Estate & Gift Tax Questions Flashcards
Greg establishes an irrevocable trust with Friendly National Bank as Trustee. The trustee has discretion to pay the income to Greg or his children during Greg’s life. At his death, the trust property will be distributed to Greg’s surviving issue. Are the gifts of income and/or principal complete?
The gifts of income and principal are complete because Greg has not retained the power to change the beneficial enjoyment of the trust property (Treas. Regs. 25.2511-2(b)).
Greg establishes an irrevocable trust with Friendly National Bank as Trustee. The trustee has discretion to distribute either income or principal for the health and maintenance of Greg and the income to his children during Greg’s life. At his death, the trust property will be distributed to Greg’s surviving issue. Is the transfer a completed gift?
Not a completed gift. The standard is ascertainable, and Greg can force the trustee to distribute trust property to him for those needs. So, the transfer is not a completed gift (Treas. Regs. 25.2511-2(b)).
Daniel purchases Blackacre, taking title as joint tenants with the right of survivorship with his daughter, Betsy, and paying the entire purchase price himself. What result for the estate tax and the gift tax?
The creation of the joint tenancy is a completed gift, and at Daniel’s death, the full value of Blackacre will be in his gross estate (IRC 2040(a)). (PG. 156)
Ellen creates an irrevocable trust with Friendly National Bank as Trustee to pay the income to her during her life and then to distribute the trust property to her surviving issue at her death. What gift and estate tax consequences? Why?
The gift of the remainder interest is complete because Ellen has given up all dominion and control over the trust property. The full value of the trust, however, will be in her gross estate pursuant to IRC 2036(a)(1). (PG. 156)
Fred creates an irrevocable trust with Friendly National Bank as Trustee to pay the income to Ann for her life, and at her death to distribute the trust property to Bob, and Fred retains the right to terminate the trust and distribute the trust property to Bob. Is the gift complete? What gift and estate tax consequences? Why?
The gift of the income interest is incomplete because Fred has retained the ability to change the recipient of the trust income by terminating the trust; the gift of the remainder is complete because Fred can only alter the time and manner of enjoyment (Reg. 25.2511-2(d)). The full value of the trust will be in Fred’s gross estate under IRC 2038 if he dies without exercising the power because of this right to terminate the trust. (PG. 156-57)
Terry has three adult children. Terry sends each child gifts of books, music, clothing, and artwork during the year for birthdays and other special occasions. On December 1, Terry visits Larry Lawyer, who informs her of the gift tax annual exclusion. Larry does not inquire about any prior gifts, and Terry doesn’t volunteer that info. What are the gift tax consequences if Terry sends each child $17,000 on December 2?
Section 2503(b) applies to all gifts made during the taxable year, no matter how small and no matter what form. Terry has exceeded the 2503(b) amount by giving each child $17,000 on December 2. As a result, she must file a gift tax return.
If a donor transfers property to a minor (of whom the donor is the custodian) and the donor passes away before the minor becomes an adult, what are the estate and gift tax consequences?
If the donor is the custodian and they die while the child is a minor, the property will be in the donor’s gross estate under either 2036 or 2038 because of the custodian’s broad powers.
Debra establishes an irrevocable trust with Friendly National Bank as Trustee to pay income to her for 15 year. At the end of 15 years, the trustee is to distribute the property to Debra’s issue. Debra dies in year 12. What are the inclusion results for her estate? What result if she dies in year 16?
The value of the trust property is in her gross estate because she retained the right to the income for a period that did not in fact end before her death (2036(a)(1)). If Debra lived for 16 years, nothing would be in her gross estate because she did not retain the right to income for any of the periods specified in 2036(a)(1).
David establishes an irrevocable trust with Friendly National Bank as Trustee to pay income to him each quarter. The right to income terminates with the quarterly payment immediately preceding his death. Any income generated between the last payment and the termination of the trust will be distributed, along with the trust property, to David’s surviving issue. What are the estate inclusion results for David?
Both the value of the interest and the trust property is included in David’s gross estate. Section 2036(a)(1) prevents this tax avoidance scheme by including in the gross estate transfers where decedent retained the right to income for a “period not ascertainable without reference to his death” (Treas. Regs. 20.2036-1(b)(1)(i)).
Doris creates an irrevocable trust with Friendly National Bank as Trustee to pay the income to Adam for life. After Adam’s death, the trustee is to pay the income to Doris for her life. After the death of both Adam and Doris, the trustee is to distribute the trust property to Ben. Doris dies before Adam. What are the estate inclusion results for Doris?
The value of the trust property, less the value of Adam’s life estate, is in Doris’s gross estate under 2036(a)(1) and Treas Regs 20.2036-1(b)(1)(ii).
Kevin received the following amount of money this year: (1) $60,000 salary, (2) $2,000 in interest on bank accounts, (3) $3,000 in dividends, (4) $10,000 check from his mom on his birthday. Is the interest included in Kevin’s gross income? Is the interest ordinary or capital in nature?
The interest is included in Kevin’s gross estate, and they are ordinary income.
Kevin received the following amount of money this year: (1) $60,000 salary, (2) $2,000 in interest on bank accounts, (3) $3,000 in dividends, (4) $10,000 check from his mom on his birthday. Are the dividends included in Kevin’s gross income? Are they ordinary or capital in nature?
The dividends are included in Kevin’s gross income. They are capital in nature.
Kevin received the following amount of money this year: (1) $60,000 salary, (2) $2,000 in interest on bank accounts, (3) $3,000 in dividends, (4) $10,000 check from his mom on his birthday. Is the birthday gift included in Kevin’s gross income?
The birthday gift is not included in Kevin’s gross estate. Section 102 excludes gifts.
In 2010, Reagan purchased stock for $100,000. Five years later the stock has a value of $500,000. Reagan transfers the stock to Bank as Trustee to pay income to her daughter, Jessica for her life and at her death to distribute the remaining amount to Jessica’s descendants. The trust is irrevocable. It distributes $20,000 to Jessica during the first year. What is Reagan’s basis in the stock?
Reagan’s basis is $100K because that’s what she paid for it. 1012 cost basis.
In 2010, Reagan purchased stock for $100,000. Five years later the stock has a value of $500,000. Reagan transfers the stock to Bank as Trustee to pay income to her daughter, Jessica for her life and at her death to distribute the remaining amount to Jessica’s descendants. The trust is irrevocable. It distributes $20,000 to Jessica during the first year. Must Reagan recognize a gain or a loss when she transfers the stock to the trust?
Transferring stock to the trust is not a realization event, so there’s no gain or loss.
In 2010, Reagan purchased stock for $100,000. Five years later the stock has a value of $500,000. Reagan transfers the stock to Bank as Trustee to pay income to her daughter, Jessica for her life and at her death to distribute the remaining amount to Jessica’s descendants. The trust is irrevocable. It distributes $20,000 to Jessica during the first year. Must Jessica include the $500,000 in her gross income at the time the trust is created?
No, Jessica does not need to include the $500K in her gross income because it’s a gift. Under 102, gifts not included in income.
In 2010, Reagan purchased stock for $100,000. Five years later the stock has a value of $500,000. Reagan transfers the stock to Bank as Trustee to pay income to her daughter, Jessica for her life and at her death to distribute the remaining amount to Jessica’s descendants. The trust is irrevocable. It distributes $20,000 to Jessica during the first year. What is the trust’s basis in the stock?
The trust’s basis in the stock is 100K. Under 1015, the donee takes the donor’s basis.
In 2010, Reagan purchased stock for $100,000. Five years later the stock has a value of $500,000. Reagan transfers the stock to Bank as Trustee to pay income to her daughter, Jessica for her life and at her death to distribute the remaining amount to Jessica’s descendants. The trust is irrevocable. It distributes $20,000 to Jessica during the first year. Must Jessica include the $20,000 distribution from the trust in her gross income? If so, what is the character of the income?
Yes, Jessica must include the $20,000 distribution from the trust in her gross income, and this would be ordinary income.
Azami purchases stock for $100,000. Five years later, the stock is valued at $300,000. Azami sells the stock to Hans for $300,000. What is Azami’s basis?
Azami’s basis is $100K–her 1012 cost basis.
Azami purchases stock for $100,000. Five years later, the stock is valued at $300,000. Azami sells the stock to Hans for $300,000. Does Azami have a gain or loss on the sale? If so, what is the character of her gain or loss?
Azami has a gain of $200K on the sale. This is a LT CG, because stock is classified as a capital asset, and it was held for more than one year.
Azami purchases stock for $100,000. Five years later, the stock is valued at $300,000. Azami sells the stock to Hans for $300,000. What is Hans’s basis?
Hans has a 1012 cost basis of $300K.
Azami purchases stock for $100,000. Five years later, the stock is valued at $300,000. Azami sells the stock to Hans for $300,000. What are the income tax consequences to Hans if he sells the stock six months later for $350,000?
Hans has a ST CG, so no preferential 20% treatment (taxed as ordinary income).
Azami purchases stock for $100,000. Five years later, the stock is valued at $300,000. Azami gifts the stock to Hans. Azami does not pay any gift tax. Does Azami recognize any gain or loss on the transaction?
No gain or loss, as this is not a taxable event (not a realization event).
Azami purchases stock for $100,000. Five years later, the stock is valued at $300,000. Azami gifts the stock to Hans. Azami does not pay any gift tax. Must Hans include the value of the stock in his gross income?
No (102).
Azami purchases stock for $100,000. Five years later, the stock is valued at $300,000. Azami gifts the stock to Hans. Azami does not pay any gift tax. What is Hans’s basis in the stock?
Hans’s basis in the stock is $100K (1015: donee takes the donor’s basis).
Azami purchases stock for $100,000. Five years later, the stock is valued at $300,000. Assume that six months after Azami gave Hans the stock, Hans sells it for $350,000. What is Hans’s holding period in the stock? What is the character of the stock now?
Azami’s holding time is added to Hans’ (1015: donor’s holding period time is tacked on to the donee’s time because the donee inherited the donor’s basis).
