B.16 Gift/income tax strategies Flashcards
(15 cards)
Which of the following is NOT considered a gift for gift tax purposes?
A) A present interest gift
B) A future interest gift
C) A gift of a partial interest
D) A gift of services
A gift of service
Explanation: A gift of services is not considered a gift for gift tax purposes because it does not involve a transfer of property.
B.16 Gift/Income Tax Strategies
When does the gift tax annual exclusion apply?
A) To gifts of any amount
B) To gifts up to a certain dollar amount per year per donee
C) To gifts made to charitable organizations only
D) To gifts made to family members only
To gifts up to a certain dollar amount per year per donar.
Explanation: The gift tax annual exclusion applies to gifts up to a certain dollar amount per year per donee. For 2023, this amount is $17,000 per year per donee.
B.16 Gift/Income Tax Strategies
Which of the following gifts is NOT eligible for the gift tax annual exclusion?
A) Cash gifts
B) Gift of property
C) Gifts to a qualified charity
D) Gifts to a political organization
Gifts to a political organization
Explanation: Gifts to a political organization are not eligible for the gift tax annual exclusion.
B.16 Gift/Income Tax Strategies
Which of the following strategies allows a taxpayer to transfer wealth to future generations while avoiding estate and gift taxes?
A) Installment sale to a grantor trust
B) Charitable lead trust
C) Dynasty trust
D) Grantor retained annuity trust
Dynastry trust
Explanation: A dynasty trust allows a taxpayer to transfer wealth to future generations while avoiding estate and gift taxes.
B.16 Gift/Income Tax Strategies
Which of the following strategies allows a taxpayer to make a gift to a charity and receive an income stream in return?
A) Charitable remainder annuity trust
B) Charitable lead trust
C) Private foundation
D) Donor-advised fund
Charitable remainder annuity trust
Explanation: A charitable remainder annuity trust allows a taxpayer to make a gift to a charity and receive an income stream in return.
B.16 Gift/Income Tax Strategies
John wants to gift $20,000 to his niece, Sarah. How much of this gift is eligible for the gift tax annual exclusion?
A) $0
B) $5,000
C) $10,000
D) $17,000
$17,000
Explanation: For 2023, the gift tax annual exclusion is $17,000 per year per donee, so $17,000 of John’s gift to Sarah is eligible for the annual exclusion.
B.16 Gift/Income Tax Strategies
Jane wants to make a gift of $50,000 to her son, Jack, to help him purchase a home. Which of the following strategies could Jane use to minimize her gift tax liability?
A) Make the gift as a cash gift
B) Use her unified credit to offset the gift tax liability
C) Make the gift as a loan instead of a gift
D) None of the above
Use her unified credit to offset the gift tax liability
Explanation: The unified tax credit defines a dollar amount that an individual can gift during their lifetime and pass on to heirs before gift or estate taxes apply. The tax credit unifies the gift and estate taxes into one tax that decreases the tax bill of the individual or estate, dollar for dollar.
B.16 Gift/Income Tax Strategies
Tom wants to transfer $1,000,000 of assets to his grandchildren. Which of the following strategies would allow him to transfer the assets while minimizing estate and gift taxes?
A) Make the gift as a cash gift
B) Use his unified credit to offset the gift tax liability
C) Make the gift as a future interest gift
D) Use a dynasty trust
Use a Dynasty Trust
Explanation: Tom could use a dynasty trust to transfer the assets to his grandchildren while minimizing estate and gift taxes.
B.16 Gift/Income Tax Strategies
Which of the following types of trusts allows a grantor to retain an income stream from the trust assets while removing the assets from their estate for estate tax purposes?
A) Charitable lead trust
B) Grantor retained annuity trust
C) Irrevocable life insurance trust
D) Qualified personal residence trust
Granter Retained Annuity Trust (GRAT)
Explanation: A grantor retained annuity trust (GRAT) allows a grantor to retain an income stream from the trust assets while removing the assets from their estate for estate tax purposes.
