M1 Trusts and Gifts

Question 1

MCQ-12550
Which of the following is a requirement for a simple trust?

Answer 1

The trust must not have a charitable beneficiary

Question 2

MCQ-05524
Which of the following is an attribute exclusively of a complex trust?

Answer 2

It distributes corpus.

Complex trusts may accumulate current income, distribute principal, and provide for charitable contributions. Simple trusts may only make distributions from current income
(not corpus, or principal), must distribute all income currently, and may not make charitable contributions. Either trust may have more than one beneficiary, have a grantor that is not an
individual, or have beneficiaries that are not individuals.

Question 3

MCQ-05544
Brown transfers property to a trust. A local bank was named trustee. Brown retained no powers over the trust. The trust instrument provides that current income and $6,000 of principal must be distributed annually to the beneficiary. What type of trust was created?

Answer 3

Complex

A complex trust may distribute principal, so this is the type of trust that was created.

Question 4

MCQ-14908
In determining the amount of taxable gifts, the Internal Revenue Code allows each of the following, except the:

Answer 4

Standard deduction

The standard deduction is an allowable deduction for determining an individual taxpayer’s taxable income for federal income tax purposes, not for determining the amount of taxable gifts for gift tax purposes.

Question 5

MCQ-15694
Which of the following payments includes a taxable gift?

Answer 5

$20,000 cash to a friend.

If a taxpayer gives a taxable gift in excess of the $16,000 per donee annual exclusion amount, the amount in excess of $16,000 is a taxable gift and subject to the gift tax.

Question 6

MCQ-14703
Which of the following payments is a taxable gift subject to the gift tax?

Answer 6

$60,000 to a university for a cousin’s room and board.

Although payments made to the university for a cousin’s tuition would not be subject to the gift tax, the direct payment to the university for room and board is considered a gift and
would be subject to the gift tax.

Question 7

MCQ-02020
Which of the following requires filing a gift tax return, if the transfer exceeds the available annual gift tax exclusion?

Answer 7

Payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor

Payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor

Question 8

MCQ-15691
Steve and Kay Briar, U.S. citizens, were married for the entire calendar year. During the year, Steve gave a $34,000 cash gift to his sister. The Briars made no other gifts in the year. They each signed a timely election to treat the gift as made one-half by each spouse. Disregarding the unified credit and estate tax consequences, what amount of the current year gift is taxable to the Briars?

Answer 8

$2,000

A married couple can elect to treat taxable gifts as made half by each spouse for gift tax purposes. Every donor receives a $16,000 per person, per year, exclusion from the gift tax. Mr. and Mrs. Briar split Mr. Briar’s gift to his sister, for an effective gift of $17,000 each. Then each of them receives a $16,000 exclusion to reduce the taxable gift to $1,000. Because there are two deemed gifts, one from each spouse, the total taxable gift, ignoring the lifetime combined gift and estate tax exclusion, is $2,000.

Question 9

MCQ-15692
During the current year, Mann, an unmarried U.S. citizen, made a $5,000 cash gift to an only child and also paid $25,000 in tuition expenses directly to a grandchild’s university on the grandchild’s behalf. Mann made no other lifetime transfers. Assume that the gift tax annual exclusion is $16,000.
For gift tax purposes, what was Mann’s taxable gift?

Answer 9

$0

Rules: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. A donor may exclude gifts of up to $16,000 per year/per donee. In addition, there are four items that qualify for unlimited exclusion from gift tax: (1) payments
made directly to an educational institution for a donee’s tuition, (2) payments made directly to a health care provider for medical care, (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is irrelevant.

Question 10

MCQ-15693
George and Suzanne have been married for 40 years. Suzanne inherited $1,000,000 from her mother. Assume that the annual gift tax exclusion is $16,000. What amount of the $1,000,000 can Suzanne give to George without incurring a gift tax liability?

Answer 10

$1,000,000

Marital transfers are excluded from gift tax. In this case, Suzanne inherited $1,000,000. Suzanne can give the entire $1,000,000 to George without incurring a gift tax liability.

Question 11

MCQ-15446
In the current year, Sayers, who is single, gave an outright gift of $50,000 to a friend, Johnson, who needed the money to pay medical expenses. In filing the current year gift tax return, Sayers was entitled to a maximum exclusion of:

Answer 11

$16,000

Medical expenses paid directly to the health care provider qualify for an unlimited deduction, even if paid for unrelated persons. In this problem, the payment was made to the friend, not to the health care provider directly. The $16,000 annual exclusion per donee applies to all gifts other than future interests.

Question 12

MCQ-01975
When Jim and Nina became engaged in April of the current year, Jim gave Nina a ring that had a fair market value of $50,000. After their wedding in July that same year, Jim gave Nina $75,000 in cash so that Nina could have her own bank account. Both Jim and Nina are U.S. citizens. What was the
amount of Jim’s current year marital deduction?

Answer 12

$75,000

$75,000 was Jim’s marital deduction for the current year. Transfers between husband and wife (interspousal transfers) are not subject to taxation for gift tax or income tax purposes.

Question 13

MCQ-15813
Baker made the following gifts: a $100,000 house to Baker’s child, a $50,000 automobile to a friend, $40,000 cash to Baker’s spouse, and $60,000 capital stock to a qualified charity. Baker and Baker’s spouse do not elect gift splitting. What is the total taxable gift before considering the gift tax annual exclusion?