Azami purchases stock for $100,000. Five years later, the stock is valued at $300,000. Azami gives the stock to Hans. Assume that six months after Azami gave Hans the stock, Hans sells it for $350,000. Must Hans recognize a gain or loss on the sale? If so, in what amount, and what is its nature?
Yes, Hans recognizes a $250K LT CG on the sale (1015: donor’s holding period time is tacked on to the donee’s time because the donee inherited the donor’s basis).
Azami purchases stock for $100,000. Five years later, the stock is valued at $300,000. Assume that six months after Azami gave Hans the stock, Hans sells it for $350,000. So, Hans recognizes a $250K LT CG on the sale. Is this result fair? Explain.
Yes, this is fair. The $250K value has never been taxed before. Also, if Hans has any liquidity issues, he can wait to sell it, and then there’s no realization event to worry about.
Jennie purchases stock for $100,000. Five years later, the value of the stock is $75,000. Jennie sells the stock to Michael for $75,000. Does Jennie have a gain or loss on the transaction? If so, in what amount, and what is its nature (capital or ordinary)?
Jennie has a loss, and it is a LT CL of $25K.
Jennie purchases stock for $100,000. Five years later, the value of the stock is $75,000. Jennie sells the stock to Michael for $75,000. Can Jennie recognize her gain or loss?
Yes, Jennie can recognize her loss because she was the one to originally own the property. Note though that you need to know whether the parties are related to know whether there will be a limitation on losses under 267.
Jennie purchases stock for $100,000. Five years later, the value of the stock is $75,000. Jennie sells the stock to Michael for $75,000. Must Michael include the value of the stock in his gross income?
No, he has a basis of $75K, and this is not included in his income.
Jennie purchases stock for $100,000. Five years later, the value of the stock is $75,000. After purchasing the stock from Jennie, Michael sells the stock six months later for $50,000. Does Michael have a gain or loss? If so, in what amount and what is its nature?
Michael has a $25K ST CL.
Jennie purchases stock for $100,000. Five years later, the value of the stock is $75,000. After purchasing the stock from Jennie for $75,000, Michael sells the stock six months later for $50,000. Can Michael recognize a gain or loss on the sale?
Michael can recognize a $25K ST CL on the sale (if he and Jennie are unrelated).
Jennie purchases stock for $100,000. Five years later, the value of the stock is $75,000. Jennie sold the stock to Michael for $75,000. Michael then sold the stock six months later for $125,000. Does Michael have a gain or a loss? If so, in what amount and what is its nature?
Michael has a $50K ST CG.
Jennie purchases stock for $100,000. Five years later, the value of the stock is $75,000. Michael sold the stock 14 months later for $80,000? Does Michael have a gain or a loss? If so, in what amount, and what is its nature?
Michael has a $5K LT CG.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. Does Lucy have a gain or loss on the transfer? If so, in what amount, and what is its nature?
There is no gain or loss.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. What amount, if any, must Ethel include in her gross income?
Nothing (102).
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. What is Ethel’s basis in the stock? Does it matter if she sells the stock for a gain or loss?
Whether Ethel sells the stock for a gain or a loss does matter. Because the stock was worth less than it was when Lucy purchased it, the 1015 exception rules may apply and affect the basis that Ethel will have in the stock when she sells it.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. If Ethel sells Blackacre six months later for $50,000, what is Ethel’s basis in Blackacre? Why?
If Ethel sells Blackacre six months later for $50K, her basis will be the FMV at the time of the gift. Her basis is $75K and not $100K because Congress is concerned about people gifting losses and transferring excess value that way.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. If Ethel sells Blackacre six months later for $50,000, what is Ethel’s holding period in the stock?
In this case, there would not be any tacking because Ethel did not take/use Lucy’s basis (which was $100K). So, her holding period began when she obtained the property. This would be a holding period of six months.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. If Ethel sells Blackacre six months later for $50,000, does Ethel have a gain or a loss? If so, what is the amount, and what is its nature?
Ethel has a Short Term Capital Loss of $25K.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. If Ethel sold Blackacre six months later for $125,000, what is Ethel’s basis in Blackacre?
Ethel’s basis would be $100K (the donor’s basis) under 1015.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. If Ethel sold Blackacre six months later for $125,000, what is Ethel’s holding period in the stock?
In this case, tacking applies (as Ethel would use Lucy’s basis of $100K), so Ethel’s holding period would be five and a half years.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. If Ethel sold Blackacre six months later for $125,000, does Ethel have a gain or a loss? If so, what is the amount, and what is its nature?
Lucy has a long term capital gain of $25K.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. If Ethel sold Blackacre six months later for $125,000, then what is Ethel’s basis in Blackacre?
Ethel’s basis in Blackacre is the same as the donor’s (Lucy’s) basis–$100K.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. If Ethel sold Blackacre six months later for $125,000, then what is Ethel’s holding period in the stock?
Ethel’s holding period in the stock is 5.5 years. Because she takes the same basis as the donor (Lucy), the holding period of the donor tacks onto Ethel’s time.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. If Ethel sold Blackacre six months later for $125,000, does Ethel have a gain or loss? If so, what is the amount, and what is its nature?
Ethel has a long term capital gain of $25K.
Lucy purchases Blackacre for $100,000. Five years later, Blackacre has a fair market value of $75,000. Lucy gifts Blackacre to Ethel. Assume that she did not pay any gift taxes. If Ethel sold Blackacre six months later for $80,000. What is her basis for determining gain or loss? Does she have a gain or loss?
This would be a wash. A sale in the gap between gain basis and loss basis is nothing for income tax basis. SO nothing.
Fred purchases stock for $50,000. Five years later, when the value of the stock is $200,000, Fred sells the stock to Jenna for $100,000. What is Fred’s basis for determining gain or loss?
Fred’s basis is $50K (1012 cost basis).
Fred purchases stock for $50,000. Five years later, when the value of the stock is $200,000, Fred sells the stock to Jenna for $100,000. Does Fred have a gain or loss on the sale of the stock? If so, in what amount and what is its nature?
Fred has a long term capital gain of $50K. Because Fred’s basis is $50k, amount realized is 100k. And more than a year. So part sale part gift. BC FMV was 200k and sold for 100k. So you compute gain based on consideration actually gained. Rest is treated as gift.
Fred purchases stock for $50,000. Five years later, when the value of the stock is $200,000, Fred sells the stock to Jenna for $100,000. Must Jenna include the stock in her gross income?
No.
Fred purchases stock for $50,000. Five years later, when the value of the stock is $200,000, Fred sells the stock to Jenna for $100,000. What is Jenna’s basis in the stock?
Jenna’s basis in the stock is 100K (her 1012 basis).
Fred purchases stock for $50,000. Six months later, Jenna sells the stock for $250,000. What is Jenna’s basis?
$100K.
Fred purchases stock for $50,000. Six months later, Jenna sells the stock for $250,000. What is Jenna’s holding period?
Jenna bought it, so 6 months. Could argue that 100K determined by the gift, but the holding period doesn’t include tacking.
Fred purchases stock for $50,000. Five years later, when the value of the stock is $200,000, Fred sells the stock to Jenna for $100,000. Six months later, Jenna sells the stock for $250,000. Does Jenna have a gain or loss? If so, in what amount and what is its nature?
Jenna has a short term capital gain of 150K.
Sylvia purchases stock for $50,000. Several years later when the value of the stock is $250,000 Sylvia dies. Her Will devises the stock to Carlo. What amount, if any, must Sylvia’s estate include on her last income tax return?
None, because death is not a realization event.
Sylvia purchases stock for $50,000. Several years later when the value of the stock is $250,000 Sylvia dies. Her Will devises the stock to Carlo. Must Carlo include the stock in his gross income?
No. Inheritance is a gift, so 102 applies.
Sylvia purchases stock for $50,000. Several years later when the value of the stock is $250,000 Sylvia dies. Her Will devises the stock to Carlo. What is Carlo’s basis in the stock?
$250K. Under 1014, most assets receive a new basis, equal to FMV at decedent’s death–step up in basis.
Sylvia purchases stock for $50,000. Several years later when the value of the stock is $250,000 Sylvia dies. Her Will devises the stock to Carlo. Six months later Carlo sells the stock for $300,000. Does Carlo have a gain or a loss? If so, in what amount and what is its nature?
He has a 50K LT CG. Receipts of property from a decedent are automatically considered long term. 1223(9).
Blake and Adriana are married. They purchase a commercial building. The purchase price is $750,000. They rent out the building and claim annual depreciation. Blake dies when the adjusted basis (because of depreciation) of the building is $400,000, and the fair market value of the building is $2,000,000. Blake has devised his entire estate to Adriana, including the building. What amount of the value of the building must Adriana include in her gross income?
None, because it was a bequest.
Blake and Adriana are married. They purchase a commercial building. The purchase price is $750,000. They rent out the building and claim annual depreciation. Blake dies when the adjusted basis (because of depreciation) of the building is $400,000, and the fair market value of the building is $2,000,000. Blake has devised his entire estate to Adriana, including the building. What is Adriana’s income tax basis in the building?
It’s community property, so ½ is includable in his probate estate, which is $1M. Special rule in AZ for community property. The entire community property estate ($2m) receives a new basis according to its FMV. 1014(b)(6) provides for this.
Define “fair market value.”
Fair Market Value (“FMV”) means the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. FMV is not to be determined by a forced sale price.
When Jay died, he owned stock in apple. How will it be valued for estate tax purposes?
The FMV of the securities is used, and this would be the mean of the highest and lowest selling prices on the date of death.
When Jay died, he owned municipal bonds. How will they be valued for estate tax purposes?
The FMV of the securities is used, and this would be the mean of the highest and lowest selling prices on the date of death.
When Jay died, he owned a 10% interest in a closely held family business. How will it be valued for estate tax purposes?
The 59-60 factors (pg. 73) are used. After the full value is determined, determine the specific interest amount. Apply discounts (like lack of marketability and lack of control).
When Jay died, he owned a money market fund. How will it be valued for estate tax purposes?
It is valued by the balance of account on DOD + accrued interest.
When Jay died, he owned a checking account. How will it be valued for estate tax purposes?
It is valued by the balance of account on DOD + accrued interest.
