Chapter c12

Prentice Hall's Federal Taxation 2016: Corporations, 29e (Pope)Chapter C12: The Gift Tax

LO1: The Unified Transfer Tax System

1) The gift tax is a wealth transfer tax that applies to transfers during a person's lifetime and transfers at death.Answer: FALSEPage Ref.: C:12-3 and C:12-4Objective: 1

2) Identify which of the following statements is true.A) The gift tax is a wealth transfer tax that applies to transfers during a person's lifetime and transfers at death.B) The gift tax is not a part of the unified transfer tax system.C) Under the unified transfer tax system, taxable gifts made after 1976 are included in the donor's death tax base.D) All of the above are false.Answer: CPage Ref.: C:12-3Objective: 1

3) In 1998, Delores made taxable gifts to her son of property with an FMV of $200,000. In the current year when Delores dies, the property is worth $800,000. The amount included in Delores's estate tax base because of the 1998 gift isA) $0.B) $189,000.C) $200,000.D) $800,000.Answer: CPage Ref.: C:12-3Objective: 1

4) Discuss the ways in which the estate and gift tax system is a unified system.Answer: The same tax rates apply for both gift and estate tax purposes. Taxable gifts made subsequent to 1976 affect the estate tax base and, consequently, the rates at which the estate is taxed. The same unified credit is used for both gift and estate tax purposes. In 2013, the same unified credit amount of $2,045,800 is used for both estate and gift tax purposes.Page Ref.: C:12-2Objective: 1

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LO2: Gift Tax Formula

1) The annual exclusion permits donors to make gifts of $14,000 each to multiple donees.Answer: TRUEPage Ref.: C:12-4Objective: 2

2) In the current year, Cesar, who is single, gives $26,000 to each of his 20 nieces and nephews for a total property transfer of $520,000. Cesar's taxable gifts totalA) $520,000.B) $260,000.C) $300,000.D) $240,000.Answer: DExplanation: Total gifts $26,000 × 20 = $520,000 Minus: exclusions $14,000 × 20 = (280,000)Taxable gifts $240,000

Page Ref.: C:12-4Objective: 2

3) Identify which of the following statements is true.A) If the annual exclusion for gifts is not used in the current year, the unused portion can be carried forward to subsequent years.B) Individuals may not give more than $14,000 per person in gifts each year before being taxed on the transfer.C) For transfer tax purposes, both the charitable contribution deduction and the marital deduction are unlimited.D) All of the above are false.Answer: CPage Ref.: C:12-4Objective: 2

4) In November 1976, Grant uses $30,000 of the specific exemption available at that time. The unified credit available to Grant for post-1976 transfers is reduced byA) $0.B) $6,000.C) $15,000.D) $30,000.Answer: BExplanation: $30,000 × 0.20 = $6,000Page Ref.: C:12-5Objective: 2


5) In the current year, Bonnie, who is single, sells stock valued at $60,000 to Linda for $15,000. Later that year, Bonnie gives Linda $25,000 in cash. Bonnie's taxable gifts from these transfers totalA) $70,000.B) $59,000.C) $56,000.D) $25,000.Answer: CExplanation: Total gifts [($60,000 - $15,000) + $25,000] $70,000 Minus: exclusion ( 14,000)Taxable gifts $56,000


6) Jennifer and Terry, a married couple, live in Illinois; which is a common law state. In the current year, Terry gives his sister $200,000 cash. Jennifer and Terry agree to gift splitting. Neither Jennifer nor Terry has made any taxable gifts in prior years. What are Jennifer and Terry's taxable gifts?Answer: Since they elect gift splitting, each spouse is considered to have given $100,000. Each spouse is entitled to a $14,000 annual exclusion. Therefore, each spouse's taxable gift is $86,000. The tax on the taxable gifts will be offset by the unified credit available to each spouse and no gift tax will be due.Page Ref.: C:12-4 and C:12-5Objective: 2

7) In October 1976, Marian made a large taxable gift. It was her first gift. Marian used her $30,000 specific exemption to reduce her taxable gift amount. What impact does this gift have on her unified credit and death tax base?Answer: Marian's unified credit is reduced by $6,000 (20% of $30,000). Her death tax base does not include her 1976 gifts.Page Ref.: C:12-7Objective: 2

LO3: Transfers Subject to the Gift Tax

1) Molly sells her car, valued at $30,000, to her nephew Todd for $18,000. Molly has made a taxable gift.Answer: TRUEPage Ref.: C:12-7Objective: 3

2) A qualified disclaimer must be made within nine months after (a) the day the property is transferred, or (b) the day the person receiving the property becomes age 21, whichever is later.Answer: TRUEPage Ref.: C:12-9Objective: 3

3) Phil transfers $50,000 to a revocable trust benefiting his son, Josh. The transfer is a taxable gift.Answer: FALSEPage Ref.: C:12-10Objective: 3


4) Mia makes a taxable gift when she makes her mother a joint owner on Mia's bank account. Mia has $25,000 in the account.Answer: FALSEPage Ref.: C:12-14Objective: 3

5) The changing of a life insurance policy beneficiary from a spouse to an adult daughter constitutes a gift for transfer tax purposes.Answer: FALSEPage Ref.: C:12-14Objective: 3

6) A net gift occurs when a donor makes a gift subject to the agreement that the recipient agrees to pay the gift tax.Answer: TRUEPage Ref.: C:11-15Objective: 3

7) Mike transfers securities to an irrevocable trust and gives Rachel the power to determine who will receive the trust's income and assets. Rachel, her estate, and her creditors cannot be beneficiaries or receive the trust assets. Rachel has a general power of appointment.Answer: FALSEPage Ref.: C:11-15Objective: 3

8) Barbara sells a house with an FMV of $170,000 to her daughter for $120,000. From this transaction, Barbara is deemed to have made a gift (before the annual exclusion) ofA) $50,000.B) $170,000.C) $120,000.D) $0.Answer: AExplanation: $170,000 - $120,000 = $50,000Page Ref.: C:12-7Objective: 3

