Wealth Taxation Flashcards
True or False: The federal gift tax and estate tax are completely separate taxes.
False. The federal gift and estate tax are unified.
True or False: Various US states impose an inheritance tax where the transfer tax rate depends upon the relationship between the beneficiary and the decedent.
True.
True or False: If a grandparent transfers wealth to a grandchild, the generation skipping transfer tax may apply.
True.
True or False: Assets that avoid probate will also avoid federal estate tax.
False. Many assets that avoid probate can still be taxable for the federal estate tax (e.g., insurance policies, assets held in trust where the decedent did not relinquish control, and property held as tenants in the entirety).
Assume a married couple wants to make annual cash gifts to each of their 5 children for 10 years. Assuming the annual federal gift exclusion is $14,000 per year, what are the total cash gifts the married couple could give to their 5 children over a 10-year period and avoid using any of their lifetime estate/gift tax exclusion?
$ 14,000 x 2 individuals (i.e., married couple) x 5 children x 10 years = $ 1,400,000
Assume the following facts for a married individual who dies in 2013 when the unified estate/gift tax exemption is $5,250,000 and the federal estate tax rate is 40%:
- The decedent has personal assets with a fair market value of $20,250,000 after liabilities and funeral expenses.
- The decedent’s will provides
- $5,250,000 of assets are bequeathed to the individual’s children,
- $5 million is bequeathed to Villanova University’s Graduate Tax Program, and
- the remaining $10 million is bequeathed to his wife.
- The decedent used $1 million of his unified gift/estate tax exclusion during his lifetime.
Given these assumptions, how much federal estate tax should the individual’s estate expect to pay?
- Gross estate: $20,250,000
- Charitable contribution to Villanova: (5,000,000)
- Marital deduction: (10,000,000)
- Taxable estate: 5,250,000
- Unified gift/estate tax exclusion =
- $5,250,000 - $1,000,000 = ($4,250,000)
- Estate subject to tax at 40%: $1,000,000
- Federal Estate Tax =
- $1,000,000 x 40% = $400,000
True or False: One benefit of making a gift before death is that future appreciation is removed from the individual’s taxable estate
True.
True or False: There is no tax benefit to making a charitable contribution during one’s lifetime vs. upon death.
False. Making a charitable contribution during one’s lifetime can result in a benefit for both income tax purposes and estate tax purposes whereas a charitable contribution at death only reduces the estate tax.
True or False: One benefit of making a taxable gift before death is that the gift tax can effectively be deductible for estate tax purposes.
True.
True or False: Insurance trusts are often used in estate tax planning.
True.
True or False: Assets that avoid probate do not necessarily avoid federal estate tax.
True.
True or False: If a grandparent transfers wealth to their child, the generation skipping transfer tax may apply.
False. The generation skipping transfer tax applies when a generation is skipped. Bequeathing assets to a child would not be skipping a generation.
True or False: Since the insurance proceeds are payable directly to the child, they are excluded from the Decedent’s gross estate. Only assets transferred by a Decedent’s will can be included in the Decedent’s gross estate.
False. Insurance proceeds can be included in the gross estate even though they pass to heirs or beneficiaries.
True or False: If the Decedent owns the policy (e.g., controls who the beneficiaries are), the insurance proceeds will be excluded from the Decedent’s gross estate.
False. When the Decedent controls the beneficiaries, the Decedent is considered to have sufficient ownership rights in the insurance policy that any proceeds are included in the Decedent’s gross estate.
True or False: Individuals should avoid making gifts prior to death that are taxable (i.e., exceed both the annual gift tax exclusion and the unified estate/gift exemption). Said differently, it does not make good tax sense to incur wealth transfer tax until the individual dies.
False. The gift tax incurred will effectively reduce the individual’s estate tax.