When Jay died, he owned a house. How will it be valued for estate tax purposes?
Valued by comparables (use highest and best use, depending on purpose). Look at property similar to ours and adjust as needed. If not appraised, but sold in public market 2 months after death, that should suffice as value.
When Jay died, he owned a car. How will it be valued for estate tax purposes?
Retail value is used. If it’s a collectable car, you’d want some kind of appraisal.
When Jay died, he owned a sailboat. How will it be valued for estate tax purposes?
Retail value if possible. Can use appraisal value.
When Jay died, he owned a life insurance policy that he owned on someone else’s life. How will it be valued for estate tax purposes?
The replacement cost would be used.
When Jay died, he owned a promissory note. How will it be valued for estate tax purposes?
The unpaid principal + the amount of interest accrued to the DOD. May need appraisal. To determine FMV if the interest rate is lower or higher than the prevailing rate, may need to adjust it. Also see if it is unsecured or secured. It’s more valuable if secured.
When Jay died, he owned a painting. How will it be valued for estate tax purposes?
Comparables. Looking at other paintings sold by the artist (can check on websites–look on services that will show sales for the artist.).
When Jay died, he owned household furnishings. How will they be valued for estate tax purposes?
Comparables. Items worth less than $100 may be lumped together, and individual items worth more than $3K and collections with an aggregate value exceeding $10K must be appraised.
When Jay died, he owned mineral interests. How will they be valued for estate tax purposes?
Hire an expert. They’ll value it based on the production of income of the mineral interest. It’ll be a factor of the income being produced.
When Jay died, he owned a golden retriever. How will it be valued for estate tax purposes?
If it’s a breeding or show dog, it may have value, but if it’s a pet, then no value.
When Jay died, he owned cash in his wallet and home safe. How will it be valued for estate tax purposes?
Will be valued by the dollar amount that he has. It all needs to be reported.
When Jay died, he owned gold coins. How will they be valued for estate tax purposes?
There are dealers that would value them for you.
In 1964, Clint bought a brand new Ford Gran Torino for $2,000. For 50 years the car has been his pride and joy. Though Clint has taken good care of the car, it has signs of wear and tear, and Clint believes it to be worth $10,000. In fact, a passerby offered him $10,000 for it a few months ago. Nonetheless, when a local auto dealer offered to pay Clint $18,000 for the car, Clint turned him down because he knew that other dealers in the area were selling similar 1964 Ford Gran Torinos for $25,000. Moreover, Clint checked Kelley Blue Book online and it also valued the car at $25,000. Clint has developed a close fatherly like relationship with his young neighbor, Thao, and much to his family’s dismay, Clint decided to give Thao the car. What is the value of the Gran Torino for gift tax purposes?
The value of the car is the retail value, so $25K.
In 1964, Clint bought a brand new Ford Gran Torino for $2,000. For 50 years the car has been his pride and joy. Though Clint has taken good care of the car, it has signs of wear and tear, and Clint believes it to be worth $10,000. In fact, a passerby offered him $10,000 for it a few months ago. Nonetheless, when a local auto dealer offered to pay Clint $18,000 for the car, Clint turned him down because he knew that other dealers in the area were selling similar 1964 Ford Gran Torinos for $25,000. Moreover, Clint checked Kelley Blue Book online and it also valued the car at $25,000. Clint has developed a close fatherly like relationship with his young neighbor, Thao, and much to his family’s dismay, Clint decided to give Thao the car. What will Thao’s basis be in the Gran Torino?
Thao’s basis in the car will be $2K because the general rule applies here that the donee takes the donor’s basis.
On January 7, 2015, Nolan gave his friend, Kelsey, some stock that he held in his brokerage account. On January 7, 2015, Nolan called his broker and told her to transfer 2,000 shares to Kelsey. The shares are regularly traded on the New York Stock Exchange. At the end of trading on January 7 the highest quoted selling price was $10.25, and the lowest recorded selling price was $8.75. What is the value of the gift to Kelsey that Nolan must report on his annual gift tax return?
The shares are publicly traded, so we use the FMV, which would be the mean of the highest and lowest selling prices on the valuation date (20.2031-2). This would be $9.50 per share, so the gift would be worth $19K.
Nolan called his broker and told her to transfer 2,000 shares to Kelsey. On July 4, 2015 (a holiday on which the New York Stock Exchange does not trade), Nolan gave Kelsey 2,000 shares of stock that he held in his brokerage account. On July 3, 2015 the lowest recorded selling price was $11.50 and the highest recorded selling price was $14.75. On July 5, 2015 the lowest recorded selling price was $7.00 and the highest recorded selling price was $13.00. What is the value of the gift?
Here, the weighted average formula would be used to determine the worth of the stock. July 4th value would be determined by weighing the July 3rd and July 5th FMVs (20.2512-2). This would result in each share being worth $11.56. So, 11.56 * 2,000 = $23,125.
FIND A QUESTION THAT DEALS WITH THE WEIGHTED AVERAGE FORMULA WITH AN UNEQUAL AMOUNT OF DAYS ON EACH SIDE. (VALUATION READING)
Tina and her sister Miranda won the State Lottery and elected to receive the $40 million prize in equal installments over 20 years. Tina died after receiving two payments. Although the winner of the State Lottery also has the option to receive a lump sum (approximately half of the face value of the prize), once a winner has chosen to annual installments, the winner cannot transfer or assign the right to receive those payments. How should Tina’s executor value this asset on Tina’s estate tax return in the 5th circuit?
If 5th circuit, just apply the 7520 rate to the cash flow.
Tina and her sister Miranda won the State Lottery and elected to receive the $40 million prize in equal installments over 20 years. Tina died after receiving two payments. Although the winner of the State Lottery also has the option to receive a lump sum (approximately half of the face value of the prize), once a winner has chosen to annual installments, the winner cannot transfer or assign the right to receive those payments. How should Tina’s executor value the lottery payments if she lived in the Second or Ninth Circuit?
In the 9th circuit or 2nd circuit, the 7520 rate would be applied, and marketability would be taken into account for discount purposes.
Don owns 100% of the stock in Sterling Cooper Advertising Agency. Don makes the following gifts: He gives 40% outright to his wife Betty. He also transfers 30% to an Irrevocable Trust for Betty’s benefit that qualifies for the marital deduction. How are these gifts valued?
First, the entire interest (100%) would be valued using revenue ruling 59-60. Next, these interests would be considered two gifts—a gift of 30% and 40%. Because the two gifts are now considered individually, they have marketability and control discounts applied to them. Had the full 70% been one gift, only a marketability discount would have been applied.
Don owns 100% of the stock in Sterling Cooper Advertising Agency. Don gifts 10% to each of his three children, Sally, Bobby, and Glen. How are these gifts valued?
First, the entire interest (100%) would be valued using revenue ruling 59-60. Next, these interests would be considered three gifts—each one being 10% of the entire interest. Because the three gifts are now considered individually, they have marketability and control discounts applied to them. Family attribution rules are not applied—each gift is independent.
Don owns 100% of the stock in Sterling Cooper Advertising Agency. Don dies and he devises 40% outright to his wife, Betty and 30% to a QTIP trust for her benefit. He also devises 10% to each of his three children. How will Sterling Cooper Advertising Agency be valued for purposes of Don’s estate?
As the estate tax rules are applied here, upon Don’s death (DOD value), the 100% interest of the company would be valued by applying the revenue ruling 59-60 factors. A lack of marketability discount can be applied, as this is a closely held business. However, a lack of control discount cannot be applied, because we’re valuing what Don owns, not the interest of those who receive it.
Don owns 100% of the stock in Sterling Cooper Advertising Agency. Don dies and he devises 40% outright to his wife, Betty and 30% to a QTIP trust for her benefit. He also devises 10% to each of his three children. When Betty dies, how will the stock be valued in her estate? Is Betty’s estate entitled to a minority discount, or will it be subject to a control premium?
The QTIP was never part of her estate. Courts say that the 30% and the 40% are separate gifts, so they have marketability (assuming the company isn’t publicly traded) and control discounts applied to them.
Boris purchased Greenacre for $10,000. Several years later when Greenacre had a fair market value of $100,000, he transferred the property to Emilia. Has Boris made a gift? If so, what is the amount of the gift? Do you need any other information to determine if Boris has made a gift?
Boris has made a gift of $100K. More information is needed to determine whether Boris has made a gift. We would need to know whether Boris received anything in return.
A car dealership sells a car with a list price of $35,000 to Abe for $23,000. Has the car dealership made a gift? If so, what is the value of the gift?
The list price is not necessarily indicative of FMV. This seems to be in the ordinary course of business and so qualify for the Business Transaction Exception. Seems to be bona fide, at arm’s length, and free of donative intent.
A car dealership sells a car with a list price of $35,000 to Abe for $23,000. The car dealership is owned by Abe’s parents.
As family is involved, it doesn’t seem like this is in the ordinary course of business. Still, the FMV of what was transferred and received should be considered.
Mother sells her car to her Son for $15,000. What information do you need to know to determine if this is a gift?
The FMV needs to be determined (this would be retail value). If the retail value was 15K, then this is fine. Otherwise, it would need to be determined whether the transaction (1) was at arms-length, (2) had bona fide (real) intent, (3) was free from donative intent, and (4) was in the ordinary course of business.
Mother sells her car to her Son for $15,000. Mother has owned the car for several years. Son pays Mother in cash, and rather than go through the hassle of changing the title, they decide to leave the title in Mother’s name. Is this a “bona fide” transaction?
This does not seem to be a bona fide transaction. A real purchaser would want the title in their name. They would want a contract, a bill of sale–SOMETHING.
Mother sells her car to her Son for $15,000. Son first offered to buy the car for $12,000, but Mother refused and requested $17,000. As a compromise, they agreed to use the Kelley Blue Book value which was $15,000. Was this an “arm’s length” transaction? Was this transaction free from donative intent?
The negotiation indicates that it was an arms-length transaction. This is how strangers would negotiate the price. Because of the details of the negotiation, this transaction seems to be free from donative intent.
