinary income to report, and since capital gains are often allocated to corpus, the beneficiary might not have to report capital gains.
Choice “c” is incorrect. The beneficiary does not have to report an amount greater than the distributable net income of the trust, but distributable net income, as its name implies, allows deductions for expenses of the trust, so that it is less than the gross income.
Choice “d” is incorrect. The beneficiary normally is limited in reporting income to the amount of distributable net income, but that figure includes both net investment income plus other income of the trust. Furthermore, distributable net income does not include capital gains allocated to trust corpus, which could be a part of net investment income.
Bell, a cash basis calendar year taxpayer, died on June 1 of the current year. Prior to her death, Bell incurred $2,000 in medical expenses that were paid in the current year. If the executor files the appropriate waiver, the medical expenses are deductible on:
a. The estate income tax return. b. Bell's final income tax return. c. The executor's income tax return. d. The estate tax return.
Bell’s final income tax return.
Choice “b” is correct. If the proper waiver is filed, medical expenses paid for the decedent by her executor within one year of her death can be deducted on the decedent’s final income tax return.
Choice “d” is incorrect. The expenses would normally be deducted on the estate tax return (if applicable), but under these facts the executor has made a proper election to deduct the expenses on the decedent’s final income tax return. The expenses cannot be deducted both places.
Choice “a” is incorrect. The estate does not get a deduction for medical expenses on its income tax return.
Choice “c” is incorrect. The executor cannot deduct the decedent’s medical expenses on his own income tax return. Although the executor paid them, he did so in a representative capacity on the decedent’s behalf.
Assuming the tax law in effect for 2016, what amount of a decedent’s taxable estate is effectively tax-free if the maximum applicable estate and gift tax credit is taken?
a. $0 b. $2,125,800 c. $5,450,000 d. $14,000
$5,450,000.
Choice “c” is correct. The maximum amount that can be transferred pursuant to a death tax-free is $5,450,000 (2016).
Choice “d” is incorrect. $14,000 is the annual gift tax exclusion per donee for gifts of a present interest.
Choice “b” is incorrect. The $2,125,800 is the applicable estate and gift tax credit amount (or the amount of the tax avoided) for a tax-free transfer of $5,450,000.
Choice “a” is incorrect. For the year 2016 $5,450,000 of a taxable estate is effectively tax-free.
Don and Linda Grant, U.S. citizens, were married for the entire calendar year. During the year, Don gave a $60,000 cash gift to his sister. The Grants made no other gifts in the year. They each signed a timely election to treat the $60,000 gift as one made by each spouse. Disregarding the applicable credit and estate tax consequences, what amount of the current year gift is taxable to the Grants for gift tax purposes?
a. $60,000 b. $0 c. $32,000 d. $46,000
$32,000.
Choice “c” is correct. A donor (person giving a gift) may exclude the first $14,000 of gifts made to each donee. A gift by either spouse may be treated as made one-half by each; this gift splitting creates a $28,000 exclusion per donee. Therefore, $60,000 - $28,000 = $32,000 is the amount of taxable gift made by the Grants.
Choice “b” is incorrect. Gifts to a sibling to not qualify for an unlimited gift exclusion.
Choice “d” is incorrect. The Grants elected to split the gift, therefore, a $28,000 exclusion, not a $14,000 exclusion, applies.
Choice “a” is incorrect. This gift is subject to the annual exclusion which is $28,000 when gift-splitting is elected by a married couple.
Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1. Boone gave 100 shares of the stock to another of Carter’s relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share. What was Dixon’s basis in the 100 shares of stock when acquired on June 1?
a. $5,000 b. $5,100 c. $15,000 d. $10,000
$5,000.
Choice “a” is correct. This question combines the rules of estate taxation and gift taxation. Carter’s investment in the stock was $50 per share when he died. Upon Carter’s death, the stock received a step-up in basis to the fair market value at the date of death (or six months later, if the alternate lower valuation date was elected). Therefore, the stock’s basis was $100 per share when it was transferred to Boone. [Note that no capital gain was reportable for the step-up in basis from $50 to $100; however, Carter’s estate included the stock at its fair market value of $100/share for estate tax purposes and likely paid a large amount of estate tax on that.] Further, regardless of how long Carter owned the stock (i.e., it could have only been owned for one day), it was automatically deemed long-term property upon Carter’s death. So, Boone had 100 shares of stock at a basis of $100/share when Boone received the inheritance. Then, there was a 2-for-1 stock split on April 1 of the following year. This transaction caused Boone to now have double the amount of shares (or, 200 shares) at half the basis per share (or, $50/share). [Note that the total basis remains unchanged (i.e., $100 x 100 shares = $10,000 and $50 x 200 shares = $10,000).] When Boone gifted the stock to Dixon (note: it would not have mattered if Dixon had not been a relative), the donee (Dixon) received the stock at the carryover basis of the donor (Boone). The 100 shares gifted to Dixon were shares from after the stock split; therefore, they have a basis of $50 per share, or a total basis of $5,000 for the 100 shares. [Note that Boone still has 100 shares at a basis of $50 as well.]
