Lesson 4: Gift Tax Flashcards
Bill loans $99,000 to his daughter Maura. Why would interest not be imputed on this loan?
A) The loan is less than the amount of the annual exclusion.
B) Loans of $100,000 or less are exempt from both income tax and gift tax consequences.
C) Maura has unearned income of less than $1,000.
D) Maura’s earned income is less than $1,000.
The correct answer is (C).
Option (A) is incorrect because gift loans do not qualify for the annual exclusion. Option (B) is incorrect because loans of less than $10,000 are exempt from both income tax and gift tax consequences. Option (D) is incorrect because whether interest is imputed on this loan is based on Maura’s level of unearned income, not earned income.
All of the following statements concerning the 5/5 Lapse Rule are true EXCEPT:
A) The amount lapsed by the beneficiaries is a taxable gift to the other beneficiaries.
B) The amount lapsed by the beneficiaries in excess of the 5% or $5,000 threshold is a taxable gift to the other beneficiaries.
C) A hanging power allows the lapsed amount in excess of the 5% or $5,000 threshold to carry into future years, so that a taxable gift is not made to the other beneficiaries.
D) The 5 and 5 Rule only applies to trusts with multiple beneficiaries.
The correct answer is (A).
This question addresses the 5/5 lapse rule. The 5/5 lapse rule states that a taxable gift has been made only where a power to withdraw in excess of $5,000 or 5 percent of the trust assets is lapsed by the powerholder.
Mike created a joint bank account with his son James. At what point has a gift been made to James?
A) When the account is created
B) When James is notified that the account has been created
C) When James withdraws money from the account for his own benefit
D) When Mike dies
The correct answer is (C).
A completed gift does not occur until the donee withdraws money from the account for his own benefit.
Which of the following transfers would result in a taxable gift?
A) George gifts $14,000 to his daughter Georgette.
B) Eli gifts $50,000 to his wife Renee, who is a U.S. citizen.
C) Alex gives Lisa, his favorite employee, a new car at Lisa’s retirement worth $20,000.
D) Kevin transfers $20,000 to Cindy, his ex-wife, to help support their children. They were divorced five years ago.
The correct answer is (D).
Option (A) would not result in gift tax because the gift does not exceed the annual exclusion. Option (B) is incorrect because a person can gift an unlimited amount to his or her spouse without incurring gift tax. Option (C) is incorrect because transfers in a business setting are presumed to be compensation. If Kevin had transferred $20,000 to Cindy pursuant to a divorce decree, there would be no taxable gift, but transfers to an ex-spouse five years after the divorce was final are not considered “transfers pursuant to a divorce decree.”
Which of the following transfers would not be considered a qualified transfer?
A) Sarah pays $55,000 to XYZ University for her niece’s tuition.
B) Sarah pays $50,000 to her friend Satchel to pay for his medical expenses.
C) Sarah pays $10,000 to ABC Hospital for her granddaughter’s medical expenses.
D) Sarah pays $15,000 to Prestigious Preparatory School for her nephew’s tuition.
The correct answer is (B).
Options (A), (C), and (D) describe qualified transfers. Option (B) is not a qualified transfer because the payment is not made directly to the healthcare provider.
Wendy is a very generous single woman. She had given $30 million in taxable gifts over the years prior to 2021. In 2021, Wendy gave her daughter Rachel $500,000 and promptly filed a gift tax return. Wendy did not make any other gifts this year. How much gift tax must Wendy pay the IRS because of this transaction?
A) $0
B) $15,000
C) $194,000
D) $200,000
The correct answer is (C).
The problem states that she has given $30 million in taxable gifts. Therefore, she has no unused amount of lifetime exclusion. The calculation is as follows:
$500,000 − $15,000 (2021 annual exclusion) = $485,000 × 0.40 = $194,000
Which of the following gifts permanently removes the property from the donor’s gross estate?
A) An outright gift
B) A gift where the donor has a right to continue to use and enjoy the property
C) A gift where the donor owner continues to earn income from the property
D) A gift where the donor owner has the right to get the property back at some point in the future
The correct answer is (A).
An outright gift removes the property from the donor’s gross estate.
Which of the following is NOT a valid reason for a father to make a lifetime gift of his home to his daughter?
A) He would be relieved of property management and maintenance.
B) The gift would reduce the total assets in his gross estate.
C) Any income from the property will be taxed to his daughter.
D) He can continue to enjoy the property even after it is titled to his daughter.
The correct answer is (D).
The father cannot retain the right to enjoy the property.
Which of the following statements about gift tax annual exclusion is incorrect?
A) The gift tax annual exclusion is indexed for inflation.
B) Each individual is allowed to give up to the indexed amount to as many donees as he or she wishes each year.
C) The gift must be of a present interest.
D) Gifts to Section 2503(c) trusts for minors are ineligible for the gift tax annual exclusion because they are future interest gifts.
The correct answer is (D).
To secure the gift tax annual exclusion, the gift must be of a present interest. Gifts to Section 2503(c) trusts for minors are an important exception to this rule.
The practice of gift splitting is available only between
A) spouses.
B) a parent and a natural child.
C) a parent and an adopted child.
D) siblings.
The correct answer is (A).
This practice only applies to spouses.