Vince, Sal, Eric, and Johnny are the sole shareholders of Entourage Corp. Each owns 1,000 shares of common stock and 1,000 shares of preferred stock. Vince transfers Blackacre, which has a fair market value of $500,000, to Entourage Corp. No other shareholder transferred property to the corporation, and Vince did not receive anything in return for Blackacre. Has Vince made a gift? If so, what is the amount of the gift?
Vince made a gift of $375K. The transferred property’s value was $500K and he increased the value of his own share as well by $125K.
NOTE: This is a common type of transaction.
Vince, Sal, Eric, and Johnny are the sole shareholders of Entourage Corp. Each owns 1,000 shares of common stock and 1,000 shares of preferred stock. Vince retires from the business and sells all of his shares back to Entourage Corp. pursuant to a preexisting agreement for $750,000. What must Vince show to establish that this transaction is NOT a gift?
To show that this is not a gift, Vince has to satisfy the Chapter 14 rules, otherwise the transaction isn’t honored. It is very difficult to have a buy-sell agreement honored that has a fixed price.
Vince, Sal, Eric, and Johnny are the sole shareholders of Entourage Corp. Each owns 1,000 shares of common stock and 1,000 shares of preferred stock.
Vince retires from the business and sells all of his shares back to Entourage Corp. pursuant to a preexisting agreement for $750,000. The IRS established that the fair market value of the stock was $1,000,000. How is the buy-sell agreement here different from the buy-sell agreement in Estate of Anderson v. Commissioner, 8 T.C. 706 (1947), in the text on page 104?
Here, similar to Anderson, Vince needs to meet the requirements of 2703. However, in Anderson, there was a business purpose (transferring ownership to young replacementsto create incentives which would benefit the business). Here, Vince probably can’t show that there was a business purpose, so this will likely be a gift of $250K.
Vince, Sal, Eric, and Johnny are the sole shareholders of Entourage Corp. Each owns 1,000 shares of common stock and 1,000 shares of preferred stock. Vince retires from the business and sells all of his shares back to Entourage Corp. pursuant to a preexisting agreement for $750,000. The IRS established that the fair market value of the stock was $1,000,000. What must Vince show to establish that this is NOT a gift?
Vince would need to show that the 2703(b) exception language applies. Namely, that the buy-sell agreement is:
(1) A bona fide business arrangement,
(2) Not a device to transfer property to the members of the family at less than full and adequate consideration in money or money’s worth, and
(3) Comparable to arrangements made by parties in an arms-length transaction.
Vince, Sal, Eric, and Johnny are the sole shareholders of Entourage Corp. Each owns 1,000 shares of common stock and 1,000 shares of preferred stock. Vince, Sal, Eric, and Johnny each sell 100 shares of common stock to Ari and 100 shares of common stock to Lloyd pursuant to a preexisting agreement. Each sale of 100 shares is for $40,000. What information is missing that you need to know before deciding whether this transaction is a gift?
I would need to know (1) whether this is a bona fide business arrangement, (2) their relationship (are they family?), and (3) whether the transaction is comparable to other arrangements entered into at arm’s length. 2703(b).
Vince, Sal, Eric, and Johnny are the sole shareholders of Entourage Corp. Each owns 1,000 shares of common stock and 1,000 shares of preferred stock. Vince, Sal, Eric, and Johnny each sell 100 shares of common stock to Ari and 100 shares of common stock to Lloyd pursuant to a preexisting agreement. Each sale of 100 shares is for $40,000. The IRS has established that the fair market value of each block of 100 shares is $100,000. Furthermore, Ari and Lloyd are Eric’s siblings. Have the shareholders made a gift?
Almost certainly, yes. This doesn’t seem to be at arm’s length. Each is likely a gift of $60K.
Roxanne transfers stock with a fair market value of $750,000 to Elijah on the condition that Elijah pay the $300,000 gift tax due. Roxanne’s basis in the stock is $50,000. What is the amount of Roxanne’s gift to Elijah? What is Elijah’s income tax basis in the property? Does Roxanne have a gain/loss from this transaction?
This is a part-sale part-gift. The amount of the gift would be computed based on Rev. Ruling 75-72 (Tentative Tax (the tax that would be due if the gift were not a net gift) / 1 + [rate of tax] = True Tax (amount of tax due)).
750 * .4 = 300K (tentative tax)
300K / 1.4 = $214,285.71 (amount that Elijah is paying).
The value from Roxanne to Elijah is $750K and the value from Elijah to Roxanne is ~$214,286. The difference is the gift. The gift is ~$535,714.
Elijah’s basis in the gift is Roxanne’s amount realized (~$214K).
Roxanne’s basis was $50K and she received the value of ~$214K, so she has a gain of $164K.
Trisha promises to establish an Irrevocable Trust for the benefit of her son, Mauricio, if Mauricio will quit working as a lobbyist for the tobacco industry. Trisha does not restrict Mauricio’s employment in any other way. Mauricio quits his job as a lobbyist and takes a position with the consumer protection division of the Attorney General’s Office. Trisha transfers $2,000,000 to Bank as Trustee to pay the income to Mauricio during his life and, at his death, to distribute the property to Mauricio’s issue. What are the gift tax consequences, if any, to Trisha? What if Trisha decides not to pay the 2M? Does Mauricio have recourse?
Trisha has made a $2M gift to Mauricio. Although Trisha is receiving a form of “consideration” through Mauricio’s decision to not be a lobbyist anymore, this value isn’t consideration in money or money’s worth.
If Tisha decides not to pay the $2M, Mauricio will likely have a valid contract claim under state law, but this doesn’t make the amount consideration in money or money’s worth for gift tax purposes.
Francesca is in her 70s, is in good health, and lives in a large house in a rural area. Francesca asks Kay, the granddaughter of a close friend, to live in the house with her. Francesca does not need nursing care, but wants someone for companionship and to help with housework and repairs. Francesca promises to transfer the house to Kay if she will live with her and help with the housework and repairs for five years. Kay does so and continues to work full-time in a nearby town. Francesca transfers title in the house to Kay. Has Francesca made a gift? Explain. What are the tax consequences to Kay?
The value of the services rendered would be compared to the value of the house to determine whether the house’s value is offset. What’s the value of the services (If she had to pay someone else, her estate would be depleted by the amount of those costs, so, credit is given for the value of those services).
For Kay, she is rendering services and receiving consideration, so the amount that she receives as consideration for rendered services is taxable income.
Francesca is in her 70s, is in good health, and lives in a large house on a 20-acre estate. Francesca asks Kay, the granddaughter of a close friend, to live in the house with her. Kay lives in the house with Francesca and the two become close friends, and Francesca is grateful for Kay’s companionship. Francesca does not need nursing care or housework, but wants someone for companionship. Francesca promises to transfer the house to Kay if she will live with her and help with the housework and repairs for five years. Kay does so and continues to work full-time in a nearby town. Francesca transfers title in the house to Kay. Has Francesca made a gift? Explain.
This is very likely a gift. It’s looking like a gift because the services that are supposed to be performed (housework and maintenance) are non-existent.
Tricia is divorced, has two children, and owns substantial assets. She and Clarence are planning to marry and are considering an antenuptial agreement. Tricia would transfer stock (FMV: $3,000,000; Basis: $500,000) to Clarence. Clarence will lose substantial trust income established by his former wife, Minerva, upon his remarriage. What are the gift tax consequences if Clarence signs the agreement? Assume that he does not release any support or property rights. His only promise in the antenuptial agreement is to marry Tricia.
Clarence’s lost income doesn’t provide an objective benefit to Tricia, so this would be a gift of $3M (See Wemyss).
Tricia is divorced, has two children, and owns substantial assets. She and Clarence are planning to marry and are considering an antenuptial agreement. Tricia would transfer stock (fair market value $3,000,000, basis of $500,000) to Clarence. Clarence releases his rights to share in Tricia’s property upon her death or divorce. He does not release any support rights. What are the gift tax consequences of this arrangement?
This would be a $3M gift from Tricia to Clarence. Clarence’s release of marital rights is not enough to be consideration for Gift Tax purposes (See Merrill).
Tricia is divorced, has two children, and owns substantial assets. She and Clarence are planning to marry and are considering an antenuptial agreement. Tricia would transfer stock (fair market value $3,000,000, basis of $500,000) to Clarence. Clarence releases both his property and his support rights. What are the gift tax consequences of this arrangement? See Rev. Rul. 68-379, 1968-2 C.B. 414, infra, section D.
The release of support rights has value. The gift is offset by the consideration of the release of support rights to determine the gift (the gift is the difference between the consideration and the support rights).
Ramona buys her 14-year-old child the latest Nike sneakers for $300 and the 14-year-old is eternally grateful. What are the gift tax consequences?
Although these are expensive shoes, this is almost certainly a discharge of a support obligations, and so not a gift.
What are the gift tax consequences to Ramona if she buys her 16-year-old child a car?
Probably not a gift, as this is likely a discharge of support obligations
Ramona, a struggling single-mother that works two jobs, uses her life savings to buy her 16-year-old child a new Tesla. Is this a gift?
This is likely a gift (probably more than a discharge of support obligations).
Ramona buys a used 1995 Oldsmobile Cutlass for her 23-year-old child? Is this transaction a gift?
This is a gift (the child is over 18)
Ramona purchased the car for her 23-year-old child only because he agreed to enroll in law school? Is this transaction a gift?
Yes, this is a gift. While this is likely a valid contract under state law, for gift tax purposes, this is not adequate and full consideration in money or money’s worth.
Ramona pays her daughter’s law school tuition. Her daughter has an online shopping addiction, so instead of sending her daughter a check for tuition, Ramona sends it directly to the school. Has Ramona made a gift? If so, is it a taxable gift?
Ramona has not made a gift, due to the educational exclusion under 2503(e).
Ramona pays the law school tuition of someone that she met at McDonald’s. Ramona sends the tuition money directly to the school. Has Ramona made a gift? If so, is it a taxable gift?
Ramona has not made a gift, due to the educational exclusion under 2503(e). 2503(e) applies to everyone–it doesn’t have to be family.
