chapter 3

Question 1

short term gain for capital assets- tax rate

Answer 1

As a general rule, short-term capital gains are taxed at the same rate as for ordinary income. There are a variety of specific rates for long-term capital gains and the recapture of depreciation previously deducted on real estate. Since the capital gain taxation rates have been controversial, they have had a tendency to change frequently.

Question 2

gift tax- revocable trust

Answer 2

if you retain the power to revoke a trust, it is not taxable as a gift because IT IS NOT A GIFT.

Question 3

gift tax- irrevocable trust

Answer 3

if you relinquish power to revoke and it is a present interest, then you have to pay gift tax on the amount
usually the remainder interest is taxable on a revocable trust but the interest income is eligible for gift tax deduction

Question 4

remainder interest

Answer 4

taxable if irrevocable

non taxable b/c not a gift if revocable

Question 5

gift of stock

Answer 5

FMV- annual exclusion= taxable amount

Question 6

contributions to political orgs

Answer 6

are not taxable gifts

Question 7

gift tax on remainder interest- irrevocable trust

Answer 7

Since the remainder interest in the trust is a gift of a future interest the annual exclusion cannot be used to reduce the gift.

Question 8

Gross Estate

Answer 8

includes property owned by the decedent at death and certain property transfers

Question 9

property owned by the decedent

Answer 9

property owned at the date of death is included in the probate estate

Question 10

Property transferred by the decedent at death

Answer 10

is included in gross estate:
Transfer of property occurs probate through operation of law.
other forms of property that pass by operation of law inclue revocable gifts/transfers triggered by death and life insurance

Question 11

valuation of property

Answer 11

included in gross estate at FMV
valuation date is the date of death or the alt. valuation date
- six months after date of death or on the date the property is disposed of if earlier
- only available to elect if it causes the gross estate tax payable to decline

Question 12

Life insurance- estate

Answer 12

proceeds are included in the gross estate

• decedent had incidents of ownership like the right to designate the beneficiary
• the decedent’s estate or executor is the beneficiary of the policy

Question 13

joint property owned- included in gross estate

Answer 13

value of decedent’s interest as a tenant in common is included in gross estate

• for jointly owned property by husband and wife (RIGHT OF SURVIVORSHIP OR TENANCY IN ENTIRRETY) 50% of the value of property will be included in the first spouses’ estate who died.
• for unmarried tax payers with right of surviorships, the amount includible is the portion of property equal to the proportion of consideration that the decedent provided to acquire the property.

Question 14

Retained interests

Answer 14

property transferred where the decedent retianed an interest or power

Question 15

Marital deduction- estate

Answer 15

the spouse must receive property outright and bee able to control it’s ultimate destination.
1. property that passes to surviving spouse as a result of joint tenancy
2. only the net value of property subject to mortgage qualifies
3. property rights that are terminable do not qualify.
DEDUCTION IS UNLIMITED FOR SPOUSES if the property qualifies.

Question 16

Qualified terminable interest property will qualify for the deduction

Answer 16

an election is made to use the marital deduction for a transfer to a spouse of less than a complete interest in trust.
surviving spouse must receive all the trust income annually for life
the property must be included in the surviving spouse’s estate at VALUE when the survivor dies

Question 17

non marital deduction applies to spouses

Answer 17

who are non-citizen spouses

Question 18

Deductions from gross estate

Answer 18

debts of estate- mortgages and accrued taxes- DEDUCTIBLE
final expenses are deductible
casualty and theft losses- deductible without any floor limitation
charitable contributions- are deductible without any limitation.

Question 19

Estate Computation

Answer 19

1. taxable estate is increased by adjusted taxable gifts
2. apply current tax rates to total transfers (Max = 40%)
3. reduce the tentative transfer tax by gift taxes paid or payable
4. subtract the unified credit or other credits
5. credits against estate=
   —$5,430,000- unified credit
   foreign death tax credit is subtracted and taxes on prior transfers

Question 20

Filing Requirements

Answer 20

estate tax is levied on the estate but installment payment of estate taxes is available for closely held business interests
- Form 706 is due after 9 months of death
estate tax return must be filed if the gross estate plus adjusted taxable gifts equal or exceed the exemption of $5 mill

Question 21

Generation Skipping Tax

Answer 21

prevents avoidance of transfer taxes by skipping a generation-
in addition to the gift and estate taxes.