Estate Planning: Gift and Estate Taxes Flashcards
indirect gift
+ different forms
transfer on behalf of a donor for the benefit of the donee
- below market loan (payment of another’s debt or through an interest free loan) – lender need to impute the interest income PHANTOM INTEREST INCOME
- the lender is considered to have made a GIFT (may be eligible for annual exclusion)
reversionary interest
interests that have been transferred by a transferor and subsequently revert back to the transferor
has both gift and estate tax consequences
net gift
when a gift is made on the condition that the donee pay any gift tax due
donor will have taxable income to the extent that any gift tax paid by the donee exceeds the donor’s adjusted basis in the gifted property
split gift
when one donor makes the gift and the donor’s spouse consents and agrees to use their annual exclusion for that donee
gift tax return
Form 709
lifetime gift tax applicable amt aka applicable credit equivalency amt
$4,625,800
shelters up to $4,625,800 of cumulative taxable transfers, in excess of the annual exclusion amt from transfer taxes
examples of present interest
is an unrestricted right to the immediate use of property
gifts of cash, property etc, where title passes immediately are common examples of gifts of the present interest
crummey provision aka power to lapse
right of a trust beneficiary to withdraw some or all of any contribution to a trust for a limited period of time (~30 days after contribution)
essentially a general power of appointment or the ability of the power holder to appoint assets to himself
may limit the withdrawal right to an amt equal to the annual exclusion or less
5/5 Lapse Rule
if a trust has more than 1 beneficiary
a taxable gift is deemed to have been made when a power to withdraw an amt in excess of the GREATER of $5,000 or 5% of the trust assets has lapsed or not have been used by a beneficiary
What is the usual reason for a CFP® professional to recommend a QTIP, rather than other marital deduction transfers?
A continuing income can be provided to the spouse for life.
The decedent’s estate can achieve reduced federal estate taxes.
The decedent can obtain management by a trustee for estate assets.
The estate owner can direct the remainder after the spouse’s death.
Solution: The correct answer is D.
With a QTIP, the estate owner can direct the disposition of the estate assets after the spouse’s death. The management by a trustee can be obtained with other kinds of marital trusts, so the QTIP is not necessary to obtain this management. Other marital transfers can provide the same reduction in federal estate taxes. Other marital trusts can provide a life income to the spouse.
Next year, Tom Traxler is planning to sell the commercial property on which he operated his business to his daughter Sally, for $300,000. Tom’s adjusted basis in the property will be $100,000. The sale will be structured as an installment sale, with Sally to make a down payment of $60,000 and make installment payments annually for 12 years. Sally will pay 10% interest on any unpaid balance. Tom wants to know what will happen if he died after Sally had made the second installment payment. Tom’s will leaves his estate to his wife. If the installment note were given to Sally under a codicil to Tom Traxler’s will, which of the following statements would be correct?
Sally must recognize gain on the remaining installments.
Sally must report the remaining installments as income in respect of a decedent.
The remaining installments receive a step-up in basis.
Tom’s estate must recognize gain on the remaining installments.
Solution: The correct answer is D.
If the installment note were bequeathed to Sally, Tom’s estate must recognize the remaining gain immediately. The estate is treated as making a disposition of the note. There is no step-up in basis. Sally will not have to report the installments as income in respect of a decedent because she is now the obligor and owner of the note.
Next year, Tom Traxler is planning to sell the commercial property on which he operated his business to his daughter Sally, for $300,000. Tom’s adjusted basis in the property will be $100,000. The sale will be structured as an installment sale, with Sally to make a down payment of $60,000 and make installment payments annually for 12 years. Sally will pay 10% interest on any unpaid balance. Tom wants to know what will happen if he died after Sally had made the second installment payment. Tom’s will leaves his estate to his wife. Which of the following statements concerning the estate tax treatment of the installment payments due after Tom’s death is correct?
The unpaid installments will not be included in Tom’s gross estate.
The unpaid installments will be included in Tom’s gross estate at their face value of $200,000.
The present value of the unpaid installments will be included in Tom’s gross estate.
The unpaid installments plus the interest payable on the balances will be included in Tom’s gross estate.
Solution: The correct answer is C.
The unpaid installments should be included in Tom’s gross estate, discounted to present value, using the Sec. 7520 interest rate for the month of Tom’s death.