Ramona pays her daughter’s law school tuition. Ramona wants her daughter to become more independent, so instead of paying tuition directly to the school, she sends her daughter a check every month and trusts her to pay the school. Has Ramona made a gift? If so, is it a taxable gift?
Ramona has made a taxable gift of the amount(s) that she sends to her daughter. The amounts need to be paid directly to the school for the 2503(e) educational exclusion to apply.
Ramona wants her daughter to have everything she needs to succeed in law school, so Ramona bought her daughter’s books, school supplies, and a brand new laptop computer. Has Ramona made a taxable gift?
Ramona has made a taxable gifts in the amount of these items. The 2503(e) educational exclusion only applies to money paid directly to the educational institution.
Ramona pays her daughter’s law school tuition, sending the payments directly to the school. Ramona also pays her daughter’s rent, utilities, and food bills. Are these payments taxable gifts?
The payments to the school are excluded under 2503(e), but the other items are not excluded, and are therefore taxable gifts.
Walton and Lana want to pay for the private school tuition of their grandchildren from kindergarten through high school. They are concerned that they may not be able to make the payments each year if they become incapacitated or die. If Walton and Lana establish an Irrevocable Trust, would distributions from the trust to the school for the benefit of the grandchildren qualify for the exclusion from the gift tax under § 2503(e)? What is another option available to them?
This will not qualify for the gift tax exclusion. The gift needs to be directly from the donor to the educational institution for 2503(e) to apply, and the trust disrupts that.
Walton and Lana could have used a 529 account, which is tax-advantaged, as it allows the money to grow income-tax free. You can “superfund” these with 5 years-worth of annual exclusions.
Remember that above that $17K will be a taxable gift, as it doesn’t qualify for the 2503(e) exclusion.
Walton and Lana want to pay for the private school tuition of their grandchildren from kindergarten through high school. If Walton and Lana prepay tuition directly to the school, will that payment be excluded from the gift tax by § 2503?
Yes, prepayments are still excluded under 2503(e).
Lincoln and Flora live together but are not married. They refer to each other as “life partners.” Lincoln is a wealthy businessman who travels and frequently entertains. Flora is not employed outside the home. She travels with Lincoln and makes all their travel arrangements. She manages the house, the entertainment, and personal finances. Lincoln pays all of the expenses. He frequently gives Flora presents—jewelry, artwork, and clothing. He also gives her $5,000 per month to spend as she pleases. Are there any gift tax consequences to Lincoln from this arrangement or these transfers? What are the tax consequences for Flora?
The value of what Lincoln has transferred and what he has received in return needs to be compared to determine whether (and how much) gift tax is owed. Love and affection has no value for gift tax purposes. However much went out and didn’t come back in needs to be reported.
Flora will have income taxes on the value that she gets for the services that she provided.
Vincent and Keri got divorced. Before the divorce was final they signed a written agreement in which Vincent agreed to transfer $1 million of marketable securities to an Irrevocable Trust. Keri will receive the trust income for life and the remainder will pass to their children from the marriage. Assume that Keri did not use her marital rights to bargain for the children’s remainder interest. Is the income interest to Keri a taxable gift? Is the remainder interest to the children a taxable gift?
The income interest is not a taxable gift, as it is excluded under 2516 (settlement of marital property or rights).
The remainder interest is a taxable gift, as it is not covered under 2516 since it wasn’t part of the settlement.
Curtis loans his son Terrence $250,000. Terrence signs a promissory note agreeing to repay the $250,000 within ten days of a written demand by Curtis. The note does not require interest payments. What are the gift tax consequences?
(1) You would compute the interest under 7872(a) (interest rate in effect on the date of the loan), and the amount of the forgone interest is a taxable gift.
(2) Under 7872(a), the forgone interest is considered to go from Terrence back to Curtis, and this is considered to be interest income to Curtis, and Curtis needs to pay income taxes on that interest.
Curtis loans his son Terrence $250,000. Terrence signs a promissory note agreeing to repay the $250,000 within ten days of a written demand by Curtis. Curtis charges Terrence interest at 2% above what he could earn on a certificate of deposit (CD). What are the gift tax consequences?
What result if instead of loaning the money to his son, Curtis lends it to his friend, Bernard?
The CD rate doesn’t matter. If the interest here is at or above the rate provided in 7872, then there will be no gift tax consequences (if it’s below, then there will be forgone interest, and this will be subject to the gift tax, and will be considered going back to the donor as income interest).
If loaning to Bernard, the same analysis would apply. Relationship doesn’t change anything.
Leah and her sister, Phyllis, create a new business venture, Winterfell, Inc. They are equal investors in the company and both work full time for Winterfell. Their mother, Judith, is retired. She does all the bookkeeping and accounting for Winterfell and receives no compensation. Has Judith made a gift? Explain.
Services aren’t a gift for gift tax purposes (they’re not property).
Leah and her sister, Phyllis, create a new business venture, Winterfell, Inc. They are equal investors in the company and both work full time for Winterfell. Their father, Rolland, personally guarantees the business loans that Leah and Phyllis obtained from the Bank. Has Rolland made a gift? Explain.
Rolland has not made a gift unless he actually has to pay. There may be some economic benefit to the daughters here, but this isn’t considered a gift for gift tax purposes. It’s not a transfer of property at that point in time.
[1] Titus allows Alma to use his summer cabin for one month without paying rent. Has Titus made a gift?
[2] Would it change your answer if Titus usually rented his cabin during the summer and it was in high demand, but he let Alma use it for free?
[1] Yes, this is a gift, as it is beneficial use of property.
[2] This might change how much we value the gift at. We would need to determine how much value is being provided to Alma (remember that it might be different than what she would value it at).
Leanna allows her son, George, who is 22 and just graduated from college, to live with her for one year. George contributes nothing to the household expenses. Has Leanna made a taxable gift?
This is technically considered a taxable gift because there’s no legal obligation of support and there’s provision of food and other necessities to a child over the age of 18. No one would actually report this though.
Serena owns a successful cosmetics company. Jocelyn and Ronald (her children) have been employed by the cosmetics company for over ten years. When Serena decides to produce a new line of cosmetics, she has Jocelyn and Ronald form a new company to develop her idea. Serena consults with the company for free, but she does not work for the company on a regular basis. Jocelyn and Ronald resign their positions with Serena’s company to work full time on their own company.
What did Serena transfer? Did Serena make a taxable gift?
Serena has not transferred property. She has transferred ideas. If there were patents or copyright on those ideas then it would be property, but ideas alone are not a transfer of property.
Serena has not made a taxable gift, as personal services are not subject to the gift tax.
Gwen practices law as a solo practitioner. She hires Roger, a new law school graduate, to work for her. Three years later she retires, and Roger takes over the practice. Has Gwen made a taxable gift?
It depends on whether the transfer of the practice includes transfer of the property. She may have transferred goodwill, which is also a gift. Gwen received something in return: a release from her obligations to take care of the case files. Professor Becker thinks that this is a wash (the end result has a negligible advantage or disadvantage).
Reed organized Corporation with funds provided by his daughter, Gwen. Gwen was the driving force behind Corporation, but she had credit problems and was unable to obtain other financing. Reed agreed to execute personal guarantees so Corporation could obtain financing. Five years later, Gwen’s credit problems had been resolved and Corporation was financially secure. Reed transferred all of his shares of Corporation’s stock to Gwen. When Reed agreed to execute the personal guarantee for Gwen, did he make a gift?
No. Personal guarantee obligations are not a gift.
He transferred his name, and while that and his credit history have value, in practice, this situation has never been taxed as a gift.
Note that if he was actually called upon to pay, then that would be a gift.
Reed organized Corporation with funds provided by his daughter, Gwen. Gwen was the driving force behind Corporation, but she had credit problems and was unable to obtain other financing. Reed agreed to execute personal guarantees so Corporation could obtain financing. Five years later, Gwen’s credit problems had been resolved and Corporation was financially secure. Reed transferred all of his shares of Corporation’s stock to Gwen. Did Reed make a gift when he transferred his shares in the corporation to Gwen?
No. The shares were held as an accommodation—almost as a fiduciary. If in the future, Reed was asked to return the shares and Reed refused, Gwen could force the return of the shares.
Transfer 1: he formed the company and gave Gwen 49%.
Transfer 2: Reed returned the 51% when Gwen’s credit was better. The retention of 51% and its subsequent transfer to Gwen is NOT a gift because Gwen furnished the consideration for it (so Reed was holding it as an accomodation–almost as a fiduciary).
Jeremy transfers 10,000 shares of stock in his bar the “Clam” to his son, Bruce on condition that he pay his sister, Brandie, $25,000 each year for ten years. Bruce pays Brandie $25,000 each year. Has Bruce made a gift?
No. This is an “equitable charge” (property is transferred to one party on the condition that that party transfer property to a third party). This is not considered a gift by the secondary part to the third party, but rather is considered a gift from the first person to the third party. So, it is Jeremy who has made a gift to Bruce AND has made a gift to Brandie.
Jeremy transfers 10,000 shares of stock in his bar the “Clam” to his son, Bruce on condition that he pay his sister, Brandie, $25,000 each year for ten years. Has Jeremy made a gift? If so, how many and to who?
Yes. This is an “equitable charge” (property is transferred to one party on the condition that that party transfer property to a third party). This is not considered a gift by the secondary part to the third party, but rather is considered a gift from the first person to the third party. So, it is Jeremy who has made a gift to Bruce AND has made a gift to Brandie.
Miles makes devises in his will to Chad (son), Judith (daughter), Augustus (friend), Herman (friend), and to Miriam (wife). Miles’ Will states that if any of his beneficiaries predeceases him or is treated as predeceasing him under state law, that beneficiary’s share will pass to that beneficiary’s issue. Chad has two children; Judith has two children; Augustus has one child; and Herman has four children. Chad is to receive Blackacre, but wants to pass Blackacre to his two children immediately. Can he achieve this by disclaiming his interest?
Yes, but his disclaimer must comply with 2518(b). If he disclaims, his interest will pass according to the terms of the will, which is to his children, so this would satisfy the disclaimer requirements and get the property to where he wants it.
