G.57 Gift, estate, and GST tax compliance and calculation Flashcards
(40 cards)
**Scenario: **
Margaret is in the process of estate planning and she’s consulting with her financial advisor, Jason. She intends to transfer a piece of real estate she owns to her nephew, Kevin. In exchange, Kevin agrees to transfer a valuable art collection to Margaret. The properties in question have been assessed to have roughly the same market value.
Question:
Which of the following best describes the nature of Margaret’s transaction with her nephew, Kevin?
A. A gratuitous transfer of property
B. A transfer subject to GST tax
C. A transaction of consideration
D. A taxable gift under the estate tax
A transaction of consideration
Explanation: The transaction between Margaret and Kevin is not a gratuitous or one-sided transfer. Both parties are exchanging properties of roughly equivalent value. Hence, it is a transaction where property is transferred in return for other property. It’s not considered a gift because something of equal value is given in return, which means it wouldn’t fall under the category of a taxable gift for estate tax purposes.
G.57 Gift, estate, and GST tax compliance and calculation
Jessica recently set up a trust for the benefit of her nephew, Alex. She has included a provision in the trust deed that allows Alex to withdraw any amount from the trust for 30 days after any contribution is made by Jessica. She hopes to maximize her usage of the annual exclusion in gift taxes through this approach.
Which of the following best describes the impact of this provision in the trust?
A) The provision converts a gift of a present interest to a gift of a future interest, making it ineligible for the annual exclusion.
B) The provision does not impact the gift’s status regarding the annual exclusion.
C) The provision converts a gift of a future interest to a gift of a present interest, making it eligible for the annual exclusion.
D) The provision will result in a higher tax penalty for Jessica.
The provision converts a gift of a future interest to a gift of a present interest, making it eligible for the annual exclusion.
Explanation: The provision in the trust deed, known as a Crummey power or right, allows the beneficiary to withdraw contributions for a limited time. This makes the gift a present interest, meaning the beneficiary has an immediate right to the gift, rather than a future interest. As gifts of present interest qualify for the annual gift tax exclusion, this provision ensures that Jessica’s contribution to the trust can make use of this tax advantage.
David intends to support his daughter by providing her with some financial assistance. Which of the following best describes the action if David either hands her a sum of cash directly or transfers ownership of a property to her?
A) Charitable contribution
B) Testamentary bequest
C) Direct gift
D) Loan
Direct gift.
Explanation:A direct payment of cash or transfer of property to a donee is known as a direct gift. Unlike charitable contributions which are made to qualified charitable organizations, or testamentary bequests which are transfers made upon death, a direct gift is a straightforward transfer of assets without any consideration in return. It’s also different from a loan, where there is an expectation of repayment.
Jane decides to transfer a valuable antique to her friend Mark without any consideration in return. In this situation, Mark is best described as:
A) Donor
B) Donee
C) Beneficiary
D) Trustee
Donee
Explanation: In the context of gifts, the person who gives the gift is called the “donor,” while the person who receives the gift is called the “donee.” In this scenario, since Mark is the one receiving the antique from Jane, he is the donee.
Emily wishes to transfer some of her assets to her nephew as a gesture of goodwill. In the context of gift-giving for financial planning purposes, what term best describes Emily’s role?
A) Beneficiary
B) Donee
C) Trustee
D) Donor
Donor
Explanation: In the context of gift-giving, the individual who gives the gift is referred to as the ‘donor’. The person receiving the gift is termed the ‘donee’. Thus, in the scenario, Emily would be the donor as she is the one giving the gift.
Jane decided to gift her son, Michael, a piece of property. At the time of the gift, the fair market value of the property was lower than Jane’s adjusted basis. If Michael decides to sell this property in the future, how would his basis be determined for gains and losses?
A) He will use Jane’s adjusted basis for both gains and losses.
B) He will use the fair market value for both gains and losses.
C) He will have one basis for gains and another basis for losses.
D) He will use the average of Jane’s adjusted basis and the fair market value for both gains and losses.
He will have one basis for gains and another basis for losses.
Explanation: This is referred to as the Double-Basis (or Bifurcated Basis) Rule. When a donee receives a gift where the fair market value at the date of the gift is less than the donor’s adjusted basis, the donee will have one basis (the fair market value) if the property is later sold at a gain and another basis (the donor’s adjusted basis) if the property is sold at a loss.
The lapse of a general power of appointment., like the release of such a power, results in a transfer for gift tax purposes. This rule applies only to the extent the value of the property subject to the lapsed powers exceeds the greater of $5,000 or 5% of the aggregate value of the assets out of which the powers could have been satisfied.
Five-And-Five Lapse Rule
A tax-advantaged savings plan designed to encourage saving for future college costs
529 Plan
An interest that is limited in some way by a future date or time. A gift of a future interest does not qualify for the annual exclusion
Future Interest
A voluntary transfer, without full consideration, or property from one person (a donor) to another person (a donee) or entity.
Gift
Any transfers that include a revocable beneficiary designation or a transfer to a revocable trust. These types of transfers are not considered gifts for gift tax purposes.
Incomplete Transfer
A payment, or transfer, to a third party on behalf of a donor for the benefit of the donee
Indirect Gift
A gift that requires the donee to pay the gift tax. This gift tax is based on the value of the transfer less the gift tax.
Net Gift
An unrestricted right to the immediate use of property and qualifies for the annual exclusion
Present Interest
Payment made directly to a qualified educational institution for tuition, excluding room and board, or payment made directly to a medical institution for the qualified expenses of someone else. These are excluded from gift tax.
Qualified Transfers
Interests that have been transferred and subsequently revert back to the transferor. Also includes a possibility that the property transferred by the decedent may return to him or his estate and a possibility that property transferred by the decent may become subject to a power of disposition by him.
Reversionary Intrerest
An election available to a donor of separate property which allows him to utilize his spouse’s annual exclusion and transfer up to $30,000 per year per donee without incurring gift tax.
Split Gift Election
The period of time allowed for the IRS to assess any additional gift tax, generally 3 years, unless the gift is not adequately disclosed on a filed gift tax return. If the gift is not adequately disclosed, this will never expire,.
Statute of Limitations.
Tax Act signed into law in 2010 that extended various income and estate tax provisions of EGTRRA and introduced exemption portability. The provisions were made permanent by the ATRA.
Tax Relief, Unemployment Insurance Authorization, & Job Creation Act of 2010 (TRA 2010)
A gift in excess of the annual exclusion. Does not create a tax liability until the lifetime exemption for taxable gifts is exhausted. This type of gift does not include any qualified transfers.
Taxable Gift
Is equal to the gross estate less any deductions for the funeral expenses, administrative expenses, debts, and losses during the administration of the estate.
Adjusted gross estate
An alternate date, other than the date of death, to value a decedent’s gross estate. This date is either six months after the date of death, or if the asset is disposed of within six months of the date of death, the asset’s disposition date. Wasting assets do not qualify to use this date.
Alternate valuation date
A reduction in the fair market value of a large block of publicly- traded stock because the transfer of a large block of stock is less marketable than other transfers of smaller amounts of stock.
Blockage discount
The date a board of directors approves and declares a dividend to be paid to the stockholders
Date of declaration
