Deck 23: The Gift Tax

Question 1

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 1

False

Question 2

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 2

C

Question 3

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 3

B

Question 4

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.

Question 5

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 total

A)$520,000.
B)$260,000.
C)$300,000.
D)$240,000.

Question 6

The annual exclusion permits donors to make gifts of $14,000 each to multiple donees.

Question 7

A net gift occurs when a donor makes a gift subject to the agreement that the recipient agrees to pay the gift tax.

Question 8

Molly sells her car,valued at $30,000,to her nephew Todd for $18,000.Molly has made a taxable gift.

Question 9

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)of

A)$50,000.
B)$170,000.
C)$120,000.
D)$0.

Question 10

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 by

A)$0.
B)$6,000.
C)$15,000.
D)$30,000.

Question 11

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?

Question 12

The changing of a life insurance policy beneficiary from a spouse to an adult daughter constitutes a gift for transfer tax purposes.

Question 13

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?

Question 14

Discuss the ways in which the estate and gift tax system is a unified system.

Question 15

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 is

A)$0.
B)$189,000.
C)$200,000.
D)$800,000.

Question 16

Phil transfers $50,000 to a revocable trust benefiting his son,Josh.The transfer is a taxable gift.

Question 17

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.

Question 18

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.

Question 19

The gift tax is a wealth transfer tax that applies to transfers during a person's lifetime and transfers at death.

Question 20

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 total

A)$70,000.
B)$59,000.
C)$56,000.
D)$25,000.

Question 21

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.

Question 22

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.

Question 23

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 is

A)a remainder interest.
B)a life estate.
C)a reversionary interest.
D)a term certain.

Question 24

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 is

A)a remainder interest.
B)a life estate.
C)a reversionary interest.
D)a term certain.

Question 25

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.

Question 26

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.

Question 27

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.

Question 28

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.

Question 29

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.

Question 30

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.

Question 31

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.

Question 32

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.

Question 33

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.

Question 34

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.

Question 35

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 is

A)a term certain.
B)a life estate.
C)a reversionary interest.
D)none of the above.

Question 36

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.

Question 37

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)of

A)$100,000.
B)$60,000.
C)$50,000.
D)$0.

Question 38

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 is

A)$8,500.
B)$9,000.
C)$15,500.
D)$20,500.

Question 39

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 of

A)$0.
B)$40,000.
C)$80,000.
D)$90,000.

Question 40

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 total

A)$19,500.
B)$19,000.
C)$3,000.
D)$0.

Question 41

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.

Question 42

What is a "net gift" and what is the potential income tax problem associated with making a net gift?

Question 43

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?

Question 44

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?

Question 45

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.

Question 46

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.

Question 47

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.

Question 48

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?

Question 49

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?

Question 50

Discuss the statutory exemptions from the gift tax.

Question 51

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.

Question 52

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?

Question 53

Abby transfers $10,000 to a political organization to promote her favorite candidate for president.Does Abby's transfer qualify as a gift?

Question 54

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?

Question 55

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.

Question 56

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?

Question 57

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.

Question 58

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?

Question 59

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?

Question 60

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?

Question 61

A husband transfers $90,000 by gift directly to his wife.The marital deduction for the transfer is

A)$0 unless he elects to claim one.
B)$90,000.
C)$76,000.
D)none of the above

Question 62

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?

Question 63

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 total

A)$28,000.
B)$15,500.
C)$12,000.
D)$0.

Question 64

A gift-splitting election

A)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.

Question 65

A Crummey trust

A)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.

Question 66

A split-interest gift transfer

A)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.

Question 67

Discuss the purpose of the gift tax annual exclusion.

Question 68

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.

Question 69

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 a

A)2503(c)trust.
B)Clifford trust.
C)Crummey trust.
D)none of the above

Question 70

The computation of the gift tax liability for a current year

A)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.

Question 71

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.

Question 72

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.

Question 73

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.

Question 74

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?

Question 75

What are the requirements for classifying a transaction as a transfer of a qualified terminable interest property (QTIP)?

Question 76

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.

Question 77

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 total

A)$132,000.
B)$148,000.
C)$110,000.
D)$60,000.

Question 78

Contrast the Crummey trust with the Sec.2503(c)trust.

Question 79

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.

Question 80

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)$550,000
B)$536,000
C)$500,000
D)$50,000