Miles makes devises in his will to Chad (son), Judith (daughter), Augustus (friend), Herman (friend), and to Miriam (wife). Miles’ Will states that if any of his beneficiaries predeceases him or is treated as predeceasing him under state law, that beneficiary’s share will pass to that beneficiary’s issue. Chad has two children; Judith has two children; Augustus has one child; and Herman has four children. Chad is to receive Blackacre, but wants to pass Blackacre to his two children immediately. Why might Chad want to disclaim the property instead of inheriting it and then giving it to his children later in life?
Chad would have to pay gift taxes on the property if he inherited the property and then gave it to his kids during his life. By disclaiming, he would be moving assets down and avoid gift taxes (though remember GST taxes). Also, if Chad has a creditor or expects to have creditors, he can disclaim, and the creditors can’t reach the property.
Miles makes devises in his will to Chad (son), Judith (daughter), Augustus (friend), Herman (friend), and to Miriam (wife). Miles’ Will states that if any of his beneficiaries predeceases him or is treated as predeceasing him under state law, that beneficiary’s share will pass to that beneficiary’s issue. Chad has two children; Judith has two children; Augustus has one child; and Herman has four children. Chad is to receive Blackacre, but wants to pass Blackacre to his two children immediately. What must Chad do to disclaim Blackacre?
Chad must meet the 2518(b) requirements. (1) be irrevocable and unqualified; (2) Be written; (3) Have that writing be received by the transferor (or here, their legal representative) within 9 months of the creation of the interest (DOD); (4) Not accept the property interest or any of its benefits; (5) Not affect the passage of the property.
Miles makes devises in his will to Chad (son), Judith (daughter), Augustus (friend), Herman (friend), and to Miriam (wife). Miles’ Will does not state what happens if any of his beneficiaries predeceases him or is treated as predeceasing him under state law. Chad has two children; Judith has two children; Augustus has one child; and Herman has four children. Chad is to receive Blackacre, but wants to pass Blackacre to his two children immediately. If Chad disclaims, what will happen? Is there any missing information that you need to know to answer the question?
Ordinarily, this would fall into the residue, unless a substitute gift is created under state law. We would need to know what happens under state law. In AZ, a substitute gift would be created because of the relationship (14-2603).
Miles makes devises in his will to Chad (son), Judith (daughter), Augustus (friend), Herman (friend), and to Miriam (wife). Miles’ Will states that if any of his beneficiaries predeceases him or is treated as predeceasing him under state law, that beneficiary’s share will pass to that beneficiary’s issue. Chad has two children; Judith has two children; Augustus has one child; and Herman has four children. Judith is to receive $1,000,000. Can Judith disclaim an interest in $600,000 of the $1,000,000 Miles left her?
Yes, partial disclaimers are allowed.
Miles makes devises in his will to Chad (son), Judith (daughter), Augustus (friend), Herman (friend), and to Miriam (wife). Miles’ Will states that if any of his beneficiaries predeceases him or is treated as predeceasing him under state law, that beneficiary’s share will pass to that beneficiary’s issue. Chad has two children; Judith has two children; Augustus has one child; and Herman has four children. Herman is set to receive Whiteacre. Herman wants to build a house on the northern portion of Whiteacre, however he wants his children to have the southern portion. Can he make a qualified disclaimer of a specific portion of Whiteacre, for example, of the “south 40 acres”?
Yes, as long as the property is severable (can be separated into parts).
Renaldo died and made the following devises in his Will: (1) Stock portfolio to his friend, Roxie; (2) Real estate to his friend, Joseph; (3) Residuary to Roxie and Joseph in equal shares.
Renaldo’s Will makes no mention of disclaimers or what happens if a devisee predeceases him. What are the gift tax consequences if Roxie disclaims her interest in the stock portfolio?
The interest in the stock portfolio would be considered a failed devise, and so would pass into the residue. She disclaimed the interest in the stock portfolio, but not the interest into the residue, so she has retained an interest. Thus, this disclaimer would be no good!
She would need to disclaim the stock portfolio interest AND her interest in the residue to not have the property in her estate. She could go into the grey area by disclaiming the stock portfolio interest AND any part of the residue attributable to the stock portfolio (accepting other parts of the residue).
Hershel dies on January 1, 2015 leaving Blackacre to Gaston. Gaston disclaims the property exactly nine months later and the property passes to Jordan. One week later, Jordan disclaims the property. Has Jordan made a valid disclaimer?
No, because all the disclaimers relate back to the creation of the interest, so the nine month window has passed for Jordan (even though Gaston left him no time to disclaim). The creation of the initial interest is the creation of the interest for 2518 (in this case, the death).
On September 5, 2005, Manuel (Settlor) established an Irrevocable Trust by transferring property to Bank as Trustee to pay the income to Isaiah for his life, and at his death to distribute the trust property to Taylor and Dianne in equal shares. Isaiah dies on March 10, 2015, and Taylor sends the Trustee written notice on June 26, 2015, disclaiming her interest in the trust property. Assume that Taylor’s interest would pass to her heirs under state law. Has Taylor made a valid disclaimer?
No, creation of the interest was in 2005, when the trust was created. The nine months has passed since the creation of that interest (2518).
On September 5, 2005, Manuel (Settlor) established an Irrevocable Trust by transferring property to Bank as Trustee to pay the income to Isaiah for his life, and at his death to distribute the trust property to Taylor and Dianne in equal shares. Isaiah dies on March 10, 2015, and Taylor sends the Trustee written notice on June 26, 2015, disclaiming her interest in the trust property. Assume that Taylor’s interest would pass to her heirs under state law. Has Taylor made a valid disclaimer if she was ten years old on September 5, 2005?
Yes. Under 2518, someone has nine months after they turn 21 to make a disclaimer.
NOTE: the age is 21 and not 18 because the age of maturity used to be 21 and was subsequently lowered, but the IRC hasn’t changed on that front yet.
Claire and Harriett are sisters and own Greenacre as joint tenants with the right of survivorship. Greenacre has a fair-market value of $2 million. Claire dies. Harriett disclaims the interest that passes from Claire. What are the gift tax consequences?
If Harriett disclaims within 9 months of Claire’s death, this will change the ownership into tenants in common. She would retain her half and the other half would go according to the instrument / state law (she retains her half and she is disclaiming the other half that is coming to her).
Cassio gifts Werner 100 shares of Stark Corporation. Werner disclaims the income interest in the shares, but keeps the remainder interest. Has Werner made a valid disclaimer?
No. This is a property interest that isn’t divisible. Can’t just assign income.
Cassio gifts Werner 100 shares of Stark Corporation. Cassio created an Irrevocable Trust, funding it with the shares of Stark Corporation and giving Werner the income interest and Werner and Chiyo the remainder in equal shares. Can Werner make a valid disclaimer of the income interest?
Yes, but he would also need to disclaim the remainder interest, otherwise, he will be getting half of that income via his remainder interest.
Esperanza establishes a joint bank account with her boyfriend, Leopold, by depositing $100,000 in the Bank on November 17, 2014. Leopold makes no deposits into the account, but he withdraws $25,000 on March 15, 2015. Has Esperanza made a gift to Leopold? If so, when is the gift complete?
Yes, a gift of $25,000. In AZ, the property interests are based in contributory interests (parties own an account in proportion to their net contribution).
The gift is complete when Leopold makes the withdrawal, because before that point, Esperanza could merely take the money out (she still has the power to change its disposition).
Mitch purchases Blackacre, taking title with his daughter, Mariana as joint tenants with right of survivorship. Has Mitch made a gift? If so, when is it complete?
This is a completed gift.
When it is complete depends on state law, but it would generally be the earlier of (1) when he delivers the deed to Mariana or (2) when the deed is recorded.
Grant signs a deed transferring title to Greenacre to his daughter, Eva on September 1, 2009. Grant gives the deed to Eva on September 1, 2009. Eva records the deed on October 15, 2012. Is this a gift? If so, when is it complete?
This is a completed gift.
When it is complete depends on state law, but the gift is usually complete on the earlier of (1) when he delivers the deed to Eva or (2) when the deed is recorded. So here, it’s the 1st of September because that’s when he gave the deed to Eva.
Florian is an expert in honey farming. Florian’s friend, Hiro is interested in the honey industry, but has no experience. Florian wants to help Hiro get established in the industry. In 2013, Florian creates a corporation, retaining 51 shares of common stock and transferring 49 shares to Hiro. Following the incorporation, in 2014, Florian sent Hiro a letter stating that he (Florian) has no ownership interest in the corporation, that he has established the corporation to allow Hiro to take advantage of his expertise in the area, and that he will execute any and all documents necessary to transfer title to Hiro at any time Hiro requests. Florian is the president and CEO of the company. In 2015, Florian transferred title to the 51 shares of stock to Hiro.
Has Florian made a transfer of property to Hiro? During what year did Florian gift Hiro the first 49 shares? During what year did Florian gift Hiro the remaining 51 shares?
Florian made a transfer of property to Hiro. The creation of the corporation is a transfer of property.
Florian gifted the first 49 shares in 2013. Florian likely gifted the remaining 51 shares in 2014. In 2014, he wrote a letter saying that he had no ownership interest and that he’s holding the shares for Hiro. If this is a valid contract, then he’s holding the shares in a fiduciary capacity, so (Professor Becker thinks that) 2014 is when the gift was completed.
On August 1, 2014, Eva promises to send her brother, Eric, $50,000. Eva sends the check on March 1, 2015. Eric deposits the check on March 5, 2015. The check clears Eva’s bank account on March 6, 2015. When did Eva make a gift?
On March 6, 2015. Not a gift until it clears the bank account.
On April 15, 2013, Ernest promises to pay his niece, Frankie, $50,000 if she stops smoking for two years. Frankie agrees to do so, and she keeps her promise. Ernest sends Frankie the check for $50,000 on May 1, 2015. Do Ernest and Frankie have a valid and enforceable contract? Has Ernest made a gift to Frankie? If so, when?
Ernest and Frankie have an enforceable contract. Performance is acceptance (enforceable after the two years of not smoking are complete).