9) Identify which of the following statements is true.A) A taxable gift may occur when property is sold in an arm's length transaction for less than its FMV.B) An individual can inadvertently make a gift by underestimating a property's fair market value and selling it to a relative for a price below its fair market value.C) The statutory exemption from the gift tax for payments for medical care requires that the payment be made for a relative.D) All of the above are false.Answer: BPage Ref.: C:12-7Objective: 3


10) Vincent makes the following property transfers in the current year:

• $5,000 tuition for a grandson paid directly to the school• $1,000 medical expense for a child paid directly to a hospital• $500 donation to the Democratic party• $10,000 property settlement in conjunction with a divorce• $3,000 room and board at college for a grandson paid directly to the school

Vincent's gifts for the year before considering the annual gift tax exclusion totalA) $19,500.B) $19,000.C) $3,000.D) $0.Answer: CPage Ref.: C:12-8Objective: 3

11) Identify which of the following statements is true.A) Cash paid directly to a medical school for room and board is a "qualified transfer" and not subject to the gift tax.B) Transfers by an individual to a political party constitute a gift subject to the gift tax rules.C) A statutory exemption from the gift tax is available for property transfers between divorced individuals when the divorce occurs during a three-year period beginning one year before the transfer agreement is made.D) All of the above are false.Answer: CPage Ref.: C:12-8Objective: 3

12) Greg transfers property on August 8 of the current year with an adjusted basis of $40,000 and an FMV of $90,000 to his ex-wife as a property settlement that is part of their divorce agreement. The property settlement agreement and the divorce were both finalized on June 3 of the current year. Greg has made a gift ofA) $0.B) $40,000.C) $80,000.D) $90,000.Answer: APage Ref.: C:12-8Objective: 3


13) Which of the following transactions constitutes a completed gift made by Ellen, a widow, in the current year?A) Ellen deposits $100,000 cash and Matt deposits $5,000 cash into a joint savings account. Matt does not withdraw anything during the current year.B) Ellen names Larry the beneficiary of a $100,000 life insurance policy on Ellen's life. The beneficiary designation is revocable.C) Ellen transfers property to a revocable trust, naming the bank as trustee. The trustee must pay out all the income to Ed over Ed's lifetime, beginning next year.D) Ellen reimburses her granddaughter $15,000 for her tuition at medical school.Answer: DPage Ref.: C:12-8Objective: 3

14) Identify which of the following statements is true.A) An individual making a qualified disclaimer can determine to whom the disclaimed property will pass.B) A qualified disclaimer must be made within six months after (a) the day the property is transferred, or (b) the day the person receiving the property becomes age 21, whichever is later.C) One of the tests that a qualified disclaimer must meet is that it must be an irrevocable, unqualified, written refusal to accept property.D) All of the above are false.Answer: CPage Ref.: C:12-9Objective: 3

15) Identify which of the following statements is false.A) A gift occurs when a revocable trust is funded.B) A gift does not occur until the transfer is complete.C) A transfer is incomplete (and not subject to the gift tax) if the donor retains the power to name new beneficiaries or to change the interests of the beneficiaries.D) Transfers to an irrevocable trust can be deemed incomplete.Answer: APage Ref.: C:12-10Objective: 3

16) Which of the following transfers is subject to the gift tax?A) Matilda contributes $5,000 to a Senate candidate's political organization.B) Frank gives $30,000 to a lobbying group promoting stricter environmental regulations.C) Julia establishes a trust benefiting her nieces and nephews. Julia will determine the amount of any distributions made.D) Lance purchases land, titling it in the names of Lance and Sheryl, joint owners.Answer: DPage Ref.: C:12-14Objective: 3


17) Gordon died on January 1 and by his will left land with an adjusted basis of $60,000 and an FMV of $100,000 to Becky. Becky disclaims the property on December 31 of the year of death, when the land was still worth $100,000. Becky has made a gift (before the annual gift tax exclusion) ofA) $100,000.B) $60,000.C) $50,000.D) $0.Answer: AExplanation: The disclaimer is not effective since it was made more than nine months after the date of Gordon's death.Page Ref.: C:12-9Objective: 3

18) Jack transfers property worth $250,000 to a revocable trust on January 1. Two-and-a-half years later, when the property is worth $300,000, the trust becomes irrevocable. Which of the following statements is correct?A) A $300,000 gift occurs when the trust became irrevocable.B) A $250,000 gift occurs when the original transfer was made.C) A $250,000 gift occurs when the trust became irrevocable.D) Jack may elect which amount to report as a gift.Answer: APage Ref.: C:12-10Objective: 3

19) Which of the following statements is true?A) Transfers to an irrevocable trust can be deemed incomplete due to powers retained by the grantor.B) If the donor retains the power to change the trust beneficiary, the gift is complete.C) Transfers to a revocable trust are completed gifts.D) All of the above are false.Answer: APage Ref.: C:12-10Objective: 3

20) Calvin transfers land to a trust. Calvin retains the right to the income from the land for the rest of his life. Upon his death, the land is to be transferred to his daughter, Melissa. Calvin's interest isA) a remainder interest.B) a life estate.C) a reversionary interest.D) a term certain.Answer: BPage Ref.: C:12-11 and C:12-12Objective: 3


21) Calvin transfers land to a trust. Calvin retains the right to the income from the land for the rest of his life. Upon his death, the land is to be transferred to his daughter, Melissa. Melissa's interest isA) a remainder interest.B) a life estate.C) a reversionary interest.D) a term certain.Answer: APage Ref.: C:12-11 and C:12-12Objective: 3

22) Calvin transfers land to a trust. His daughter Melissa will receive the income from the land for ten years. After ten years, the land is returned to Calvin. Calvin's interest isA) a term certain.B) a life estate.C) a reversionary interest.D) none of the above.Answer: CPage Ref.: C:12-11 and C:12-12Objective: 3

23) Identify which of the following statements is false.A) If an individual transfers property in trust and reserves the right to the trust's income for life, the individual retains a life estate.B) An individual who receives a remainder interest will receive property after the death of the holder of a life estate.C) If a grantor transfers property in trust and names a beneficiary to receive only a term-certain interest and then the property is to return to the grantor, the transaction is not subject to gift tax.D) Life estates are valued using actuarial tables.Answer: CPage Ref.: C:12-10; Example C:12-15Objective: 3