B.16 Gift/Income Tax Strategies
Which of the following gifts would be subject to the highest tax rate under the federal gift tax?
A) A cash gift of $100,000 to a family member
B) A gift of a partial interest in a valuable piece of artwork to a friend
C) A gift of stock in a family-owned business to a child
D) A gift of $5,000 to a neighbor
A gift of a partial interest in a valuable piece of artwork to a friend
Explanation: Gifts of partial interests are generally subject to higher tax rates than outright gifts because of the valuation complexities involved.
B.16 Gift/Income Tax Strategies
Which of the following is a disadvantage of using a private foundation as a charitable giving strategy?
A) Private foundations allow donors to retain control over the use of their gifts.
B) Private foundations offer donors substantial income tax deductions.
C) Private foundations are subject to strict IRS regulations and reporting requirements.
D) Private foundations are not subject to the same payout requirements as other charitable giving vehicles.
Private foundations are subject to strict IRS regulations and reporting requirements
Explanation: Private foundations are subject to strict IRS regulations and reporting requirements, which can make them more difficult to administer than other charitable giving vehicles.
B.16 Gift/Income Tax Strategies
Which of the following is a benefit of using a donor-advised fund as a charitable giving strategy?
A) Donor-advised funds offer donors substantial income tax deductions.
B) Donor-advised funds allow donors to retain control over the use of their gifts.
C) Donor-advised funds are not subject to any IRS regulations or reporting requirements.
D) Donor-advised funds allow donors to receive an income stream in return for their gifts.
Donor-advised funds allow donars to retain control over the use of their gifts
Explanation: Donor-advised funds allow donors to retain control over the use of their gifts, which can be a significant advantage for donors who want to ensure that their gifts are used in accordance with their wishes.
B.16 Gift/Income Tax Strategies
Which of the following strategies would be most appropriate for a taxpayer who wants to transfer assets to their children while minimizing income taxes?
A) Charitable remainder annuity trust
B) Charitable lead trust
C) Installment sale to a grantor trust
D) Irrevocable life insurance trust
Installment sale to a granter trust
Explanation: An installment sale to a grantor trust can be an effective way to transfer assets to children while minimizing income taxes because it allows the taxpayer to sell the assets to the trust at a reduced value and defer recognition of the gain.
B.16 Gift/Income Tax Strategies
Which of the following is a requirement for a gift to qualify for the gift tax annual exclusion?
A) The gift must be made in cash.
B) The gift must be made to a family member.
C) The gift must be made to a qualified charity.
D) The gift must be of a present interest.
The gift must be of a present interest
Explanation: For a gift to qualify for the gift tax annual exclusion, it must be of a present interest. This means that the recipient must have a right to use or enjoy the gift immediately.
B.16 Gift/Income Tax Strategies
Bonnie is a widow with an estimated net worth of $45,000,000. She is terminally ill and is expected to die before the year ends. She has $4,500,000 in one IRA and $1,500,000 in another IRA. She would like to give $4,500,000 to a charity. Which of the following will minimize her income and estate tax liability?
A) Naming the charity as beneficiary of the $4,500,000 IRA
B) Leaving $4,500,000 from an IRA to the charity in her Will
C) Withdrawing $4,500,000 from an IRA and giving it to the charity before she dies
D) Naming her estate as beneficiary of the $4,500,000 IRA and giving the charity $4,500,000 in her Will.
Naming the charity as beneficiary of the $4,500,000 IRA.
Explanation:By naming the charity directly as the beneficiary of the IRA, the entire amount would pass to the charity free of income and estate tax. This approach preserves the maximum value of the gift for the charity.
Option B would subject the IRA funds to potential estate taxes first. Option C would incur income taxes upon withdrawal, thus reducing the value of the gift. Option D is a more complicated method that achieves the same result as option B, but with additional steps and potential for mistakes.
B.16 Gift/income tax strategies