Ernest has made a gift to Frankie. There is consideration for the contract (not smoking), but it is not consideration in money or money’s worth. The gift is complete when Frankie completes performance on April 15, 2015.
On April 15, 2013, Ernest promises to pay his niece, Frankie, $50,000 if she stops smoking for two years. Frankie agrees to do so, and she keeps her promise. Ernest sends Frankie the check for $50,000 on March 5, 2016. When is the gift complete?
The gift is complete on the date the performance is completed—April 15, 2015. It doesn’t matter when he sends the check.
On December 14, 2022, Kathryn sends her son, Dewitt, a check for $16,000 (equal to the 2022 annual gift tax exclusion amount). Dewitt deposits the check in his bank account on December 29, 2022. The check clears Kathryn’s bank on January 3, 2023. When is Kathryn’s gift complete?
Her gift is complete on December 29, 2022 (Rev. Ruling 96-56).
On December 14, 2022, Kathryn sends her son, Dewitt, a check for $16,000 (equal to the 2022 annual gift tax exclusion amount). Dewitt deposits the check in his bank on January 2, 2023. The check clears Kathryn’s bank on January 5, 2023. When is the gift complete? Why does it matter?
Her gift is complete on January 2. This matters because now it’s counts towards the 2023 gift tax exclusion, which is a problem from a tax planning standpoint.
On December 14, 2022, Kathryn sends her son, Dewitt, a check for $16,000 (equal to the 2022 annual gift tax exclusion amount). Dewitt deposits the check in his bank on December 28, 2022. Kathryn dies December 29, 2022. The check clears Kathryn’s bank on January 2, 2023. Does the relation back rule apply?
The relation back rule doesn’t apply because the donor has to be alive for the rule to apply.
On December 14, 2022, Kathryn sends her son, Dewitt, a check for $16,000 (equal to the 2022 annual gift tax exclusion amount). Dewitt’s birthday is December 30, and Kathryn wants to give him $16,000 (she does not believe in giving birthday presents early). She does not like to carry lots of cash and does not want Dewitt to do so either. What advice would you give her to make sure she can take advantage of the annual exclusion in 2022?
Use a cashier’s check. Hand the cashier’s check to the donee (it’s complete when delivered).
Jin Park sends Ravi a letter on October 15, 2012, promising to transfer Blackacre as a wedding present. Jin transfers title to Ravi on February 25, 2015, the day after Ravi got married. When did Jin make a gift?
On February 25, 2015, as that is the date on which the gift was complete. There’s no reliance on consideration of a contract—this is just a promise to make a gift and is not legally enforceable.
Jin Park sends Ravi a letter on October 15, 2012, promising to transfer Blackacre as a wedding present. Jin transfers title to Ravi on March 5, 2015? When did Jin make a gift?
Jim made a completed gift on March 5, 2015. The October event was just a promise to make a gift and is not legally enforceable.
Luca (Settlor) establishes an Irrevocable Trust to pay income to Carlos for ten years, with the remainder to Samantha.
Is Luca’s gift complete? How should Luca’s gift be valued?
Luca’s gift is complete—both the income and remainder interest.
The remainder interest and the income interest are valued by means of the code’s actuarial tables (the 7520 rate).
Luca (Settlor) establishes an Irrevocable Trust to pay income to Carlos for ten years. The trust corpus reverts to Luca after ten years. Is Luca’s gift complete?
The income interest is a gift, but the remainder interest is not. The value coming back to Luca isn’t a gift because you can’t make a gift to yourself.
Elsa (Settlor) establishes a Revocable Trust to pay income to Bernardo for ten years with the remainder to Olaf. Is Elsa’s gift complete? As a matter of policy, should Elsa’s transfer to the Revocable Trust be subject to the gift tax at the time of transfer?
Elsa’s gift is not complete. She hasn’t given up any dominion/control. She can take it back at any time.
As a matter of policy, the revocable trust should not be subject to gift tax because these are used for estate planning purposes as substitutes for wills—we don’t want to subject revocable trusts to gift taxes because they wouldn’t be able to be effectively used as estate planning devices in the place of wills (you’d exhaust your exemption and make people not want to use this great device).
Reiko (Settlor) establishes an Irrevocable Trust with Bank as Trustee to pay the income to Vladimir for life with the remainder to Quinn. Has Reiko made a completed gift if she retains the power to add or delete beneficiaries?
Reiko has not made a completed gift. This is because she hasn’t departed with dominion and control of the property (she can still give the property to herself or others).
Reiko (Settlor) establishes an Irrevocable Trust with Bank as Trustee to pay the income to Vladimir for life with the remainder to Quinn. Has Reiko made a completed gift if she retains the power to alter the remaindermen?
She’s made a completed gift of the income interest, but not of the remainder interest.
Reiko (Settlor) establishes an Irrevocable Trust with Bank as Trustee to pay the income to Vladimir for life with the remainder to Quinn. Has Reiko made a completed gift if she retains the power to add or delete beneficiaries, but must obtain the consent of Henri (her spouse) to do so?
The consent doesn’t change anything (Henri has no interest), so the gift is incomplete.
Reiko (Settlor) establishes an Irrevocable Trust with Bank as Trustee to pay the income to Vladimir for life with the remainder to Henri. Has Reiko made a completed gift if she retains the power to add or delete beneficiaries, but must obtain Henri’s consent to do so? Why?
Henri has a substantial and adverse interest (because changing the beneficiary would mean taking something from him), so the remainder interest is complete. The income interest is still incomplete because this beneficiary can still be changed.
Reiko (Settlor) establishes an Irrevocable Trust with herself as Trustee to pay the income to Vladimir for life with the remainder to Quinn. She has the discretion to distribute income or accumulate it. Has Reiko made a completed gift? Accumulated income is added to the trust principal.
Income interest: if she doesn’t distribute the income, it goes to the remainderman, so this is not a completed gift (because she can alter it—take from the income bene and give to the remainder bene).
Remainder interest: The remainder will still go to the remainderman regardless of her choices about income distributions, so it is a completed gift.
Reiko (Settlor) establishes an Irrevocable Trust with herself as Trustee to pay the income to Vladimir for life. The Trustee has the power to distribute trust principal to Vladimir, but only for his education. Has Reiko made a completed gift?
Income Interest: Reiko can’t change the income beneficiary, so the income interest is considered completed.
Remainder Interest: Reiko can dip into the trust principal, but this is limited by an ascertainable standard—discretion considered to be eliminated), so this gift is complete.
Boyle (Settlor) establishes an Irrevocable Trust that pays income to Rosa for her life and the remainder to Gina. Rosa and Gina are not related to Boyle. Boyle retains the right to change the income beneficiary, but only with Rosa’s consent. Boyle does not have the power to change the remainder interest. Has Boyle made a completed gift?
Yes, for both the income and remainder interests. Rosa has a substantial and adverse interest to the change of the income interest, and Boyle retained no right to change the remainder.
Boyle (Settlor) establishes an Irrevocable Trust that pays income to Rosa for her life and the remainder to Gina. Rosa and Gina are not related to Boyle. Boyle retains the right to change the income beneficiary, but only with Rosa’s consent. Boyle also has the power to change the remainder interest, but only with Rosa’s consent. Has Boyle made a completed gift?
Income interest: The income interest is complete because Gina has a substantial and adverse interest.
Remainder Interest: Rosa has no interest in the remainder, so because Boyle can change this interest without Rosa having a substantial and adverse interest, the gift is incomplete.
Boyle (Settlor) establishes an Irrevocable Trust that pays income to Rosa for her life and the remainder to Gina. Rosa and Gina are not related to Boyle. Boyle retains the power to revoke the trust, but only with Rosa’s consent. Has Boyle made a completed gift?
Yes, for both income and remainder interests, because Rosa has a substantially adverse interest to this happening.
Salvatore (Settlor) establishes an Irrevocable Trust with income payable to Amara or Theo and the remainder to Yuma or Yuma’s estate. Salvatore retains the power to allocate the income between Amara and Theo. Has Salvatore made a completed gift?
Income Interest: This is an incomplete gift because he can choose between the two (can effectively modify the beneficiaries).
Remainder Interest: This is a complete gift because he can’t change it (it’s only Yuma or Yuma’s estate that will receive the remainder depending on if Yuma’s alive).
Salvatore (Settlor) establishes an Irrevocable Trust with income payable to Amara and the remainder to Yuma or Yuma’s estate. Salvatore, as Trustee retains the power to distribute trust principal to Theo in an emergency. Has Salvatore made a completed gift?
Income Interest: It’s a completed gift because Salvatore retains no power to modify the remainder interest.
Remainder Interest: It’s a completed gift because emergency is an objective standard like HEMS. Reg 25.2511-1(g)(2) refers to an emergency as being ascertainable.
Salvatore (Settlor) establishes an Irrevocable Trust with income payable to Amara and the remainder to Yuma or Yuma’s estate. Salvatore, as Trustee retains the power to distribute trust principal to Theo for his “comfort and happiness.” Has Salvatore made a completed gift? Has Salvatore made a completed gift?
Remainder Interest: The remainder interest is an incomplete gift because comfort and happiness is not an ascertainable standard.
Income Interest: The income interest is still complete.
Candice owns Greenacre with a fair market value of $100,000 and a basis of $20,000. Candice gives Greenacre to her niece, Ramona. When is the gift complete?
When she records the deed or delivers the deed (whichever is earlier).
Candice owns Greenacre with a fair market value of $100,000 and a basis of $20,000. Candice sells Greenacre to Ramona for $50,000. Has Candice made a gift? If so, what is the amount of the gift? What is Candice’s gain on the sale of Greenacre to Ramona?
Gift Amount: Candice has made a gift of $50K (the difference between the FMV and the consideration received).
Candice’s Gain: Gain of $30K. Probably LT CG.
NOTE: no tacking because her basis is based on the consideration that she paid (she’s not receiving Candice’s basis).