24) Identify which of the following statements is true.A) The creation of a joint bank account constitutes a taxable gift.B) The creation of a joint tenancy by one person will result in a gift equal to the other joint tenant's pro rata interest in the property.C) The naming of a life insurance policy beneficiary constitutes a gift for transfer tax purposes.D) Since municipal bond interest is exempt from federal income taxation, gifting the bonds escapes the gift tax.Answer: BPage Ref.: C:12-12 and C:12-13Objective: 3


25) Identify which of the following statements is false.A) The interpolated terminal reserve is similar to a life insurance policy's cash surrender value.B) A gift occurs when the owner of an insurance policy irrevocably assigns all ownership rights in the policy to another.C) The payment of premiums on an insurance policy that is owned by another does not constitute a gift.D) The value of the gift of a life insurance policy is the amount it would cost to purchase a comparable policy on the date of the gift.Answer: CPage Ref.: C:12-11 and C:12-12Objective: 3

26) On April 1, Martha opens a joint bank account with Ned and deposits $1,000. Ned deposits $500 into the account on April 2. On May 2, Martha withdraws $750. Two days later, Ned withdraws $600.A) Martha has made a gift to Ned of $100.B) Ned has made a gift to Martha of $500.C) Martha has made a gift to Ned of $600.D) Martha has made a gift to Ned of $1,000.Answer: APage Ref.: C:12-14Objective: 3

27) Damitria transfers her rights in a $100,000 insurance policy on June 1 to Tremayne. The policy has a cash value of $9,000 and an interpolated terminal reserve of $8,500. The annual policy premium of $12,000 had been paid on January 1. Damitria's gift (before the annual gift tax exclusion) to Tremayne isA) $8,500.B) $9,000.C) $15,500.D) $20,500.Answer: CExplanation: $8,500 + (7/12 × $12,000) = $15,500Page Ref.: C:12-14Objective: 3

28) Which of the following is a completed gift?A) Greta transfers $50,000 to a revocable trust benefiting her children Hans and Julio.B) Juan purchases a ski chalet using his own funds, but listing Penelope as a joint owner.C) Horatio transfers $60,000 to a bank account with Hazel. Hazel does not contribute any money to the account.D) Mike changes the beneficiary of his policy to Meredith.Answer: BPage Ref.: C:12-14Objective: 3


29) Identify which of the following statements is false.A) A power of appointment exists when a person transfers property and grants someone else the power to specify who eventually will receive the property.B) A person possesses a general power of appointment if the person has the power to appoint property to himself, his creditors, his estate, or the creditors of his estate.C) The donee's payment of the gift tax does not reduce the amount of the gift because it is treated as consideration paid to the donor.D) The donor must recognize as a gain the excess of the gift tax payable over the adjusted basis of the property.Answer: CPage Ref.: C:11-15Objective: 3

30) Tia funds an irrevocable trust with $100,000, naming Vonda to receive income for life. Tia also grants Vonda a general power of appointment during her life. During the next year, Vonda directs the trustee to give $100,000 to Rick. Which of the following statements is not correct?A) Tia made a $100,000 gift to Rick.B) Vonda makes a $100,000 gift to Rick.C) Tia has made a gift of $100,000 to Vonda.D) Exercising a general power of appointment constitutes a gift.Answer: APage Ref.: C:11-15Objective: 3

31) Connie has some acreage that is valued at $1,500,000. Her daughter would like to build a home on it, but can only afford $500,000. Connie agrees to sell it to her daughter for $500,000. Is there any gift tax consequence as a result of this transaction?Answer: Connie is considered to have made a gift to her daughter of $1,000,000, the excess of the land's FMV over the consideration received. If this is the only gift that Connie makes to her daughter during the year, she will be able to subtract the $14,000 annual exclusion to arrive at taxable gifts for the current period. To the remaining $986,000, she will add taxable gifts for all prior periods. The gift tax will then be computed, at current rates, on the cumulative taxable gifts. Next, she will subtract the tax on prior gifts computed at current rates and any unified credit available to her. The remaining amount is her gift tax liability for the current period.Page Ref.: C:12-7Objective: 3


32) Discuss the statutory exemptions from the gift tax.Answer: Payments of medical expenses and college tuition are not gifts. The payments are exempt only if paid directly to the service provider. Only tuition qualifies as an educational expense. The beneficiary of the payment need not be a relative. Congress permitted this exemption to allow for the support of children who had reached majority as well as for elderly parents who may be ill to alleviate concern over the gift tax.

Transfers to political organizations are not subject to the gift tax.

Property settlements in conjunction with divorce are not subject to the gift tax. For the exemption to apply, the divorcing parties must adopt a written agreement concerning their marital and property rights. In addition, the divorce must occur during a three-year period beginning one year before the agreement is made.

Certain "gifts" resulting from a disclaimer by a person who is designated as a donee by a donor are not subject to the gift tax. The disclaiming party is typically elderly, sick, or wealthy. The qualified disclaimer must be irrevocable and in writing. The donor must receive the refusal no later than nine months after the latter of the day the transfer is made or the day the disclaiming party becomes age 21. Also to have a qualified disclaimer, the disclaiming person must not have accepted the property and the disclaiming party must not direct who is to receive the disclaimed property.Page Ref.: C:12-7 and C:12-16Objective: 3

33) Ida sells some stock to Mae for $20,000 at a time when the stock is valued at $50,000. Later in the year, she gives Mae $15,000 in cash.a) What is the amount of Ida's taxable gifts?b) How would your answer to Part (a) change if Ida gave the cash to Jonathan instead of to Mae?Answer: a) Ida made gifts of $45,000 [($50,000 - $20,000) + $15,000] to Mae. Ida receives an annual exclusion of $14,000. Ida's taxable gifts are $12,000.b) Ida's taxable gift to Mae is $17,000 [($50,000 - $20,000) - $14,000] and to Jonathan is $1,000 ($15,000 - $14,000). Total taxable gifts for Ida are $17,000.Page Ref.: C:12-7Objective: 3