Choices “b”, “d”, and “c” are incorrect, per the above discussion.
Which of the following is an attribute exclusively of a complex trust?
a. It has a grantor that is not an individual. b. It has a beneficiary that is not an individual. c. It distributes corpus. d. It distributes income to more than one beneficiary.
It distributes corpus.
corpus = sum of money or property left when an individual dies.
Choice “c” is correct. Complex trusts may accumulate current income, distribute principal, and provide for charitable contributions. Simple trusts may only make distributions from current income (not corpus, or principal), must distribute all income currently, and may not make charitable contributions. Either trust may have more than one beneficiary, have a grantor that is not an individual, or have beneficiaries that are not individuals.
Choice “d” is incorrect. Both complex and simple trusts may distribute income to more than one beneficiary.
Choice “a” is incorrect. Both complex and simple trusts may have a grantor that is not an individual.
Choice “b” is incorrect. Both complex and simple trusts may have a beneficiary that is not an individual.
Brown transfers property to a trust. A local bank was named trustee. Brown retained no powers over the trust. The trust instrument provides that current income and $6,000 of principal must be distributed annually to the beneficiary. What type of trust was created?
a. Simple. b. Revocable. c. Complex. d. Grantor.
Complex.
Choice “c” is correct. A complex trust may distribute principal, so this is the type of trust that was created.
Choice “a” is incorrect. A simple trust may not distribute principal, and the facts tell us that $6,000 of principal must be distributed annually to the beneficiary.
Therefore, a simple trust could not have been created.
Choice “d” is incorrect. A grantor trust could not have been created, as it requires that a person transfer property to a trust and retain certain powers over the trust (or treat the trust as being owned by the transferor for income tax purposes). In this case, Brown does transfer property, but Brown retained no powers over the trust.
Choice “b” is incorrect. A revocable trust was not created because Brown retained no powers over the trust and, thus, no right to revoke it.
Which of the following is allowed in the calculation of the taxable income of a simple trust?
a. Standard deduction. b. Charitable contribution. c. Exemption. d. Brokerage commission for purchase of tax-exempt bonds.
Exemption.
Choice “c” is correct. An exemption of $300 is available for simple trusts.
Choice “a” is incorrect. There is no standard deduction for simple trusts. Standard deductions are available only for individuals.
Choice “d” is incorrect. There is no deduction for brokerage commissions to purchase tax-exempt bonds. Since the interest on tax-exempt bonds is not taxable, related investment expenses are not deductible (by any taxpayer).
Choice “b” is incorrect. There is no charitable contribution deduction for simple trusts.
Under which of the following circumstances is trust property with an independent trustee includible in the grantor’s gross estate?
a. The trust is established for a minor.
b. The trust is revocable.
c. The income beneficiary disclaims the property, which then passes to the remainderman, the grantor’s friend.
d. The trustee has the power to distribute trust income.
The trust is revocable.
Choice “b” is correct. If a revocable trust is created by a grantor, the trust assets may be returned to the grantor upon the grantor’s “revocation” of the trust (i.e., no “complete” gift exists); thus, the assets never left the control (or possible ownership) of the grantor and remain includible in the gross estate of the grantor.
Choice “a” is incorrect. When a trust is established for a minor, a complete gift is made to the trust, and the assets are no longer includible in the estate of the grantor.
Choice “d” is incorrect. The trustee typically has the power to distribute trust income in various types of trusts; thus, this fact alone would not make the assets includible in the gross estate of the grantor.
Choice “c” is incorrect. This type of arrangement has nothing to do with the requirement of assets to be included in the gross estate of the grantor, as it could exist in an irrevocable trust or a revocable trust. The beneficiary is simply passing his/her distribution to another party.
The Simone Trust reported distributable net income of $120,000 for the current year. The trustee is required to distribute $60,000 to Kent and $90,000 to Lind each year. If the trustee distributes these amounts, what amount is includible in Lind’s gross income?
a. $0 b. $60,000 c. $72,000 d. $90,000
$72,000.
Rule: The income distribution deduction is the LESSER of DNI or the actual amount distributed to the beneficiary.
Choice “c” is correct. Distributable net income is the maximum amount of income from the trust that may be taxed (passed through) to the beneficiary and be deductible by the trust as “the income distribution deduction.” [The reason is that the beneficiary will report this amount of taxable income on his/her personal income tax return.] However, while DNI is the maximum amount of the income distribution deduction, the income distribution deduction is the LESSER of DNI or the actual amount distributed to the beneficiary. The amount of the income distribution deduction to the beneficiary is the amount of income that is taxed to the beneficiary.