Candice owns Greenacre with a fair market value of $100,000 and a basis of $20,000. Candice sells Greenacre to Ramona for $100,000. Ramona signs a promissory note for $100,000 plus interest at the applicable federal rate. Ramona also gives Candice a mortgage on the property. The mortgage is recorded. Assume that when Candice and Ramona arranged the transaction, Candice intended to collect payments from Ramona. However, Ramona experienced some financial difficulties, so every time a payment is due Candice gauges Ramona’s ability to pay. Thus far, Ramona has not been able to make a payment, so Candice has forgiven each payment of principal and interest ($12,000) as it comes due. Has Candice made a gift? If so, when?
Candice has not made a gift so long as there is no agreement/understanding that there aren’t going to be subsequent forgiving of the amounts owed. The intent makes a big difference. The initial loan is very likely not a gift. Each forgiven payment is a gift when it is forgiven, but is not taxable due to the annual exclusion.
Candice owns Greenacre with a fair market value of $100,000 and a basis of $20,000. Candice sells Greenacre to Ramona for $100,000. Ramona signs a promissory note for $100,000 plus interest at the applicable federal rate. Ramona also gives Candice a mortgage on the property. The mortgage is recorded. Candice and Ramona discussed Ramona’s inability to pay at the time of the transaction. Candice never expected Ramona to make payments and Ramona knew that Candice was not expecting payment. Thus far, Ramona has not been able to make a payment, so Candice has forgiven each payment of principal and interest ($12,000) as it comes due. Has Candice made a gift? If so, when?
Yes, Candice made a gift at the outset of the transaction ($100,000).
Richie loans his nephew, Patrick, $500,000 to start a business. Patrick signs a promissory note. Richie does not charge Patrick interest. He secures the promissory note with a lien against the business property. Patrick pays each installment of principal as it comes due. Has Richie made a gift? If so, in what amount and when?
Transaction 1: when we don’t have adequate interest, a computation is done of the interest that should have been charged, and that’s considered to be a gift (IRC 7872). Patrick has transferred the amount of the non-charged interest to Richie, and that’s a gift for gift tax purposes.
Transaction 2: Patrick is treated as having returned the amount back to Ritchie, so Ritchie has taxable income of that amount.
Richie loans his nephew, Patrick, $500,000 to start a business. Patrick signs a promissory note. Richie charges Patrick 5% interest. Has Richie made a gift? If so, what is the amount of the gift?
We would need to compare this interest rate with the applicable federal rate. If that rate is higher, than the difference between the two is the value of the gift (in the form of non-charged interest, which then in turn is treated as income to Richie for income tax purposes under 7872).
Richie loans his nephew, Patrick, $500,000 to start a business. Patrick secures the promissory note with a lien against the business property. Richie charges Patrick interest at the applicable federal rate. He forgives each payment as it comes due. Has Richie made a gift? If so, what is the amount of the gift?
Richie makes a gift in the amount of each payment as they come due (this seems to be an arm’s length transaction and structured in a bona fide manner).
Damian and Antoinette are unrelated. The I.R.C. § 2503(b) annual exclusion amount is $17,000. Damian gives Antoinette $10,000 on May 1. Damian has not given Antoinette anything else and Antoinette did not give Damian anything in return. Is this a taxable gift?
This is a gift (with a present interest, so a present interest gift), but it qualifies for the annual exclusion, so it is not a taxable gift.
Damian and Antoinette are unrelated. The I.R.C. § 2503(b) annual exclusion amount is $17,000. Damian gives Antoinette $10,000 on May 1 and then another $10,000 on September 1. Antoinette did not give Damian anything in return. Is this a taxable gift?
Yes, this is a $3,000 taxable gift.
Damian and Antoinette are married. The I.R.C. § 2503(b) annual exclusion amount is $17,000. Damian gives Antoinette $10,000 on May 1 and $10,000 on September 1. Antoinette does not give Damian anything in return. Will Damian’s gifts be subject to the gift tax?
No. Outright gifts between spouses qualify for the unlimited marital deduction under 2523.
Lucky and Wendy are married and both have two adult children from a prior marriage. Lucky gives each of his children $34,000 as a birthday present. Assume that the $34,000 is a gift and not a discharge of a legal obligation of support. What are the gift tax consequences if Wendy agrees to split the gifts? Also, what must they do to elect to split these gifts?
If Wendy agrees, the gift isn’t taxable because both would be making a 17K gift (2513).
Lucky and Wendy are married and both have two adult children from a prior marriage. Lucky gives each of his children $34,000 as a birthday present. Assume that the $34,000 is a gift and not a discharge of a legal obligation of support. Lucky and Wendy split $34,000 gifts in May. For Christmas, Wendy gives each of Lucky’s children $17,000. What are the gift tax consequences of Wendy’s gifts?
They’ve already used up their exclusion amounts. They would need to split the new gifts too, so both Lucky and Wendy will be $17K over the limit.
Lucky and Wendy are married and both have two adult children from a prior marriage. Lucky gives Wendy $34,000. Wendy deposits the money in her bank account and writes a $17,000 check to each of Lucky’s children the following day. What are the gift tax consequences of this arrangement?
The 34K qualifies for the marital deduction, and in this case we’re not splitting gifts, so the 17K both qualify for the annual exclusion. No tax liability here. This is an alternative to using 2513.
Shawn and Jules are engaged to be married. On September 1, Shawn creates a college fund for his niece and puts $34,000 in the fund. Shawn and Jules get married on September 4. Shawn and Jules agree to split gifts. Has Shawn made a taxable gift to his niece?
Yes, because in order to split gifts, the spouses must be married at the time of the gift.
Deloris sends her son, Bob, a painting valued at $1,000 for his birthday in March. When Bob got married in June, she sent a set of china valued at $2,000. For Christmas, Deloris gives Bob $17,000. What are the gift tax consequences of these transactions?
$3,000 is taxable.
Cleo gives her son, Ted, stock valued at $17,000. On the same day, Cleo gives her ten nieces and nephews $17,000 of stock in the same company. One week later, all ten nieces and nephews transfer the stock to Ted. Has Cleo made a taxable gift?
This looks like it was orchestrated to go to the nieces and nephews and then to Ted (looks too much like an agreement or understanding), so this doesn’t work.
“Old and cold.” If it were done earlier in the year and then everyone later transferred the amounts to Ted for other reasons (they really like Ted, he does a lot with the company, etc.), then it might be okay. This would be a taxable gift.
Cleo gives her son, Ted, stock valued at $17,000. On the same day, Cleo gives her ten nieces and nephews $17,000 of stock in the same company. One week later, all ten nieces and nephews transfer the stock to Ted. All of the nieces and nephews are independently wealthy and did not need the stock. They all decided to give Ted their stock for his birthday because Ted was much more interested in owning the stock of that particular company. Cleo did not ask nor intend for her nieces and nephews to give Ted the stock. What are the gift tax consequences?
There would be no gift tax consequences, as all of them would have the exclusion applied to them.
Jeff and Cameron are brothers. Jeff has Three (3) adult children, Arnold, Mira, and Artemis. Cameron also has Three (3) adult children, Wendy, T.J., and Clint. On December 1, Jeff sends $17,000 to all Six (6) children. On December 5, Cameron sends $17,000 to all Six (6) children. What are the gift tax consequences?
This is suspicious—it seems like a scheme (gifting to each other’s children). May run into the reciprocal trust doctrine. Needs to be old and cold—needs to be spaced out more. Professor Becker ultimately thinks that this should be fine, but it is definitely a suspicious transaction.
Lane owns Blackacre valued at $272,000 with a basis of $25,000. She deeds Blackacre to her two sons, her two daughters, her two sons-in-law, her two daughters-in-law, and her eight grandchildren as tenants in common. Has Lane made a taxable gift?
This is not a taxable gift, but this is a bad transaction. Should put into an LLC so that not all 16 need to agree on a sale of property.
Lane owns Blackacre valued at $272,000 with a basis of $25,000. Lane sells Blackacre to her two sons, Rocky and Thomas, as tenants in common. Rocky and Thomas each make a down payment of $5,000 and sign a promissory note agreeing to pay the principal plus interest on an annual basis. Each payment is $17,000, and Lane forgives each payment as it comes due. What are the gift tax consequences?
If you don’t assess the situation on an annual basis and forgive based on that (i.e. if you have an agreement to forgive the payments as they come in), then that outstanding amount at the outset is a gift. This looks problematic.
Mateo transfers shares of stock in Honeybee Farms with a fair market value of $17,000 to his son Omar. There are no restrictions on Omar’s ownership of the stock. Will this gift qualify for the annual exclusion?
Yes. There’s no restriction on the immediate use, possession, or enjoyment of the property. Present interest.
Mateo transfers shares of stock in Honeybee Farms with a fair market value of $17,000 to his son Omar. If Honeybee Farms is a closely held family business that has never paid dividends, will the gift qualify for the annual exclusion?
Production of income is NOT a requirement for it to be a present interest gift. This qualifies for annual exclusion.
Mateo transfers a limited partnership interest in Honeybee Farms with a fair market value of $17,000 to his son Omar. Will the gift qualify for the annual exclusion?
It depends on the facts and circumstances (what the interest looks like). A limited partnership interest means that there’s a lot less that you can do with it. For example, in Hackle, there were too many restrictions on it, such that it wasn’t a present interest. We don’t have facts here on restrictions of this interest, so this likely qualifies as a present interest.
Raymond transfers a term life insurance policy on his life to his niece, Cleo.
Raymond has a 15-year life expectancy. Is this a gift of a present interest?
Yes. She has the right to the property and do what she wants with it (like sell the policy).
Raymond transfers a term life insurance policy to Bank as Trustee of an Irrevocable Trust for the benefit of Cleo. Is this a gift of a present interest?
A transfer to a trust is generally a future interest. She doesn’t have the unrestricted right to the immediate use, possession, or enjoyment. If she had a Crummey withdrawal right (considered a GPOA), this would be a present interest gift.
Raymond transfers a term life insurance policy on his life to his niece, Cleo. Raymond pays the premiums on the life insurance policy each year. Cleo is in possession of all incidents of ownership in the policy. Has Raymond made a gift of a present interest?
Yes, because Cleo is able to control the insurance (it’s her property). Raymond is making gifts in the form of those premium payments. They are gifts of a present interest, and up to $17K, they aren’t taxable.