34) Yuli wants to help his adult grandson, Jerry, become a CPA. He pays all of Jerry's tuition this year, which totals $20,000. He also pays $9,000 for Jerry's room and board at school. Yuli makes the payments directly to the school. What are the gift tax consequences?Answer: IRC Sec. 2503(c) exempts the direct payment of tuition to the school from being treated as a gift. The $9,000 that Yuli paid for room and board does not qualify under Sec. 2503(c) as exempt from gift tax. Yuli has made a $9,000 gift to his grandson but after the $14,000 annual exclusion, he has no taxable gift.Page Ref.: C:12-8Objective: 3


35) Bryce pays $10,000 for his adult grandson's tuition at medical school and $8,000 for the grandson's room and board in the medical school's dormitory. All payments are made directly to the medical school. Do these payments by Bryce qualify as gifts?Answer: Section 2503(e) exempts the payment of tuition from being treated as a gift. The room and board payments are a gift to the grandson.Page Ref.: C:12-8Objective: 3

36) Ward and June decide to divorce after 30 years of marriage. Ward transfers $500,000 to June in settlement of her property rights. What are the gift tax consequences of this transfer?Answer: Ward is not deemed to have made a gift to June if the requirements of Sec. 2516 are met.Page Ref.: C:12-8 and C:12-9Objective: 3

37) Abby transfers $10,000 to a political organization to promote her favorite candidate for president. Does Abby's transfer qualify as a gift?Answer: No, political contributions do not fall within the statutory definition of a gift.Page Ref.: C:12-8Objective: 3

38) On March 1, Bruce transfers $300,000 to a revocable trust with Sprint Bank as trustee. The trustee must pay out all the income to Sam during Sam's lifetime. At Sam's death, the property is to be paid to Sam Jr. On December 31, the trustee distributes $40,000 of income to Sam. What date did a gift occur? What was the amount of the gift?Answer: A $40,000 gift occurred on December 31 because Bruce no longer had control over the distributed income. A gift did not occur on March 1 since the trust is revocable.Page Ref.: C:12-10Objective: 3

39) Karen purchased a beach house for $300,000 and immediately titled it in the names of Karen and Kenny, as joint tenants with right of survivorship. Karen and Kenny are not married. Did a gift occur? If so, for what amount?Answer: Yes, a gift of one-half the value of the property has occurred, $150,000, from Karen to Kenny.Page Ref.: C:12-14Objective: 3

40) On June 1, Sherri deposits $60,000 into a new joint bank account in the names of Sherri and John. Her friend John makes no deposits. On December 15th, John withdraws $25,000 from the joint account. What are the gift tax consequences, if any?Answer: No gift arises upon the creation of the bank account. On December 15th, when John withdraws $25,000, Sherri is considered to have made a gift to John of the excess of John's withdrawal over his deposits ($25,000).Page Ref.: C:12-14Objective: 3


41) On September 1, George transfers his entire ownership rights in a $250,000 life insurance policy on his own life to his sister, Sally. The policy's interpolated terminal reserve is $30,000 as of September 1. On July 1, George had paid the policy's $6,000 annual premium. What are the gift tax consequences, if any?Answer: George is considered to have made a gift to Sally of the interpolated terminal reserve, $30,000, plus the amount of the annual premium attributable to the period after he gave her the policy,$5,000 ($6,000 × 10/12), for a total gift of $35,000.Page Ref.: C:12-14Objective: 3

42) On September 1, George transfers his entire ownership rights in a $250,000 life insurance policy on his own life to his sister, Sally. The policy's interpolated terminal reserve is $30,000 as of September 1. On July 1, George had paid the policy's $6,000 annual premium. On July 1 of the subsequent year, George again paid the premium on the policy. What are the gift tax consequences in the subsequent year, if any?Answer: As a result of the premium payment, George is considered to have given Sally a $6,000 gift. The result would be the same if he had given her $6,000 in cash to make the payment herself.Page Ref.: C:12-14Objective: 3

43) What is a "net gift" and what is the potential income tax problem associated with making a net gift?Answer: A potential donor who wants to freeze a property's value but who lacks sufficient liquid assets to pay the gift tax might be interested in making a net gift (a transfer in which the donee agrees to pay the gift tax as a condition of receiving the gift). The donor of a net gift must recognize a gain if the gift tax the donee pays exceeds the adjusted basis of the property transferred.Page Ref.: C:11-15Objective: 3

44) Jason funds an irrevocable trust with Liberty Bank as trustee and reserves the right to receive the income for seven years. He provides that at the end of the seventh year, the trust assets will pass outright to his adult daughter, Paula, or to Paula's estate should Paula not be alive. Jason transfers assets valued at $1.5 million to the trust; the assets at present are producing income of about 7.5% per year. Assume that the Sec. 7520 rate per the actuarial tables for the month of the transfer is 10%. What tax issues should Jason consider regarding the trust?Answer: • Do the estate freeze rules apply to this transaction?• If they do, what is the amount of the deemed gift from Jason to Paula?• What is the significance of the 6.5% income yield?

The estate freeze rules of Sec. 2702 do apply to this transaction. Jason makes a transfer for the benefit of a family member (a daughter) and retains an interest in such trust. His retained interest, however, is not an annuity interest or a unitrust interest (a specified percentage of the fair market value of the trust assets, as redetermined annually).

Because Jason did not keep an annuity interest or a unitrust interest, the value of his retained interest is treated as being zero. Thus, he is deemed to have made a gift to Paula of the total value, or $1.5 million.