Typically, we see a situation in which DNI exceeds the amount distributed to the beneficiary; thus, the income distribution deduction would be the amount distributed. In this case, the examiners are truly testing the candidate’s ability to understand the concept of DNI, distributions, and the amount that can be deducted by the trust (and thus taxed to the beneficiary) because actual (and required) distributions exceed DNI. Further, the examiners are requiring candidates to make a calculation based on the prorated amount of actual distributions required to be made. Kent is required to receive $60,000 and Lind is required to receive $90,000 per year (for a total of $150,000). The applicable pro-rata portion of the income distribution deduction ($120,000 in this case) for Lind and the amount that would subsequently be includible in Lind’s gross income is calculated as follows:
$90,000/$150,000 × $120,000 = $72,000
Choice “a” is incorrect. The amount includible in Lind’s gross income is calculated per the above explanation.
Choice “b” is incorrect. The answer ($60,000) is the amount of actual distributions to Kent. While the question asks about Lind, we can take this option one step further for illustrative purposes. Kent received $60,000 in actual distributions, but the maximum income distribution for Kent (and the amount that will show up on Kent’s K-1 from the trust) is $48,000 [$60,000/$150,000 × $120,000].
Choice “d” is incorrect. Lind received $90,000 in actual distributions, but the maximum income distribution for Lind (and the amount that will show up on Lind’s K-1 from the trust) is $72,000 [$90,000/$150,000 × $120,000].
Which of the following payments would require the donor to file a gift tax return?
a. $50,000 to a hospital for a parent’s medical expenses.
b. $40,000 to a university for a cousin’s room and board.
c. $80,000 to a physician for a friend’s surgery.
d. $30,000 to a university for a spouse’s tuition.
$40,000 to a university for a cousin’s room and board.
Rule: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. There are four items that qualify for unlimited exclusion from gift tax and qualify to be excluded from being reported on a gift tax return: (1) payments made directly to an educational institution for a donee’s tuition, (2) payments made directly to a health care provider for medical care (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of consequence.
Choice “b” is correct. While payments made to the university for a cousin’s tuition would be excluded from the requirement to file a gift tax return, the direct payment to the university for room and board is considered a gift and would require the filing of a gift tax return.
Choice “d” is incorrect. Per the above rule, payments made directly to an educational institution for a donee’s tuition qualify for exclusion from gift tax and from the gift tax return filing requirement.
Choice “a” is incorrect. Per the above rule, payments made directly to a health care provider (e.g., a hospital) for medical care qualify for exclusion from gift tax and from the gift tax return filing requirement.
Choice “c” is incorrect. Per the above rule, payments made directly to a health care provider (e.g., a physician) for medical care qualify for exclusion from gift tax and from the gift tax return filing requirement.
During the current year, Mann, an unmarried U.S. citizen, made a $5,000 cash gift to an only child and also paid $25,000 in tuition expenses directly to a grandchild’s university on the grandchild’s behalf. Mann made no other lifetime transfers. Assume that the gift tax annual exclusion is $12,000. For gift tax purposes, what was Mann’s taxable gift?
a. $25,000 b. $18,000 c. $30,000 d. $0
$0.
Rules: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. A donor may exclude the maximum allowable amount of gifts according to the tax law each year made to each donee. In addition, there are four items that qualify for unlimited exclusion from gift tax: (1) payments made directly to an educational institution for a donee’s tuition, (2) payments made directly to a health care provider for medical care, (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of consequence.
Choice “d” is correct. The information in the fact pattern tells us that the annual exclusion for the year in question is $12,000. Mann has gifted less than this amount (the $5,000 in the question), so the entire $5,000 is exempt from gift tax. The information in the fact pattern also tells us that Mann has paid $25,000 in tuition expenses directly to a grandchild’s university on the grandchild’s behalf. Per the above rule, payments made directly to an educational institution for a donee’s tuition are excluded from gift tax. Therefore, zero gift tax applies to the transfers made by Mann.
Choice “c” is incorrect. This answer option assumes that both the $5,000 and the $25,000 transfers qualify as taxable gifts. Neither one of them qualify, per the above rules.
Choice “a” is incorrect. This answer option assumes that the $25,000 transfer qualifies as a taxable gift. Per the above rule, payments made directly to an educational institution for a donee’s tuition are excluded from gift tax.
Choice “b” is incorrect. This answer option incorrectly subtracts the $12,000 annual exclusion from the total transfers of $30,000 transfer [$25,000 + $5,000 - $12,000 = $18,000]. As discussed above, Mann has no taxable transfers in the year.
