Exam 12: The Gift Tax

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?

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

Which of the following transfers is subject to the gift tax?

Identify which of the following statements is true.

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 "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.

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?

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?

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?

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

Bryce pays $40,000 for his adult grandson's tuition at medical school and $18,000 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?

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 $30,000 per year. Sandra contributes $30,000 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

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?

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?

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?

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 gift- splitting election

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?

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

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?