Estate Planning | Lesson 2: Gift & Estate Taxes Flashcards
Crystal loans Holly $650,000 so that Holly can buy a home. Holly signs a note, with a term of 5 years, promising to repay the loan. The house is the collateral, but because Crystal and Holly have been friends since childhood, Crystal does not charge Holly interest. Of the following statements, which is true?
1. The imputed interest is considered a taxable gift from Crystal to Holly.
2. The imputed interest is taxable income on Crystal’s income tax return.
3. The imputed interest is an interest expense deduction for Crystal.
4. Holly can deduct the imputed interest on her income tax return.
a) 2 only.
b) 2 and 4.
c) 1, 2, and 4.
d) 1,2, 3, and 4.
Answer: C
The loan is more significant than $100,000 and does not meet any exceptions to imputing interest. Crystal will have imputed interest income based on the applicable federal rate, and the imputed interest will also be considered a taxable gift to Holly. Because Holly’s residence secures the loan, Holly will also have an itemized deduction equal to the imputed interest. Crystal does not have an interest expense.
Despite his efforts to transfer all of his property out of his estate during his life, Gordon died on January 16th
still owning the following property:
(See image)
What is the value of Gordon’s gross estate?
a) $124,500.
b) $128,500.
c) $422,500.
d) $424,500.
Answer: C
The personal residence, the rental property, the cruise refund, and the cash are all included at the fair market value at Gordon’s date of death. The rental income is not included because the payment was made after Gordon’s death, and it was not owed to Gordon before his death. $320,000 + $80,000 + $4,500 + $18,000 = $422,500. The rental income would be included in the estate’s income tax return (Form 1041).
Timothy made the following transfers to his only daughter during the year:
1. A bond portfolio with an adjusted basis of $130,000 and a fair market value of $140,000.
2. 2,000 shares of RCM Corporation stock with an adjusted basis of $126,000 and a fair market value of
$343,000.
3. An auto with an adjusted basis of $15,000 and a fair market value of $9,000.
4. An interest-free loan of $2,000 for a personal computer on January 1st. The applicable federal rate for the tax year was 8%.
What is the value of Timothy’s gross gifts for this year? a) $271,000. b) $492,000. c) $494,000. d) $498,000.
Answer: B
The total gross gifts are the fair market value of all gifted property before any deductions for gift splitting, the marital deduction, or the annual exclusion. Because the loan in Statement 4 is less than $10,000, it meets one of the exceptions of the imputed interest rules. The fact that the basis in Statement 3 is higher than the FMV is ignored for purposes of calculating the total gross gifts. The double-basis rule will apply to the
donee in a subsequent sale. $140,000 + $343,000 + $9,000 = $492,000.
Celeste and Raymond have been married for 29 years. Last year, Raymond sold his highly successful automotive repair shop, and his net worth now exceeds $10 million. Celeste and Raymond have twin daughters, Kelly and Shelly, who will be 35 next month. Celeste and Raymond, neither of whom has given any gifts in the past, would like to give their daughters the maximum amount of cash possible without paying any gift tax. How much can Celeste and Raymond each give to Kelly and Shelly this year?
a) $16,000. b) $32,000.
c) $12,092,000. d) $24,120,000.
Answer: C
$16,000 (for 2022) per child (annual exclusion) = $32,000
$12,060,000 (for 2022) per parent (applicable gift tax exemption) = $12,060,000
Total that can be gifted per parent without paying gift tax = $12,092,000
Deborah provides the following list to her CPA, preparing her gift tax return. Which of the following will Deborah’s CPA include as a taxable gift on Deborah’s gift tax return?
a) Payment to her grandmother of $20,000 to help her with her medical bills.
b) Payment to her Doctor’s Hospital for $35,000 to cover a friend’s medical bills.
c) Payment to Northshore Medical School for $17,000 to cover her nephew’s tuition.
d) Payment to her child of $6,000 that represents legal support.
Answer: A
Deborah’s CPA will include the payment made to Deborah’s grandmother as a taxable gift. Payment must be paid directly to the health care provider or educational institution to be a qualified transfer. Answers B and C represent qualified transfers and are not taxable gifts. Answer D is a payment of legal support and is not considered a gift for gift tax purposes.
Celeste made the following transfers during the year:
1. Her friend, Paul, needed $22,000 to begin law school. Celeste gave Paul the cash.
2. An alimony payment of $14,000 to her ex-husband from their 2017 divorce.
3. She paid $12,000 to Diamond Shores Hospital for her friend Jackie’s medical bills.
What is the amount of Celeste’s taxable gifts?
a) $6,000. b) $12,000. c) $22,000. d) $36,000.
Answer: A.
