Deck 16: Family Tax Planning

Question 1

Mr.and Mrs.B are equal shareholders in Beta Corporation, which is an S corporation.In order to shift corporate income to their children and still retain total control of the corporation, Mr.and Mrs.B may have Beta issue common, nonvoting stock to their children without terminating Beta's Subchapter S election.

Answer 1

True

Question 2

On the whole, a regular corporation provides more intra-family income-shifting advantages than an S corporation.

Answer 2

False

Question 3

Taxpayer T transfers $1 million in assets to a revocable trust.Under the terms of the trust instrument, daughter D will be paid the income generated by the trust assets for her life, and charity C will receive the remainder interest upon D's death.The income of this trust will be taxed to T.

Answer 3

True

Question 4

A family member will be recognized as a legitimate partner if he or she owns a capital interest in a partnership in which capital is a material income-producing factor, even if the family member does not perform any services for or on behalf of the partnership.

Question 5

Taxpayer M, a sole proprietor, hires her 15-year-old dependent daughter D as an employee of her business.During the year, M pays D a reasonable salary of $6,500 for the work D performs.D put the entire amount of her salary into a savings account for college.Which of the following statements is not accurate?

A)M will claim a $6,500 ordinary business deduction on her current-year tax return.
B)D will report $6,500 of ordinary income on her own current-year income tax return.
C)D may not claim a personal exemption on her own current-year income tax return.
D)M may not claim a dependency exemption for D on M's current tax return.

Question 6

One advantage of a Crummey trust over a § 2503 (c) trust is that the distribution of trust corpus can be delayed beyond the date when the beneficiaries reach age 21.

Question 7

Individual S is the sole shareholder of Corporation S.The corporation employs S's college-aged granddaughter as secretary-treasurer for the summer, paying her $25,000 for three months work.If the Internal Revenue Service determines that the granddaughter is not a bona fide corporate employee and disallows the entire $25,000 salary deduction, the $25,000 payment could be reclassified as a dividend to the granddaughter.

Question 8

If a transfer of assets into trust is complete for gift and estate tax purposes, the trust is always held to be a separate, taxable entity.The transferor will not be taxed on any income generated by these assets after transfer into trust.

Question 9

The payment of dividends by a regular family corporation to shareholders who are low tax bracket family members is an economical and effective method for family income-shifting.

Question 10

Grandfather GF, a single taxpayer, has current year taxable income of $300,000.His granddaughter GD, also single, has current year taxable income of $210,000.An income shift of $15,000 from GF to GD during the current year would not result in any tax savings to the family.

Question 11

D, the seven-year-old daughter of Mr.and Mrs.M, is a very successful child model.Because Mr.and Mrs.M provide more than 50 percent of D's support and claim her as a dependent, D's earnings as a model must be reported on her parent's income tax return.

Question 12

Taxpayer T would like to "shift" some of his current year taxable income to an elderly aunt.T can accomplish this objective through the use of a $150,000 interest-free demand loan to his aunt.

Question 13

An excellent source of funds with which to pay a sizeable Federal estate tax is insurance on the life of the potential decedent with the decedent's estate named as beneficiary.

Question 14

"Flower" bonds, which may be used to pay a Federal estate tax liability, typically will pay an interest rate higher than the market interest rate.

Question 15

Married taxpayers have the option of filing a joint income tax return or filing as two single taxpayers.

Question 16

The purpose of a Crummey power in a trust is to prevent a beneficiary from gaining access to current additions to the trust.

Question 17

The gift of an income-producing asset, for purposes of shifting tax liability on the income to the donee, is never completed until the donor irrevocably transfers ownership to the donee.

Question 18

For tax purposes, trusts can be divided into two basic categories: grantor trusts and trusts recognized as separate taxable entities subject to the provisions of Subchapter J.

Question 19

In the current taxable year, married couple H and W give a completed gift of a $20,000 certificate-of-deposit bearing simple interest to their 15-year-old child, C.The interest on the certificate paid to C during the current year totals $1,600.Under the assignment-of-income doctrine, the $1,600 must be included in the gross income of H and W.

Question 20

The tax attributable to a closely held business can be deferred but only if the business is at least 50 percent of the estate.

Question 21

D's grandmother places $50,000 in a trust for D at her birth.The trustee may distribute income to D at his discretion.Which of the following is a true statement about the tax consequences of this arrangement?

A)Any amounts accumulated by the trust are subject to the "kiddie tax."
B)The distributed amounts will be subject to the "kiddie tax" as long as the child is less than 19 or a full-time student less than 24.
C)D's parents must recognize all the trust income for income tax purposes until D reaches age 24.
D)Income generated by a gift to a minor is nontaxable to the extent it is not distributed to the minor.

Question 22

T incorporated his candy business as a C corporation.Several family members work for the corporation.Which technique will not avoid double taxation?