If Jason had kept an annuity interest or a unitrust interest, the Sec. 7520 10% interest rate would have been used to value his interest. The actual income yield of 7.5% would not be relevant in arriving at the valuation.Page Ref.: C:12-12 and C:12-13Objective: 3


LO4: Exclusions

1) A "Crummey demand power" in a trust document allows the donor to demand a distribution from the trust in years in which earnings exist within the trust.Answer: FALSEPage Ref.: C:12-17Objective: 4

2) Identify which of the following statements is true.A) A purpose of the annual exclusion is to eliminate the necessity of accounting for and reporting small gifts such as those made for weddings and Christmas.B) The gift tax exclusion is available only for a gift of a present interest.C) A present interest is an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property.D) All of the above are true.Answer: DPage Ref.: C:12-16 and C:12-17Objective: 4

3) Identify which of the following statements is false.A) A future interest includes reversions, remainders, and other interests, which are limited to commence in use, possession, or enjoyment at some future date or time.B) The gift tax exclusion is available only for a gift of a present interest.C) A trust for a minor (Sec. 2503(c) trust) must distribute all of its income currently in order to qualify for the annual exclusion.D) For a transfer made in trust, each beneficiary is deemed to be a separate donee.Answer: CPage Ref.: C:12-17Objective: 4

4) Identify which of the following statements is true.A) The trustee of a Sec. 2503(c) trust must distribute all of the corpus and accumulated income when the beneficiary reaches the age of 25.B) The gift tax exclusion is available for a gift of a present or future interest.C) A "Crummey demand power" in a trust document allows the donor to demand a distribution from the trust in years in which assets are transferred to the trust.D) All of the above are true.Answer: CPage Ref.: C:12-17 and C:12-18Objective: 4


5) George transfers property to an irrevocable trust for the benefit of his adult children and names himself as trustee. The trust document requires the trustee to distribute trust property to the beneficiaries at the trustee's discretion with the possibility of no distribution to certain beneficiaries as the trustee deems appropriate. The trust will terminate at the end of nine years, and the property will pass to George's children. Which of the following statements is correct?A) The beneficiaries receive a present interest in the trust property when George transfers the assets to the trust.B) The transfer by George is eligible for the annual gift tax exclusion.C) George's transfer of property to the trust is not taxed under gift tax rules at the date of transfer.D) George's transfer of property to the trust is a gift of a future interest.Answer: DPage Ref.: C:12-17Objective: 4

6) A Sec. "2503(c) trust"A) is a discretionary trust for a beneficiary of any age.B) is intended for beneficiaries over the age of 20.C) requires distribution of trust assets to the beneficiary at age 21.D) can be formed only by the parent(s) of the beneficiaries.Answer: CPage Ref.: C:12-17Objective: 4

7) Marilyn and Earl establish a trust benefiting their grandchild, Courtney, age 4. Courtney is to receive the accumulated income and corpus when she reaches age 30. In the year of the transfer, Courtney has a two-week period in which to request distributions. This trust is aA) 2503(c) trust.B) Clifford trust.C) Crummey trust.D) none of the aboveAnswer: CPage Ref.: C:12-17 and C:12-18Objective: 4

8) A Crummey trustA) provides the donor with the ability to retrieve the property.B) prohibits the beneficiary from withdrawing assets.C) allows the donor an annual exclusion for transfers.D) receives property that is not eligible for the annual exclusion.Answer: CPage Ref.: C:12-17 and C:12-18Objective: 4


9) Why are Crummey trusts popular for minors?A) They are considered gifts of a future interest and allow the donor to take an exclusion.B) They are considered gifts of a present interest, permitting an annual gift tax exclusion.C) Crummey trusts require annual distributions to minors.D) Donors are only subject to the gift tax when funds are distributed from Crummey trusts.Answer: BPage Ref.: C:12-17 and C:12-18Objective: 4

10) Discuss the purpose of the gift tax annual exclusion.Answer: Congress enacted the annual exclusion for administrative simplicity to keep "routine" gifts (e.g., birthday, wedding, and Christmas gifts) from needing to be reported for gift tax purposes.Page Ref.: C:12-16Objective: 4

11) Donna transfers $200,000 of property to an irrevocable trust with a bank as trustee. Donna names Toby (age 60) to receive all of the trust income for the rest of his life. At Toby's death, the property is to pass to Al or Al's estate. What kind of interest do Toby and Al possess?Answer: Toby has a present interest. Al has a future interest.Page Ref.: C:12-17Objective: 4

12) Contrast the Crummey trust with the Sec. 2503(c) trust.Answer: Contributions to both discretionary trusts are eligible for the annual exclusion, despite the fact that both trusts limit the ability of the beneficiary to access the trust assets. The Sec. 2503(c) trust permits the minor beneficiary (i.e., under 21) access to trust assets only at the trustee's discretion, while the Crummey trust permits a forfeitable right to withdraw trust assets.

The Sec. 2503(c) trust receives its legitimacy from the statutes while the Crummey trust receives its legitimacy through the judicial process. The trustee of a Sec. 2503(c) trust must distribute the assets and accumulated income to the beneficiary at age 21. Thus, the Crummey trust is more flexible than the Sec. 2503(c) trust because the beneficiary can be any age when the trust is created and the trust can be terminated at any age. However, under the Crummey trust, the beneficiary does have the right to demand distribution of the contribution to the trust for a period of time; thus, the donor's intent may be defeated if the beneficiary exercises the right of withdrawal.Page Ref.: C:12-17 and C:12-18Objective: 4


LO5: Gift Tax Deductions

1) Identify which of the following statements is false.A) The marital deduction for gift tax purposes is limited to one-half the value of the property transferred.B) The marital deduction is generally allowed since the transfer remains within the economic (husband/wife) unit.C) The marital deduction for gift tax purposes is limited to the amount of the includible gift (e.g., the amount of the gift that is in excess of the annual exclusion).D) Transfers of community property are eligible for the marital exclusion.Answer: APage Ref.: C:12-19Objective: 5

2) Identify which of the following statements is true.A) When making a QTIP transfer, the donor does not control who will receive the property on the death of the donee-spouse.B) The marital deduction is limited to the amount of the gift that exceeds the annual exclusion.C) Claiming the marital deduction on a QTIP transfer is mandatory.D) Terminal interests cannot be eligible for the marital deduction.Answer: BPage Ref.: C:12-19 and C:12-20Objective: 5

3) A husband transfers $90,000 by gift directly to his wife. The marital deduction for the transfer isA) $0 unless he elects to claim one.B) $90,000.C) $76,000.D) none of the aboveAnswer: CExplanation: Gift $ 90,000 Minus: annual exclusion ( 14,000)Eligible for marital deduction $ 76,000



4) In the current year, Melanie makes two transfers to Peter, her husband. In June, she gives him land valued at $50,000. In December, she transfers $500,000 to a trust with a bank named as trustee. All income must be paid to Peter monthly for life. At Peter's death, the property passes to their children. Compute the maximum marital deduction assuming Melanie makes the appropriate elections.A) $550,000B) $536,000C) $500,000D) $50,000Answer: BExplanation: $550,000 - $14,000 annual exclusion = $536,000.Page Ref.: C:12-19Objective: 5

