Chapter 14

Question 1

What is included in transfer taxes?

Answer 1

gift tax and estate tax

Question 2

Who pays transfer taxes?

Answer 2

The giver

Question 3

What does it mean to say the gift tax and estate tax were “unified”?

Answer 3

There is an integrated formula that take into account the cumulative effect of transfers in previous periods when calculating the tax on transfers in the current period.

Takes into account both gifts during life and upon death.

Question 4

What is the maximum transfer tax rate and when does it set in?

Answer 4

40% once gifts exceed $1 million

Question 5

What is the transfer tax on the first $1 million?

Answer 5

$345,800

Question 6

What is the transfer tax exemption equivalent?

Answer 6

A tax credit on cumulative transfers below the limit
Changes each year.
Big increase in 2018 (TCJA)
$13.61 million equal to a $5,389,800 tax credit in 2024

Question 7

What type of transfer taxes have no limit on exemption equivalent?

Answer 7

Charitable donations
Transfers to spouse

Question 8

What does less than adequate consideration mean?

Answer 8

Transfers of property to a recipient when the recipient doesn’t give enough in return for the fair market value of the transferred property

Question 9

What form is used to register the gift tax if required?

Answer 9

Form 709

Question 10

What are inter vivos gifts

Answer 10

Gifts given while the donor is alive

Question 11

What kind of gifts are taxable?

Answer 11

Completed gifts (the donor relinquishes control of the property and the donee accepts the gift)

Question 12

What kind of gifts are excluded for tax?

Answer 12

Incomplete and revocable gifts (e.g., trust where grantor can revoke)
Payments for support of obligations or debts (e.g., parent supporting a dependent child
Contributions to political parties or candidates
Medical and educational expenses paid on behalf of an unrelated individual (and paid directly to the institution)
Divorce settlements (transferred within 3 years)

Question 13

What is the annual exclusion for gifts?

Answer 13

$18,000 per donee in 2024.
Don’t have to file a form 709 if below this amount
Gets subtracted for determining total current taxable gifts

Question 14

Other than the annual exclusion for gifts, what else added and or subtracted from the total current gifts to get the total current taxable gifts?

Answer 14

minus: 1/2 of split gifts (they are added to the spouse’s current gifts)
add: 1/2 of split gifts given by spouse
Only in community law state and in common law states if the spouses elect to have split gifts (stated on form 709)

Question 15

What is the equation to get gift tax payable from total current taxable gifts?

Answer 15

(Total current taxable gifts + prior taxable gifts) current tax rates - tax at current rates on prior taxable gifts - unused applicable credit at current rates = gift tax payable

Question 16

What can and cannot be included in the annual exclusion?

Answer 16

Gifts of present interests are eligible–the donee has a right to own and enjoy the property currently
Certain gifts of future interest (such as placed in a trust for a minor) can also qualify
Most future interests, such as a right to occupy property in the future, is not eligible

Question 17

Rules for gift-splitting

Answer 17

Must be married at time of gift and not divorce or remarry during the year
Both spouses must consent to the election in common property states
Annual election applies to all completed gifts

Question 18

Rules for marital deduction

Answer 18

only if the gifts are not terminal interests
limited to the value of the gifts after annual exclusion
only on spousal transfers that will eventually be included in the spouse’s estate (because the spouse’s estate will be taxed and transfers should be subject to gift or estate tax, not both and not neither)

Question 19

What is a terminable interest gift?

Answer 19

An interest that terminates upon an event or after a specified amount of time, e/g/ life estate (value terminates at death and then transfers to someone else)

Question 20

Rules for charitable deduction

Answer 20

Limited to the value of the gifts after the annual exclusion
qualified charities only
No gift tax return necessary for gifts of entire interest

Question 21

When determining the gift tax, what it the value of the property given?

Answer 21

fair market value at the date of the gift

Question 22

What basis does the donee of a gift of property take?

Answer 22

carryover basis–the same basis the donor had in the property

Question 23

What is a terminal interest gift reversion?

Answer 23

At some point in the future, the gift returns to the original owner.

Question 24

What is a terminal interest gift remainder?

Answer 24

At some point in the future, the gift transfers to a new owner

Question 25

In terms of transfer tax, what must be determined in gifts of terminable interest?

Answer 25

Present interest Future interest

Question 26

How do you get the present value of the future interest?