A)The corporation employs family shareholders and pays them reasonable salaries.
B)T loans the corporation money and receives fair market interest on the loan.
C)The corporation pays dividends to family shareholders.
D)T leases the land on which a new addition is being built to the corporation.

Question 23

Which of the following is not a characteristic of a Crummey trust?

A)A Crummey trust is a grantor trust, with the result that all trust income will be taxed to the grantor.
B)A Crummey trust allows the grantor to delay distribution of trust assets beyond the 21st birthday of the trust beneficiary.
C)Transfers into a Crummey trust are eligible for the annual gift tax exclusion because of the withdrawal right given to trust beneficiaries.
D)Beneficiaries of a Crummey trust must be notified of their withdrawal right within a reasonable period prior to the lapse of the right.

Question 24

The advantages of a private trust include all of the following except

A)Placing legal title in the hands of a single entity
B)Providing for prudent management of trust assets
C)Providing a form for giving property in sequence rather than concurrently
D)Accumulating income during the years in which the trust's marginal rate is less than the income beneficiary's

Question 25

Which of the following is not a characteristic of a § 2503(c) trust?

A)A transfer into a § 2503(c) trust will be considered a gift of a current interest in the transferred property, eligible for the annual gift tax exclusion.
B)Income from the trust may be expended for the benefit of any beneficiary under the age of 21.
C)If an income beneficiary dies before reaching the age of 21, his or her share of trust assets reverts to the donor.
D)Income accumulated in the trust for an income beneficiary under the age of 21 will be taxed at the beneficiary's rates.

Question 26

During the 2012, taxpayer C (age 17 on the last day of the taxable year and a dependent on his widowed mother's tax return) receives $350 of interest on a savings account and $900 earned income from baby-sitting.Based on these facts, which one of the following statements is correct?

A)C has taxable income of $50 which will be taxed at the rate applying to single taxpayers.
B)C has no taxable income.The $350 of unearned income will be taxed on C's mother's return for the current year.
C)C has no taxable income because his standard deduction is greater than $1,300.
D)C has taxable income of $1,300 which will be taxed on C's return at the marginal rate that would apply on his mother's return.

Question 27

In the current year, donor D transfers $200,000 of income-producing assets into a trust.D's father, F, age 85, is given an income interest in the trust for the rest of his life.Upon F's death, the assets will revert to D.F's life expectancy is three years.In the current year, the trust has ordinary income of $18,000, which is distributed to F, and a capital gain allocable to corpus of $4,500.Based on these facts,

A)All current-year income, both ordinary and capital gain, will be taxed to D.
B)The current-year ordinary income will be taxed to F; the capital gain will be taxed to D.
C)The current-year ordinary income will be taxed to F; the capital gain will be taxed to the trust.
D)All current-year income, both ordinary and capital gain, will be taxed to the trust.

Question 28

Taxpayer F owns and operates a cash basis bookkeeping service as a sole proprietor.Capital is not a material income-producing factor in the business.F would like to "shift" some of the income he earns in the business to his son, S, who is 25 years old.Which of the following techniques will accomplish F's goal?

A)F hires S as an employee and pays him a reasonable salary for services actually performed.
B)F gives S an ownership interest in the business in the form of a partnership interest.
C)F gives S an ownership interest in the business in the form of a stock interest in an S corporation, and F draws no salary from the corporation.
D)F makes a gift of the business accounts receivable to S.

Question 29

Which of the following is not an advantage of the irrevocable trust form of ownership?

A)A trust allows for the professional management of assets.
B)A trust can provide economic benefits for numerous beneficiaries, even though a single trustee has legal title to the trust assets.
C)A trust pays tax on current trust income at the fiduciary rate even if such income is distributed to beneficiaries in a higher individual income tax bracket.
D)All of the above are advantages of the trust form.

Question 30

Theta Partnership, a calendar year taxpayer, operates a business in which capital is a material income-producing factor.On January 1 of the current year, T, a 70 percent partner in Theta, sells half of his capital interest to his son S for its fair market value of $250,000.(This transfer gives S a 35 percent interest in partnership capital.) For the current year, Theta earns taxable income of $600,000.The maximum amount of this income that may be allocated to son S is

A)Any amount as long as the allocation has substantial economic effect per § 704(b)
B)$0
C)$210,000
D)$420,000

Question 31

Which of the following is a false statement concerning an asset "freeze" as part of an estate plan?

A)An asset "freeze" is used to prevent or reduce future accumulations of wealth in an elderly taxpayer's estate.
B)An asset "freeze" is usually psychologically easier for an elderly taxpayer than an estate plan based on substantial gifts of existing wealth to younger-generation family members.
C)A sale to a younger-generation family member of an asset that is expected to appreciate significantly in value is an example of an asset "freeze."
D)A revocable transfer to a trust of assets by an elderly taxpayer for the benefit of younger taxpayers is an example of an asset "freeze."

Question 32

U puts $50,000 in a trust to provide funds for his nephew's education.Any assets remaining in the trust when the nephew reaches 30 revert to U.The nephew is 28 and in medical school.The gift tax consequences are which of the following?