5) Hu makes a gift of his home to a local homeless shelter (a 501(c)(3) charity). Hu will retain his home for 10 years, after which the homeless shelter will take possession. The value of Hu's 10-year interest is $30,000 and the remainder interest is valued at $120,000. Which of the following statements is correct?A) Hu is allowed a charitable deduction on his gift tax return for $150,000 in the current year.B) Hu is allowed an exclusion of $12,000 on his gift of $120,000 to the charity.C) Hu is not allowed to deduct the contribution until the charity takes possession in 10 years.D) Hu has a charitable contribution deduction of $120,000 on his current gift tax return.Answer: DPage Ref.: C:12-22Objective: 5

6) In the current year, Martha makes the transfers below to her husband, Ryan. What is the amount, if any, of her marital deduction?a) In August, she gives him a house valued at $250,000.b) In December, she gives him a 15-year income interest in a trust with the bank name as trustee. She names her son as the remainderman. The trust is irrevocable and is funded with $500,000 of assets, and 8% is the applicable interest rate.Answer: a) The marital deduction is $236,000 ($250,000 - $43,000 exclusion).b) No marital deduction is available because the transfer is of a nondeductible terminable interest. The property passes to the daughter at the end of 15 years.Page Ref.: C:12-19 and C:12-20Objective: 5

7) What are the requirements for classifying a transaction as a transfer of a qualified terminable interest property (QTIP)?Answer: The requirements for a qualified terminable interest property (QTIP) transfer are that the donee spouse be entitled to receive all the income for life and that the income be paid out at least annually. In addition, no one can have a power to appoint any part of the property to anyone other than the donee-spouse unless such power is not exercisable while the donee-spouse is alive. Finally, the donor must elect to claim a marital deduction.Page Ref.: C:12-19 and C:12-20Objective: 5


8) Kenny is thinking of making a substantial gift of stock to his fiancée, Maria. The wedding is scheduled for October 1 of the current year. Kenny already has exhausted his unified credit. He also is considering giving $26,000 cash this year to each of his three children by a previous marriage. What tax issues should Kenny consider with respect to the gifts he plans to make to Maria and his three children?Answer: • Will the gift to Maria be eligible for the marital deduction? If not, should he consider postponing the gift until after the wedding?• Will gift splitting be available on the planned gifts to the three children?• If gift splitting is available, will the gift-splitting election produce favorable tax results?

The gift to Maria will not be eligible for the marital deduction unless he postpones the gift until after their marriage. Because the anticipated gift to Maria is substantial, and his only tax break if he makes the gift before marriage is the $14,000 annual exclusion, he should consider postponing the gift and having it be nontaxable under the unlimited marital deduction rules.

Gift splitting will be available on the planned gifts to the children only if he makes them after marrying Maria.

Gift splitting would produce favorable tax results because with gift splitting the $26,000 planned gift to each child would be fully shielded by two, $14,000 per donee annual exclusions. Each spouse is deemed to make a gift.Page Ref.: C:12-18 and C:12-19Objective: 5

LO6: The Gift-Splitting Election

1) A split-interest gift transferA) involves two public (charitable) organizations.B) involves two present interests.C) qualifies for a charitable contribution deduction if the recipient charity receives a guaranteed annuity, which is a present interest.D) cannot qualify for a deduction if a future interest is given to a charitable organization.Answer: CPage Ref.: C:12-22 and C:12-23Objective: 6

2) Identify which of the following statements is false.A) The gift-splitting election will apply to all transfers made during the portion of any year that the spouses electing gift splitting are married to each other.B) The gift-splitting election is made separately on each gift either spouse makes.C) Making gifts during one's lifetime helps to reduce the amount of estate taxes owed at death.D) In order to use gift splitting, both spouses must be U.S. citizens or residents at the time of the transfer.Answer: BPage Ref.: C:12-22 and C:12-23Objective: 6


3) A gift-splitting electionA) requires each spouse to give property.B) may reduce the amount of the taxable gifts of the donor-decedent.C) results in a $6,500 per donee annual exclusion for each spouse.D) is binding on future years.Answer: BPage Ref.: C:12-22 and C:12-23Objective: 6

4) Sandra, who is married, creates an irrevocable trust in the amount of $200,000 for her 18-year-old daughter, Kelly. She names the bank as trustee. Before Kelly reaches age 21, the trustee may pay the income to Kelly. Kelly will receive any undistributed assets when she reaches age 21. If Kelly dies before age 21, the assets will be paid to her estate. In addition, Sandra creates an irrevocable trust for her son, Kevin, age 21. He is entitled to withdraw up to $28,000 per year. Sandra contributes $28,000 in the current year. Sandra elects gift splitting with her husband. Her husband makes no gifts in the current year. Sandra's annual exclusions to be claimed on her gift tax return totalA) $28,000.B) $15,500.C) $12,000.D) $0.Answer: AExplanation: Because of gift splitting, Sandra is treated as gifting $100,000 to Kelly ($14,000 exclusion) and $28,000 to Kevin ($14,000 exclusion).Page Ref.: C:12-22 and C:12-23Objective: 6

5) In the current year, Donna gives $50,000 cash and $30,000 of stock to Mike. She also gives $40,000 of tax-exempt bonds to Angela. Her husband, Andy, gives $200,000 of land to Angela. Assume the couple elects gift splitting for the current year. Donna's taxable gifts totalA) $132,000.B) $148,000.C) $110,000.D) $60,000.Answer: AExplanation: Donna's gifts: Mike Angela Total gifts

$ 80,000 40,000

$120,000 Minus: one-half of Donna's gift deemed made by Andy ( 60,000)Plus: one-half of Andy's gifts deemed made by Donna 100,000 Minus: exclusions (Mike and Angela) ( 28,000)Taxable gifts $132,000