Answer 13

$150,000

The total taxable gift before considering the gift tax amount is $150,000, which includes the gifts of the $100,000 house to Baker’s child and the $50,000 automobile to Baker’s friend. There is an unlimited exclusion for charitable gifts and gifts between spouses, so the $40,000 cash gift to Baker’s spouse and the $60,000 gift of capital stock to a qualified charity are not taxable gifts.

Question 14

MCQ-05881
This year, Beck gave $5,000 cash to a nephew, canceled $3,000 of the same nephew’s indebtedness, donated $1,500 to a political party, and gave $1,200 of municipal bonds to a parent. What is the amount of Beck’s gifts before considering the gift tax annual exclusion?

Answer 14

$9,200

In general, taxable gifts include every transfer of property for less than full consideration. This would include the gift of $5,000 of cash to the nephew, the cancellation of the
nephew’s $3,000 indebtedness, and the $1,200 of municipal bonds given to the parent ($5,000 + $3,000 + $1,200 = $9,200). However, certain transfers are excluded from being considered taxable gifts, including donations to political parties.

Question 15

MCQ-15696
An individual taxpayer makes the following gifts during the year: a residence to his married son; a life estate in a trust to his older daughter; and a remainder interest in the trust for his younger daughter. In addition, the taxpayer makes a cash contribution to a qualified charity. Which of the gifts qualifies
for neither a deduction nor an exclusion in determining the taxpayer’s gift tax for the year?

Answer 15

The remainder interest in trust.

The remainder interest in a trust given to the taxpayer’s younger daughter is a future interest because it will be distributed to her at some future date. A future interest gift does not qualify for either a deduction or the annual exclusion from gift tax.

Question 16

MCQ-14706
During the taxable year, Blake transferred a corporate bond with a face amount and fair market value of $20,000 to a trust for the benefit of her 16-year old child. Annual interest on this bond is $2,000, which is to be accumulated in the trust and distributed to the child on reaching the age of 21. The
bond is then to be distributed to the donor or her successor-in-interest in liquidation of the trust. Present value of the total interest to be received by the child is $8,710. The amount of the gift that is excludable from taxable gifts is:

Answer 16

$0

The annual exclusion applies only to transfers of a present interest. An amount will not be treated as a present interest if the governing instrument provides that the specific sum of
income is to be accumulated in the trust, and not paid at least annually. An exception exists for gifts to trusts with beneficiaries under age 21, which allows an annual exclusion if the beneficiary receives accumulated interest and assets at age 21. According to the facts, the beneficiary will not receive the
bond at age 21; thus, the transfer is not eligible for the annual exclusion. No amount of the gift isexcluded from taxable gifts.

Question 17

MCQ-12536
In Year 4, a taxpayer gifted an undivided one-half interest in the taxpayer’s farm to the taxpayer’s child. Title to the farm was held by parent and child as tenants in common. In Year 10, the taxpayer died and the other one-half interest in the farm was left to the same child. The taxpayer paid $40,000
for the farm in Year 1, and the fair market value of the entire farm was $100,000 at the date of the taxpayer’s death. An alternate valuation date was not elected. What is the child’s basis in the farm after the taxpayer’s death?

Answer 17

$70,000

The child’s basis in the farm after the taxpayer’s death is $70,000 ($20,000 original one-half interest + $50,000 other one-half interest). A gift of an undivided one-half interest in property when the property is held as tenants in common is
a complete gift, despite the possibility that the property may revert to the donor at some future time. The basis in property acquired as a gift is generally the same as the cost basis in the hands of the donor. The child’s basis in the undivided one-half interest in the farm received as a gift in Year 4 is one-half the donor’s cost basis: $40,000 Year 1 purchase price × 1/2 = $20,000. The basis in property acquired by bequest or inheritance is the fair market value at the date of the decedent’s death if an alternate valuation date is not elected. The fair market value of the farm at the date of the taxpayer’s death was $100,000, so the child’s basis in the other one-half interest in the farm inherited in Year 10 is $50,000 ($100,000 × 1/2).

Question 18

MCQ-08966
Which of the following transactions is subject to the gift tax before the gift tax annual exclusion is taken into account?

Answer 18

Reimbursement to a grandchild for medical school tuition

Amounts paid on behalf of a donee for tuition are only excluded from the gift tax if the payment is made directly to the educational institution.

Question 19

MCQ-04931
Joan is going to gift her best friend’s son $20,000 during the current tax year, and when she passes away, she will gift her home to him. Which of the following is correct with regard to these gifts during the current year, assuming that the cash is given and Joan does not die during the current year?

Answer 19

Cash: Completed gift
Home: Incomplete gift

If Joan gives her best friend’s son $20,000 during the year, it would be a completed gift, eligible for the annual gift tax exclusion. Any amount in excess of the exclusion amount would be a taxable gift. Given that Joan did not pass away during the current year, the gift of her home is not a completed gift. Until all such actions take place, the son has no right to the home.

Question 20

MCQ-15697
A $50,000 cash gift will reduce an individual’s lifetime credit against the gift tax if the gift is made to a:

Answer 20

14-year-old child living in the U.S.

A cash gift to a child is a taxable gift. The donor may exclude $16,000 per year/per donee. The remaining $34,000 will reduce the donor’s lifetime credit against gift taxes.