Answer 26

Use actuarial tables based on the Treasury published discount rate (Table S) and the time until the present interest expires. The S tables are available on the IRS website.

Question 27

How do you get the value of the present interest?

Answer 27

Value of property minus the present value of the future interest.

Question 28

What formula can you use to calculate gift tax if the cumulative gifts exceed $1 million?

Answer 28

(Cumulative gifts - prior taxable gifts - unused equivalent) x 40%

Question 29

If cumulative gifts -prior taxable gifts - unused equivalent is positive, what does it mean?

Answer 29

A gift tax is due. If the cumulative gifts are greater than $1 million, then the gift tax is equal to 40% of this value.

Question 30

If cumulative gifts -prior taxable gifts - unused equivalent is negative, what does it mean?

Answer 30

Their will be unused applicable credit. If the cumulative gifts are greater than $1 million, that the unused applicable credit is equal to 40% of this value.

Question 31

When calculating estate tax, what is property valued at?

Answer 31

Fair market value at the date of the decedent's death or 6 months after death if it reduces the gross estate and estate tax.

Question 32

What is the recipient's basis in property transferred in an estate?

Answer 32

Step-up basis to fair market value

Question 33

What form is the estate tax return form?

Answer 33

Form 706

Question 34

What is the formula for adjusted gross estate?

Answer 34

Gross estate - expenses, debts, and losses

Question 35

How do you get taxable estate from adjusted gross estate?

Answer 35

adjusted gross estate - marital and charitable deductions

Question 36

How do you get the gross estate tax from taxable estate?

Answer 36

(Taxable estate + adjusted taxable gifts) current tax rates - gift taxes payable on adjusted taxable gifts at current rates - full applicable credit calculated using current tax rates

Question 37

What are the two components of gross estate?

Answer 37

Probate estate and automatic property transfers that are not included in the probate estate

Question 38

What is probate estate?

Answer 38

Property owned by a decedent at the time of death where ownership (title) passes to beneficiaries through the process of probate.

Question 39

What is an example of a automatic property transfer that doesn't go through probate?

Answer 39

trusts

Question 40

What are the additions to gross estate?

Answer 40

Property owned by the decedent in joint tenancy with right of survivorship Proceeds of life insurance paid due to death of decedent Certain transfers within three years of death and the gift taxes paid on transfers within three years of death

Question 41

How are taxable gifts adjusted in the formula to get estate tax?

Answer 41

Any gifts that were added to the estate because they were the certain transfers within 3 years of death and subtracted from the taxable gifts before death.

Question 42

In a community property state, how much of property co-owned by married individuals is included in the estate?

Answer 42

50%

Question 43

If co-owners of property are married and have joint tenancy with right of survivorship, how much of the property is included in the estate?

Answer 43

50%

Question 44

If co-owners of property are unmarried and have joint tenancy with right of survivorship, how much of the property is included in the estate?

Answer 44

Percentage of the fair market value determined by decedent's contribution to total cost of property

Question 45

If co-owners of property have tenancy in common, but don not have right of survivorship, how much of the property is included in the estate?

Answer 45

Percentage of the fair market value determined by decedent's interest in the property

Question 46

What is DSUE?

Answer 46

Deceased Spousal Unused Exclusion. A surviving spouse whose deceased spouse died without using their applicable credit is entitled to the unused credit

Question 47

What is the estate tax short cut formula?

Answer 47

(cumulative transfers - prior gifts - unused equivalent) 40% only when cumulative transfers exceed $1 million

Question 48

What is the generation-skipping tax?

Answer 48

A flat 40% tax designed to prevent an individual from avoiding tax by transferring indirectly to a grandchild as could happen if a life estate is given to a child with a terminal interest that transfers to a grandchild.

Question 49

What are three transfer tax planning techniques?

Answer 49

Serial gifts DSUE Step-up basis

Question 50

How does serial gifts work in transfer tax planning?

Answer 50

Convert a potentially large taxable transfer into multiple smaller transfers that qualify for the annual exclusion

Question 51

What is the step-up basis in transfer tax planning?

Answer 51

If gifts are transferred in an estate, the recipient gets a step-up basis to fair market value, but if the transfer is during life as a gift, then the recipient gets a carryover basis. Thus, it is better for the recipient to get the property after the donors death.