Page Ref.: C:12-22 and C:12-23Objective: 6


LO7: Computation of the Gift Tax Liability

1) The computation of the gift tax liability for a current yearA) is made without reference to previous years.B) requires the use of current-year tax rates only.C) requires the use of different rates, depending on when the gifts were made.D) requires knowledge of the total gift taxes paid in previous years.Answer: BPage Ref.: C:12-24Objective: 7

2) Gloria makes the following gifts during the year:

$15,000 cash to her son, AndyStock with a basis of $10,000 and a $30,000 fair market value to her sister, Helen$100,000 to a revocable trust benefiting her nephew, GeorgeLand with a basis of $60,000 and a fair market value of $50,000 to the American Cancer

Society

Before considering the unified credit, what are Gloria's taxable gifts?A) $17,000B) $45,000C) $95,000D) $121,000Answer: AExplanation: ($15,000 - 14,000) + ($30,000 - 14,000) = $17,000. The transfer to a trust is not a completed gift since it is revocable, and the transfer to charity is excluded.Page Ref.: C:12-24Objective: 7

3) In 2014, Letty makes taxable gifts totaling $4 million. Her only other taxable gifts amount to $1 million, all of which were made in 2009. What is Letty's 2012 gift tax liability before the unified credit?A) $2,220,800B) $1,875,000C) $1,840,800D) $1,600,000Answer: DExplanation: Tax on $5,000,000 (.40 × $4M + $345,800) $1,945,800Minus: tax on $1,000,000 (current rate schedule) ( 345,800)Tax on $4,000,000 $1,600,000



4) In 2013, Lilly makes taxable gifts aggregating $5.25 million. Her only other taxable gifts amount to $1 million, all of which were made in 1998. What is her gift tax liability?Answer: Tax on $6,250,000 $2,445,800Minus: tax on $1,000,000 (current rate schedule)( 345,800)Tax on $5,250,000 $2,100,000Minus remaining unified credit

($2,045,800 - $345,800 used) 1,700,000 ) Tax payable $ 400,000Page Ref.: C:12-25 and C:12-26Objective: 7

LO8: Basis Considerations for a Lifetime Giving Plan

1) Steve gave stock with an adjusted basis of $7,000 and an FMV of $10,000 to Alice. No gift tax was paid. Later, Alice sold the stock for $12,000. The gain Alice will recognize on the sale isA) $5,000.B) $2,000.C) $0.D) none of the aboveAnswer: AExplanation: $12,000 - $7,000 = $5,000Page Ref.: C:12-26 and C:12-27Objective: 8

2) Virginia gave stock with an adjusted basis of $8,000 and an FMV of $10,000 to Carmen. No gift tax was paid on the transfer. Carmen then sold the stock for $9,000. The gain or loss Carmen will recognize on the sale isA) $2,000 gain.B) $1,000 gain.C) $1,000 loss.D) none of the aboveAnswer: BExplanation: $9,000 - $8,000 = $1,000 gainPage Ref.: C:12-26 and C:12-27Objective: 8

3) Tracy gave stock with an adjusted basis of $18,000 and an FMV of $15,000 to her nephew Phil. No gift tax was paid. Phil sold the stock for $16,000. The gain or loss Phil will recognize on the sale isA) $1,000 gain.B) $0.C) $1,500 loss.D) none of the aboveAnswer: BExplanation: Phil's basis for determining gain is $18,000. His basis for determining loss is $15,000. If the gift property is sold for an amount between the two basis amounts, then no gain or loss is recognized.Page Ref.: C:12-26 and C:12-27Objective: 8

4) Miguel gives Roberta land with an adjusted basis of $50,000 and an FMV of $40,000. No gift tax is paid. Roberta sells the land for $36,000. Roberta recognizesA) no loss.B) a $4,000 loss.C) a $14,000 loss.


D) none of the aboveAnswer: BExplanation: Use lower of the donor's basis or the property's FMV on the gift date in computing the loss.Page Ref.: C:12-26 and C:12-27Objective: 8

5) Ed gives Steve land with an adjusted basis of $40,000 and an FMV of $90,000. Ed paid no gift tax. Ed then inherits the same land back from Steve at Steve's death eight months later. At Steve's death, the land is worth $120,000. Ed's basis in the land becomesA) $120,000.B) $90,000.C) $40,000.D) cannot be determined from the facts givenAnswer: CPage Ref.: C:12-26 and C:12-27Objective: 8

6) Identify which of the following statements is true.A) If the gifted property's FMV on the date of the gift exceeds its adjusted basis and the donor pays no gift tax, the donee's basis is the same as the donor's basis if the property is sold for a loss.B) Prospective donors should not dispose of property that has declined in value by selling it rather than gifting it.C) A $13,000 annual exclusion per donee is available for both gift tax and estate tax purposes.D) All of the above are false.Answer: APage Ref.: C:12-26 and C:12-27Objective: 8

7) Discuss the negative aspects of gifts.Answer: The donor loses complete control of the asset prior to death. The step-up in basis permitted at death is not available when gifts are made. The step-up in basis may not be significant if the donee has no intention of selling the asset. Also, the step-up in basis is not as significant if the asset is not depreciable. The gift tax is actually an early payment of the estate tax; thus, the donor loses the use of the cash used to pay the gift tax. Such cash, however, is excluded from the donor's estate, thus reducing the estate tax.Page Ref.: C:12-26 and C:12-27Objective: 8


LO9: Below-Market Loans: Gift and Income Tax Consequences

1) Interest-free or below-market loansA) must always have interest imputed on them.B) may result in treating the borrower as paying interest.C) result in treating the entire loan proceeds as a gift.D) will always result in at least $1,000 of interest income being imputed.Answer: BPage Ref.: C:12-28Objective: 9

2) On July 1, Frank loans his brother Matt $200,000. The loan is evidenced by an interest-free demand note. The loan is still outstanding on December 31. The applicable interest rate is 12%. Frank is treated as having made a gift ofA) $200,000.B) $24,000.C) $12,000.D) $0.Answer: CExplanation: $200,000 × 0.12 × 6/12 = $12,000Page Ref.: C:12-28; Example C:12-44Objective: 9