A)The value of the income interest given to the nephew is a separate gift and subject to gift tax.
B)This is a grantor trust, with all the income taxable to U; therefore, there are no gift tax consequences.
C)All $50,000 is subject to gift tax in the year the trust was created.
D)There is no gift tax because the income received by the nephew creates a moral obligation for his parent to repay; therefore, it is treated as a loan rather than a gift.

Question 33

D puts $100,000 into First Bank Trust to establish an irrevocable discretionary trust with his children as income beneficiaries; the principal goes to D's grandchildren at the death of the last surviving child.D divorces his children's mother and severs all ties with his family.The independent trustee distributes income only to pay for the support of the children.Which of the following is a true statement?

A)The amount of income received by the children under age 19 is generally taxed to them at their father's marginal rate.
B)The income is taxed to D.
C)The distributed income is taxed at the trust's marginal rate.
D)The custodial parent (the mother/ex-wife) is taxed on the income.

Question 34

Father employs Son as a carpenter in Father's construction business.Son only works June, July, and August, and uses his salary to pay his college tuition.Father may

A)Deduct Son's wages to the extent the amount paid was reasonable payment for services rendered.
B)Deduct Son's wages to the extent Father is liable for Son's tuition.
C)Deduct Son's wages in proportion to the amount of ownership interest Son has in the business.
D)Not deduct a family member's wages under any circumstances.

Question 35

In the current year, sole proprietor Z (a single taxpayer) incorporates his business and becomes the sole shareholder in Z Corporation.The business has consistently generated $70,000 annual income to Z.Which of the following statements concerning the newly formed C corporation is not accurate?

A)Z Corporation has a lower effective tax rate on the business income than did sole proprietor Z.
B)Z Corporation may pay Z a reasonable salary for services rendered to the corporation and deduct the payment.
C)Z Corporation may pay Z a competitive interest rate on funds lent by Z to the corporation and deduct the payments.
D)Z corporation's net income is nontaxable when distributed to its shareholder as dividends.

Question 36

Dad gives his five-year-old child a certificate of deposit.The $2,000 in interest income received this year is taxed in which of the follow ways?

A)$2,000 included in Dad's gross income
B)$100 taxed at Dad's marginal rate and $950 taxed at 10%
C)$1,050 taxed at 10%
D)There is no tax on the income generated by a gift.

Question 37

A "gift-leaseback" generally occurs when the owner of a trade or business asset transfers the asset as a gift in trust for the benefit of the children (or other low-bracket family members) and then has the independent trustee lease back the asset to the business for fair rental value.The rent is deducted as a §162 business expense according to the terms of a written lease.IRS argues that this is not a business expense because

A)A child could never own such a valuable asset.
B)A legitimate business would purchase, rather than lease, the asset.
C)The trust cannot engage in business transactions without breaching its fiduciary duty to prudently manage the trust corpus.
D)There is no valid business purpose for it.

Question 38

Which of the following is not an advantage of inter vivos giving as compared with testamentary transfers?

A)The transfer tax rates for inter vivos gifts are less than the tax rates on transfers at death.
B)Any post-transfer appreciation in the value of inter vivos gifts will not be subject to tax when the donor dies.
C)The annual exclusion can be used to make substantial amounts of tax-free gifts.
D)The dollars used to pay a gift tax are not subject to transfer taxes; however, the dollars used to pay an estate tax are after-tax dollars.

Question 39

Dad gratuitously transfers 50 percent of the stock in a shipbuilding corporation valued at $10 million to Son.What are the tax consequences of this transfer to both Dad and Son?

A)Dad is generally subject to gift tax on $5 million; Son has no income tax liability on receipt of the stock.
B)Dad has no tax consequences, although his corporation gets a $5 million deduction; Son has taxable income of $5 million.
C)Dad has income tax on the gain he recognizes as the difference between his basis for the 50 percent ownership interest given away and its FMV; Son has no tax consequences and receives a step-up basis to FMV for his 50 percent ownership interest.
D)Dad has made a $5 million gift which is taxable under gift tax law; Son has income tax on the difference between Dad's basis for the 50 percent ownership interest given away and its FMV.

Question 40

This year G transferred property to a trust.Under the terms of the trust, a qualified charity is to receive the income from the trust for 10 years at which time the property is returned to G.Which of the following statements is true?

A)G will receive an income tax deduction for the value of the income interest in year one but in each year must report the actual income of the trust.
B)G will receive an income tax deduction for the value of the remainder interest in year one but in each year must report the actual income of the trust.
C)G will receive a deduction for the value of the income interest in year one and the trust will report the income it actually receives and distributes to the charity in subsequent years.
D)None of the above are true.

Question 41

Which of the following is probably not an optimal source of liquidity for the payment of estate taxes?

A)Life insurance
B)A buy-sell agreement with a family business
C)Real property assets of the estate
D)Flower bonds