STUDY UNIT TWELVE ESTATES, TRUSTS, AND WEALTH TRANSFER TAXES Flashcards
Proceeds of a life insurance policy payable to the estate’s executor, as the estate’s representative, are
A Never includible in the decedent’s gross estate.
B Includible in the decedent’s gross estate only if the premiums had been paid by the insured.
C Includible in the decedent’s gross estate only if the policy was taken out within 3 years of the insured’s death under the contemplation-of-death rule.
D Always includible in the decedent’s gross estate.
D Always includible in the decedent’s gross estate
This answer is correct.
The gross estate includes amounts receivable by all beneficiaries from insurance under policies on the life of the decedent with respect to which the proceeds are receivable by or for the benefit of the estate. If they are payable to the executor, they are receivable for the benefit of the estate and are always included in the decedent’s gross estate.
Which of the following is income in respect of a decedent?
A Both cash received from a grandmother’s estate AND royalties received on the deceased father’s published book; the right to receive these royalties was distributed from the father’s estate.
B Royalties received on the deceased father’s published book; the right to receive these royalties was distributed from the father’s estate.
C Certificate of deposit received as a gift.
D Cash received from a grandmother’s estate.
B Royalties received on the deceased father’s published book; the right to receive these royalties was distributed from the father’s estate.
This answer is correct.
Income in respect of a decedent is the amount that is earned by the taxpayer but not received prior to his or her death nor accrued prior to his or her death if on the accrual method, so it is not included in the decedent’s final return. Income in respect of a decedent is included in the recipient’s (e.g., the estate’s) income in the year received or accrued.
Which of the following credits may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen?
Applicable Credit for Gift Credit?
Taxes Paid on Gifts Amount Made after 1976?
Applicable Credit for Gift Credit? yes
Taxes Paid on Gifts Amount Made after 1976? no
This answer is correct.
Only the applicable credit amount is creditable against the gross estate tax. The unified transfer rate schedule has changed several times since 1976. This has resulted in inter vivos and testamentary transfers being taxed at different rates. In order to subject both types of transfers to the same rate, post-1976 gifts must be added back to the taxable estate to arrive at the decedent’s estate tax base. The Code provides for a credit against the tentative estate tax (the tax calculated using the estate tax base) for gift taxes actually paid on post-1976 taxable gifts (at the time of the gift). The result of this credit against the tentative estate tax is the gross estate tax. Therefore, the credit for the gift taxes paid on post-1976 gifts has already been taken and so cannot be offset against the gross estate tax.
Max died in 2014. His estate elected a December 31 tax year. His estate received the following amounts in 2014: $10,000 in dividends from ABC Corp.; $50,000 in life insurance on the life of Max; and $100,000 in proceeds on the sale of vacant land. Max had purchased the land a number of years earlier for $20,000. The $100,000 sales price was $10,000 more than the $90,000 fair market value claimed by the estate on its estate tax return. The estate did not elect alternate valuation on its estate tax return. What is the amount of taxable income that should be reported by the estate for 2014? D $20,000 A $70,000 B $140,000 C $90,000 D $20,000
D $20,000
Except as otherwise provided, the taxable income of an estate is computed in the same manner as that of individuals. The dividends are income to the estate if earned, but not collected, by the decedent before death. Life insurance proceeds are included in the gross estate, but not taxable income. The estate’s basis in the land is its fair market value at the date of death. The sale of the land produces a capital gain of $10,000 ($100,000 selling price – $90,000 basis). Therefore, the total taxable income of the estate before deducting the personal exemption is $20,000 ($10,000 + $10,000).
John and Mary were married on July 1, 2014. During 2014, John gave the following gifts:
02/21/14 – $10,000 worth of ABC Corp. stock to John’s son David
04/20/14 – $30,000 worth of vacant land to John’s daughter Susan
10/31/14 – $100,000 cash to Mary
11/18/14 – $20,000 worth of XYZ Corp. stock to John’s son David
Mary did not make any gifts during 2014. John and Mary agreed to split gifts for 2014. What is the amount of gifts that can be split between John and Mary in 2014?
A None of the answers are correct.
B $160,000
C $60,000
D $20,000
D $20,000
This answer is correct.
If both spouses consent, a gift made by one spouse to any person other than the other spouse is considered as made one-half by each spouse. However, only gifts that were made while the couple were actually married at the time of the gift qualify for gift-splitting. Because John and Mary were not married until July 1 and the transfer to Mary qualifies as an unlimited marital deduction, only the $20,000 gift to David may be split.