3) Elaine loaned her brother, Mike, $175,000 to purchase a new home. Elaine does not charge Mike any interest on the loan. What are the tax consequences to Elaine and Mike?A) Elaine is treated as having made a gift of the forgone interest on the $175,000 loan to Mike.B) Elaine only has to impute interest on $75,000 of the loan to Mike.C) If Mike has no net investment income, Elaine does not have to treat the forgone interest as a gift.D) Mike can deduct the interest that he is deemed to have paid Elaine.Answer: APage Ref.: C:12-28Objective: 9

4) On January 1, Jeff loans his friend Patrick $7,000 to buy a used car. Patrick signs a noninterest-bearing demand note. The applicable interest rate is 5%. Which of the following statements is correct?A) Jeff has made a taxable gift to Patrick of $3,500.B) Jeff must report interest income of $3,500 from Patrick.C) Jeff has made a gift to Patrick that is not taxable since it is less than $11,000.D) Interest does not have to be imputed on the gift since the loan amount is less than $10,000 and does not have a tax avoidance motive.Answer: DPage Ref.: C:12-28Objective: 9


L10: Tax Planning Considerations

1) Discuss at least two reasons for making inter vivos (lifetime) gifts.Answer: The $13,000 per donee annual exclusion allows large sums to pass to donees without any transfer tax being imposed. There is no estate tax counterpart. Inter vivos gifts remove postgift appreciation from the tax base. Gift tax amounts are also removed from the tax base unless the transfer occurs within three years of death. Gifts made in contemplation of death to a donee-spouse may allow use of the full unified credit for the donee-spouse. Most states do not impose a gift tax. Gifts to charity may also result in an income tax deduction.Page Ref.: C:12-29 and C:12-30Objective: 10

2) Terry is considering transferring assets valued at $400,000 to an irrevocable trust for the benefit of her son, Cliff, age 15, with First National Bank as trustee. Her attorney has drafted a trust agreement that provides that Cliff is to receive income at the trustee's discretion for the next 20 years and that at age 35, the trust assets will be distributed equally between Cliff and his sister Joanna. Terry anticipates that her husband will consent to gift splitting. What tax issues should Terry and her husband consider with respect to the trust she is creating?Answer: • Will any portion of Terry's transfer be classified as a gift of a present interest?• Will the transfer in trust qualify for an annual exclusion under the 2503(c) trust provisions?• Does gift splitting seem to be advisable?

The trust is a discretionary trust and so Cliff is not guaranteed to receive anything for 20 years. Also, Joanna will not receive anything until 20 years from now. Thus, Terry will make no transfers of present interests.

The trust is not a 2503(c) trust because it does not terminate when Cliff becomes age 21 (nor does it give Cliff a "window" soon after attaining age 21 to ask for the trust assets). In addition, when the trust terminates, some of the assets will go to Cliff's sister instead of all of them passing to Cliff.

We do not have sufficient facts about the spouses' prior gift history to give a definitive answer about whether gift splitting would be advisable. Because no annual exclusions will be allowed, the usual benefit of doubling the annual exclusion will not be available. However, if both spouses still have most of their unified credit available, gift splitting likely will be beneficial by reducing the tax rate on the gifts and allowing use of two unified credits.Page Ref.: C:12-29 and C:12-30Objective: 10


L11: Compliance and Procedural Considerations

1) Gift tax returns are filed on a calendar-year basis.Answer: TRUEPage Ref.: C:12-31Objective: 11

2) The purchase of a $15,000 engagement ring generates a taxable gift necessitating the filing of a gift tax return.Answer: TRUEPage Ref.: C:12-31Objective: 11

3) Roger makes a $1,000,000 cash gift on January 1 of the current year, and dies on February 1 of the current year. Roger's gift tax return is dueA) April 15 of the current year.B) December 31 of the current year.C) April 15 of the next year.D) nine months after his date of death.Answer: DPage Ref.: C:12-31Objective: 11

4) Identify which of the following statements is false.A) Gift tax returns are due annually by April 15 following the year of the gift. No extensions are allowed.B) The donor pays the gift tax generally.C) Gift tax returns are filed on a calendar-year basis.D) Receipt of an extension of time for filing a gift tax return does not extend the due date for payment of the gift tax.Answer: APage Ref.: C:12-31Objective: 11

5) Which of the following situations requires that a gift tax return be filed?A) George gives wife, Laura, a new car for her birthday.B) Yanisha makes gifts of $3,000 of present interest property to each of her nieces and nephews.C) Archie pays the hospital medical bills for his friend Paige.D) Ida purchases a beach home, listing Mark as a joint tenant. Mark provides no consideration for the home.Answer: DPage Ref.: C:12-31Objective: 11


6) Which of the following statements is true?A) If the donor does not pay the gift tax, the donee is personally liable for the tax.B) When a married couple elects gift splitting, each spouse is potentially liable for 50% of the gift tax.C) Gift tax returns are due March 15 in the year following the gift.D) Donors can request an automatic extension of time to pay their gift tax even when they don't request to have an income tax extension.Answer: APage Ref.: C:12-31Objective: 11

7) What is the due date for the gift tax return? Are there any exceptions? If so, what are they?Answer: Gifts always are reportable on a calendar-year basis. The due date for a gift tax return generally is April 15th of the year following the year in which the donor made the gifts, even if the donor reports on a fiscal year for income tax purposes. If the donor dies during the year, the gift tax return must be filed no later than the due date for the estate tax return (nine months after the date of death). If an extension is requested for filing the donor's individual income tax return, an extension until October 15 also is granted for filing the gift tax return.Page Ref.: C:12-31Objective: 11

8) Describe the penalties for undervaluing gifts on a gift tax return.Answer: Sec. 6662 imposes a penalty, at one of two rates, on underpayment of gift or estate taxes resulting from too low a valuation of property. The penalty is imposed on the amount of the transfer tax understatement. If the valuation shown on the tax return exceeds 65% of the valuation determined upon audit or court trial, there is no penalty. If the value reported on the return is 65% or less of the correct value, the penalty rate is:

Ratio of value per return tocorrect value Penalty rateMore than 40% but 65% or less 20%40% or less 40%

A taxpayer is exempt from the penalty if the underpayment is less than $5,000. The IRS will not levy the penalty if the taxpayer shows good faith and reasonable cause.Page Ref.: C:12-32Objective: 11


Documents

Chapter c12