1. The payment to Paul is for his tuition, but to be a qualified transfer, the payment must be made directly to the educational institution. The payment is, therefore, a gift of $22,000 that the available $16,000 annual exclusion will reduce. = $6,000
2. Alimony payments are deductible for income tax purposes by the payor and included in the recipient’s taxable income for divorces finalized before 12/31/2018. Alimony payments are not taxable gifts. = $0
3. A payment directly to a medical institution for the medical treatment of anyone is a qualified transfer not subject to gift taxes. $0
Taxable Gifts = $6,000
While completing Joelle’s tax returns, Joelle’s CPA asked her if she made any gifts during the year. Joelle faxed her the following information. Of the next, which would not require the filing of a gift tax return?
a) Joelle created a revocable trust under the terms of which her son is the income beneficiary for his life, and her grandson is the remainder beneficiary. Joelle created the trust with a $6,000,000 contribution, which made an income distribution in the current year.
b) Joelle opened a joint checking account for herself and her sister with $75,000. The day after Joelle opened the account, her sister withdrew $35,000 to purchase a car.
c) Joelle created an irrevocable trust giving a life estate to her husband and a remainder interest to her daughter. Joelle made the trust with a $1,000,000 contribution.
d) Joelle gave her husband one-half of an inheritance she received from her uncle. The inheritance was
$3,000,000.
Answer: D
The transfer in Answer D would qualify for the unlimited marital deduction, so it is not a taxable gift, and Joelle would not have to file a gift tax return. All of the other transfers would create taxable transfers and would require a gift tax return to be filed. The transfer in Answer a to a revocable trust would still be subject to gift tax reporting because the trust has current beneficiaries, as Joelle’s son received an income distribution in the current year.
During this year, Janice made the following transfers. What are her total taxable gifts for this year?
1. Janice gave $10,000 to her boyfriend so he could buy a new car.
2. Janice’s neighbor Judy needed $18,000 to pay for her knee surgery. Janice paid Doctors-R-Us Hospital directly.
3. Her nephew began attending Georgetown Law School this year. Janice paid the initial yearly tuition of $25,000 directly to Georgetown Law School this year.
a) $0. b) $10,000. c) $16,000. d) $50,000.
Answer: A
Statement 1 is the only gift subject to gift tax, but to arrive at the total taxable gifts for the year, the value of the gross gift is reduced by the available annual exclusion. In this case, Janice’s gift to her boyfriend would be eliminated after applying the $16,000 for the 2022 annual exclusion. Statements 2 and 3 are transfers not subject to gift tax because they are qualified transfers paid directly to a medical or educational institution.
During the year, Sean made the following gifts to his daughter:
1. An interest-free loan of $6,000 to purchase an SUV. The applicable federal rate was 6%. The loan has been outstanding for two years.
2. A corporate bond with an adjusted basis of $14,000 and a fair market value of $16,000.
3. A stock portfolio with an adjusted basis of $10,000 and a fair market value of $25,000.
Sean’s wife agrees to elect gift-splitting for the year, but she does not make any gifts of her own. What is the amount of total taxable gifts made by Sean during the year?
a) $4,500. b) $30,000. c) $41,000. d) $41,360.
Answer: A
The interest-free loan is not subject to gift tax because the loan is below $10,000 and meets the exclusion from imputed interest rules. To calculate Sean’s taxable gifts, first, add the fair market value of the transfers subject to gift tax and reduce by the annual exclusions and the gift splitting. The calculation is as follows:
Sum of the fair market values of the taxable transfers: $25,000 + $16,000 = $41,000.
Allocation for gift splitting: $41,000 ÷ 2 = $20,500.
Reduction for annual exclusion: $20,500 - $16,000 = $4,500.
Donna and Daniel have lived in Louisiana, a community property state, their entire marriage. Their combined net worth is $4,000,000, and all their assets are community property. After meeting with their financial advisor, Donna and Daniel begin a plan of lifetime gifting to reduce their gross estates. During this year, they made the following cash gifts:
Son = $80,000
Daughter = $160,000
Republican National Committee = $75,000
Granddaughter = $15,000
What is the amount of the taxable gifts to be reported by Donna?
a) $39,500. b) $88,000. c) $196,000. d) $255,000.
Answer: B
Because the assets are community property, the gifts are deemed to be made 50% by each spouse. Gift splitting is not an issue. The cash payment to the Republican National Committee is not a gift for gift tax purposes. Donna’s taxable gifts are calculated as follows:
Landon has several pieces of property valued at $30,000 that he wants to give away. He wants to make gifts
that make sense for himself and the recipient. He wants to give gifts to his father, Preston (who is in a low marginal income tax bracket), his sister, Tabitha, his daughter, Kelcie, and the United Way. Match the properties to the best recipient considering he would like to keep one asset.
a) Stock with an FMV of $30,000 and an adjusted basis of $12,000. The stock has a dividend yield of 3% and is expected to appreciate by 9%.
b) Stock with an FMV of $30,000 and an adjusted basis of $25,000. The stock has a dividend yield of 7% and is expected to appreciate by 14%.
c) Stock with an FMV of $30,000 and an adjusted basis of $45,000. The stock has a dividend yield of 0% and is expected to appreciate by 4%.
d) Real Estate with an FMV of $30,000 and an adjusted basis of $27,000. The real estate is expected to appreciate 8%.
e) Bond with an FMV of $30,000 and an adjusted basis of $30,000. The bond has a dividend yield of 7% and is expected to appreciate by 0%.