Under the terms of a simple trust, all of the income is to be distributed equally to beneficiaries A and B and capital gains are to be allocated to corpus. The trust and both beneficiaries file returns on a calendar-year basis. No provision is made in the governing instrument with respect to depreciation. During the year, the trust had the following items of income and expenses:
Rents $25,000
Dividend of domestic corporations 50,000
Tax-exempt interest on municipal bonds 25,000
Long-term capital gains 15,000
Taxes and expenses directly attributable to rents 5,000
Trustee’s commission allocable to income account 2,600
Trustee’s commission allocable to principal account 1,300
Depreciation 5,000
Compute the distributable net income of the trust.
A $67,075
B $91,100
C None of the answers are correct.
D $92,400
B $91,100
This answer is correct.
Distributable net income is taxable income with tax-exempt interest added and no personal exemption allowed. No deduction is allowed for expenses attributable to the production of tax-exempt income. Also, since the capital gains are not included in the computation of distributable net income, no expenses are allocated to capital gains. This trust is not allowed a depreciation deduction because there is no reserve and all the income is distributable to the beneficiaries. Capital gains are not considered as income for depreciation purposes if they are properly allocable to corpus. The income beneficiaries will be entitled to the depreciation deduction in addition to their income from the trust. The trust’s taxable income and distributable income are
Dividends
$50,000
Rent
25,000
LTCG
15,000
Less:
Rent expense
(5,000)
Commission allocable to income
(1,950)
Commission allocable to principal
(975)
Personal exemption
(300)
Taxable income
$81,775
Taxable income
$81,775
Add back personal exemption
300
Add tax-exempt interest
24,025
Subtract LTCG
15,000
Distributable net income
$91,100
Income in respect of a cash-basis decedent
A Cannot receive capital gain treatment.
B Receives a stepped-up basis in the decedent’s estate.
C Must be included in the decedent’s final income tax return.
D Covers income earned before the taxpayer’s death but not collected until after death.
D Covers income earned before the taxpayer’s death but not collected until after death.
This answer is correct.
IRD includes those amounts to which a decedent was entitled as gross income but that were not includible in computing taxable income on his final return. For cash-basis taxpayers, IRD is income earned by the decedent before death, but not paid until after death. A common example of IRD is salary earned by an employee prior to death but not paid by the employer until after death
Donald is a tax return preparer. His client, Jody Black, told him that she had made several gifts during 2014. She asked whether she should file a gift tax return and, if so, how much tax she would owe. Jody has never given a taxable gift before. Donald reviewed Jody’s gift transactions as follows:
Paid her parents’ medical bills, $15,000 for her father and $10,000 for her mother Bought a sports car for her son at a cost of $40,000 Gave $17,000 cash to her church Prepared her will, leaving her vacation cabin, valued at $76,000, to her sister Sent a wedding gift of $1,000 to her niece
What is Donald’s best answer to Jody’s questions?
A None of the answers are correct.
B No return is due because gifts to family are excluded.
C Jody must file a gift tax return and will owe tax on $26,000.
D Jody must file a gift tax return, but she will not owe tax because of the unified credit.
D Jody must file a gift tax return, but she will not owe tax because of the unified credit.
This answer is correct.
A tax return must be filed if there are any taxable gifts. Even after the $14,000 exclusion, Jody will have a taxable gift of $26,000 to her son. For gifts made in 2014, the applicable credit amount is for $2,081,800, reduced by the amount allowable as an applicable credit amount for all preceding calendar years.
Which of the following is a disadvantage of a revocable trust?
A. The trust is included in the gross estate of the grantor.
B. The grantor will be subject to gift taxes on the transfer of property to the trust.
C. The grantor loses power to control the trust funds for federal estate tax purposes.
D. The trust assets are subject to being probated upon the death of the grantor.
A. The trust is included in the gross estate of the grantor.
Answer (A) is correct.
The gross estate includes assets transferred during life that, at death, the decedent retained the power to revoke, such as transfers made to a revocable trust.
(12.4.99)
Mike and Carol, a married couple, have two assets at the time of Mike’s death: a $10,000,000 life insurance policy owned by Mike naming Carol as the sole beneficiary, and $8,000,000 of real estate owned by the couple as joint tenants with right of survivorship. What is the amount of the marital deduction to Mike’s estate for these two assets?
A. $18,000,000
B. $9,000,000
C. $14,000,000
D. $10,000,000
C. $14,000,000
Answer (C) is correct.
Unless stated otherwise, it is assumed all property owned by one spouse will be transferred to the surviving spouse upon the other’s death. In this case, Mike’s estate will include the life insurance proceeds of the policy he owned as well as half of the real estate owned jointly with right of survivorship for a total of $14,000,000. All of the property is transferred to his spouse; so the full $14,000,000 counts for the marital deduction.
(12.4.100)