George and Suzanne have been married for 40 years. Suzanne inherited $1,000,000 from her mother. Assume that the annual gift-tax exclusion is $14,000. What amount of the $1,000,000 can Suzanne give to George without incurring a gift-tax liability?
a. $500,000 b. $14,000 c. $28,000 d. $1,000,000
$1,000,000.
Rules: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. A donor may exclude the maximum allowable amount of gifts according to the tax law each year made to each donee. In addition, there are four items that qualify for unlimited exclusion from gift tax: (1) payments made directly to an educational institution for a donee’s tuition, (2) payments made directly to a health care provider for medical care, (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of consequence.
Choice “d” is correct. Per the above rule, marital transfers are excluded from gift tax. In this case, Suzanne inherited $1,000,000. Suzanne can give the entire $1,000,000 to George without incurring a gift tax liability.
Choice “b” is incorrect. The answer option is the annual exclusion amount given in the question of $14,000. As per the above rule, marital transfers are excluded from gift tax.
Choice “c” is incorrect. This answer option incorrectly assumes a gift-split of the two spouses (using the $14,000 annual exclusion amount). [$14,000 × 2 = $28,000]. Per the above rule, marital transfers are excluded from gift tax.
Choice “a” is incorrect. This answer option incorrectly assumes that 50% of the $1,000,000 (probably trying to trick you into applying the “joint” property rules) is the maximum amount that can be transferred to George without Suzanne incurring gift tax liability. Per the above rule, marital transfers are excluded from gift tax.
When Jim and Nina became engaged in April of the current year, Jim gave Nina a ring that had a fair market value of $50,000. After their wedding in July that same year, Jim gave Nina $75,000 in cash so that Nina could have her own bank account. Both Jim and Nina are U.S. citizens. What was the amount of Jim’s current year marital deduction?
a. $115,000 b. $125,000 c. $75,000 d. $0
$75,000.
Choice “c” is correct. $75,000 was Jim’s marital deduction for the current year.
Rule: Transfers between husband and wife (interspousal transfers) are not subject to taxation for gift tax or income tax purposes.
Choice “d” is incorrect. The $75,000 transfer was after the date of marriage and would be subject to the unlimited marital deduction.
Choices “a” and “b” are incorrect. The $50,000 transfer prior to marriage was not subject to the marital deduction. It would, however, be subject to gift tax, which is affected by the $13,000 annual gift tax exclusion.
Income in respect of a cash basis decedent:
a. Must be included in the decedent’s final income tax return.
b. Covers income earned before the taxpayer’s death but not collected until after death.
c. Receives a stepped-up basis in the decedent’s estate.
d. Cannot receive capital gain treatment.
Covers income earned before the taxpayer’s death but not collected until after death.
Choice “b” is correct. Income in respect of a decedent covers income earned before the taxpayer’s death but not collected until after death.
Choice “c” is incorrect. “Income” in respect of a decedent does not receive a stepped-up basis in the decedent’s estate. (If it did, the income would never be taxable, ho ho.)
Choice “a” is incorrect. Income in respect of a cash basis decedent collected after death is not included on the decedent’s final return, but is included in the estate tax return or the tax return of the heir.
Choice “d” is incorrect. The character of the income in the hands of the decedent will carry over to the income in respect of a decedent to be reported by the estate or heir.
Which one of the following is a valid deduction from a decedent’s gross estate?
a. Federal estate tax.
b. Income tax paid on income earned and received after the decedent’s death.
c. Unified credit.
d. Expenses of administering and settling the estate.
Expenses of administering and settling the estate.
Choice “d” is correct. Expenses of administering and settling the estate are valid deductions from a decedent’s gross estate.
Choice “c” is incorrect. The unified credit reduces the calculated estate tax.
Choices “b” and “a” are incorrect. Estates are generally allowed the same deductions for taxes as are individuals. No deduction would be allowed to the estate for income tax paid on income in respect of a decedent or for federal estate tax.
Fred and Amy Kehl, both U.S. citizens, are married. All of their real and personal property is owned by them as tenants by the entirety or as joint tenants with right of survivorship. Assuming the tax law in effect for 2016, the gross estate of the first spouse to die:
a. Includes one-third of the value of all real estate owned by the Kehls, as the dower right in the case of the wife or courtesy right in the case of the husband.
b. Includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration.
c. Includes only the property that had been acquired with the funds of the deceased spouse.
d. Is governed by the federal statutory provisions relating to jointly held property, rather than by the decedent’s interest in community property vested by state law, if the Kehls reside in a community property state.
Includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration.
Choice “b” is correct. The gross estate of the first spouse to die includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration, as they are considered to have owned the property as joint tenants with right of survivorship.
Choice “c” is incorrect. The taxpayers are considered to have owned the property jointly (tenants by the entirety or joint tenants with right of survivorship).
Choice “d” is incorrect. State law will prevail over federal law.
Choice “a” is incorrect. No such general law exists.