__ Preston (father)
__ Tabitha (sister)
__ Kelcie (daughter)
__ The United Way
__ Keep for himself
E - Preston (father)
D - Tabitha (sister)
B - Kelcie (daughter)
A - The United Way
C - Keep for himself
Property E should be gifted to Landon’s father, Preston, because the property is income producing and Landon’s father is likely to be in a lower marginal income tax bracket than Landon. By default, Property D should be gifted to Landon’s sister, Tabitha. Property B should be gifted to Landon’s daughter, Kelcie, because the property with the highest potential for appreciation should be donated to the youngest donee.
Property a should be donated to The United Way because it has experienced the greatest appreciation.Landon should keep Property C because only he can sell Property C and recognize a capital loss.
Charles worked with an estate planner for several years before his death. Accordingly, Charles made many transfers during his life in an attempt to reduce his potential estate tax burden, and Charles’ executor, Tom, is thoroughly confused. Tom comes to you to clarify which assets to include in Charles’ gross estate. Which transactions will not be included in Charles’ gross estate?
a) Charles gave $40,000 to his three grandchildren two years ago. No gift tax was due on the gifts.
b) Charles purchased a life insurance policy on his life with a face value of $300,000. Charles transferred the policy to his son two years ago.
c) Charles and his wife owned their residence valued at $250,000 as tenants by the entirety.
d) After inheriting a mountain vacation home from his mother, Charles gifted it to his daughter to remove it from his gross estate. Charles continued to use the property as a weekend getaway and continued all maintenance on the property.
Answer: A
The $40,000 gifts to his grandchildren are excluded from his gross estate because only gifts of life insurance within three years and any gift tax paid on a gift within three years are included in a transferor’s gross estate.
The life insurance policy included in Answer B is included in Charles’s gross estate because transfers of life insurance within three years of death are included in the decedent’s gross estate. Any property owned at the decedent’s date of death, as in Answer C, is included in the decedent’s gross estate. (Do not confuse gross estate inclusion with probate inclusion.) Even though Charles gave the mountain home in Answer D to his daughter, and the value of the property generally would not be included in Charles’ gross estate, the fact that Charles continued to utilize the property each weekend and maintained the property would cause inclusion in his gross estate.
In August of the current year, Jim died of lung cancer. Jim’s son, Doug, has decided to prepare his father’s estate tax return but has come to you for clarification on whether the following list of items is included in Jim’s gross estate. After reviewing the list, which items) will you tell Doug to exclude from Jim’s gross estate?
a) A life insurance policy on the life of Jim’s wife owned by Jim.
b) A check from Doctor’s Hospital for the refund of medical expenses that Jim initially paid but was subsequently paid for by Jim’s health insurance company. The reimbursements were due to Jim before his death.
A check from ABC Corporation for dividends of $15,000 was declared on September 23rd (the month after Jim’s death.
d) A payment of $500,000 from Mutual Life Insurance of America representing the proceeds of a life insurance policy owned by Jim.
Answer: C
Jim died in August. The dividends from ABC Corporation for $15,000 are not included in Jim’s gross estate because they were not declared until September. The life insurance policy in Answer a is included in Jim’s gross estate as all property owned by the decedent at his date of death is included in the decedent’s gross estate. The check from the hospital detailed in Answer B is included in Jim’s gross estate because the payments were due to him before his death. The life insurance policy in Answer D is included in Jim’s gross estate because life insurance owned or transferred within three years of a decedent’s date of death is included in the decedent’s gross estate.
Before her death, Alice loaned Jerry $400,000 in return for a note. The terms of the note directed Jerry to make monthly payments, including interest, at the applicable federal rate. If Alice dies before the note is repaid, which of the following affects the valuation of Alice’s gross estate?
1. Jerry’s inability to make payments timely.
2. The market rate of interest.
3. The remaining term of the note.
4. Alice forgives the note as a specific bequest in her will.
a) I only.
b) 1 and 2.
c) 1, 2, and 3.
d) 2,3, and 4.
Answer: C
If Alice dies before Jerry repays the note, the note is included in Alice’s gross estate at the fair market value of the note plus any accrued interest due at Alice’s date of death. This fair market value is affected by the interest rate, maturity date, and Jerry’s ability to make the note payments, but not by Alice’s forgiveness of the note in her will. The forgiveness of the note is deemed a specific legacy, and the note’s fair market value is still included in Alice’s gross estate.
Gus dies, owning several shares of an infrequently traded stock. If Gus dies on Wednesday, November 7th, the stock has the following trading information:
Monday, 11/5 $31
Thursday, 11/8 $36
Monday, 11/12 $28
What is the per-share value of the stock on the federal estate tax return?
a) $31. b) $33. c) $34. d) $36.
Answer: C
To value an infrequently traded stock or to find the value on a date that falls in between trading dates, we must follow a particular formula. First, multiply the first trading price after the valuation date by the number of days between the valuation date and the last trade before the valuation date. Add to this product the product of the previous trading price before the valuation date by the number of days between the valuation date and the first trade after the valuation date. Now, divide the total of the two by the total number of days between the trade before the valuation date and the trade after the valuation date.
