Deck 12: Wealth Transfer Taxes

Question 1

The personal representative can elect the alternative valuation date only if both the value of the estate and the estate tax are reduced.

Answer 1

True

Question 2

Bill sets up two trusts in 2011. The first is for his son, John, to which he contributes $200,000 during the current year. (The income interest is valued at $100,000 and the remainder interest's value is $100,000.) Bill plans to continue contributing money to the trust each year but John can withdraw only the lesser of $13,000 or the amount transferred to the trust each year. The trustee can pay the amount annually until John receives the trust assets at age 40. The second trust is for his 10-year old son, Tim. Bill contributes $50,000 this year. (The income interest is equal to $10,000 and the remainder interest is equal to $40,000.) The trustee may distribute the income or principal to Tim until he reaches age 21, at which time the assets will be transferred to Tim. In 2012, Bill contributes $10,000 to John's trust and $15,000 to Tim's trust. What types of trusts are these and what are Bill's gift tax consequences in 2011 and 2012?

Answer 2

John's trust is a Crummy trust and Tim's trust is a 2503(c) minor trust. In 2011, Bill makes a taxable gift of $187,000 ($100,000 income interest - $13,000 exclusion + $100,000 remainder interest) to John. He makes a $40,000 taxable gift to Tim as his $13,000 exclusion can only offset the $10,000 value of the current income interest. It cannot offset any of the remainder interest. His total taxable gifts in 2011 are $227,000.
In 2012, his only taxable gift is the $2,000 transferred to Tim's trust ($15,000 - $13,000 exclusion). The $10,000 transferred to John's trust does not exceed the annual exclusion.

Question 3

Farouk transfers bonds with a face value of $10,000 into his dependent son's name on January 1, 2011 as his son will turn 24 this year. The bonds pay 8 percent interest annually and Farouk bought the bonds in 2003 for $9,500. His son sells the bonds for $10,500 at the end of 2011 after receiving the 2011 interest. If Farouk is in the 35 percent marginal tax bracket, how much did he save in 2011 in taxes by transferring the bonds into his son's name. His son had no other income in 2011.

Answer 3

Farouk's tax if owned: $10,000 x .08 = $800 interest x .35 = $280
$10,500 - $9,500 = $1,000 gain x .15 capital gains rate = $150 tax if owned by Farouk
Son's tax: $1,000 gain + $800 interest - $950 standard deduction = $850 taxable income taxed at 0% capital gains rate. $950 x 0% = $0
Taxes saved in 2011 = $280 + $150 = $430

Question 4

When John died on April 16, he had interests in the following assets:
a. A $300,000 home held in joint tenancy with his wife
b. A $25,000 bank account in his name only
c. A $12,000 car that was jointly titled with his son
d. A $500,000 term life insurance policy owned by him with his wife the named beneficiary
e. John's living trust held title to his 50 percent ownership in the Garden Corporation valued at $2,000,000
Last year John transferred ownership of a $100,000 life insurance policy on his life to his daughter, electing gift splitting. At the time, the policy had a cash surrender value of $20,000 and $22,000 at his death.
What is John's probate estate?
What is John's gross estate?

Question 5

Rachel owned four assets when she died in 2011.

Which value should the personal representative use for valuing the gross estate? Explain.

Question 6

Weilin's gross estate was valued at $4,870,000 when he died in 2011. His estate paid administration expenses of $100,000 and funeral expenses of $25,000. Weilin left $50,000 to Georgia State University and $500,000 in a qualifying terminable interest property trust for his second wife. If Weilin had made $1,500,000 of prior taxable gifts in 2009, paying a gift tax of $210,000 on these gifts, how much estate tax would the estate have had to pay in 2011?

Question 7

Indicate by a T if the following results in a taxable gift and an N if it does not result in a taxable gift.

-John put $50,000 of his money into a joint bank account with his son

A)Results in a taxable gift(T)
B)Not result in a taxable gift(N)

Question 8

Indicate by a T if the following results in a taxable gift and an N if it does not result in a taxable gift.

-Corky transferred ownership of a $50,000 life insurance policy with a $5,000 cash surrender value to his wife.

A)Results in a taxable gift(T)
B)Not result in a taxable gift(N)

Question 9

Indicate by a T if the following results in a taxable gift and an N if it does not result in a taxable gift.

-$600,000 placed in a grantor trust

A)Results in a taxable gift(T)
B)Not result in a taxable gift(N)

Question 10

Indicate by a T if the following results in a taxable gift and an N if it does not result in a taxable gift.

-$14,000 paid to the University of Oklahoma for a foster child's tuition

A)Results in a taxable gift(T)
B)Not result in a taxable gift(N)

Question 11

Indicate by a T if the following results in a taxable gift and an N if it does not result in a taxable gift.

-Converting a revocable trust to an irrevocable trust

A)Results in a taxable gift(T)
B)Not result in a taxable gift(N)

Question 12

Indicate by a T if the following results in a taxable gift and an N if it does not result in a taxable gift.

-$20,000 transferred into Crummy trust with gift splitting elected.

A)Results in a taxable gift(T)
B)Not result in a taxable gift(N)

Question 13

Indicate by a T if the following results in a taxable gift and an N if it does not result in a taxable gift.

-Transfer of a house valued at $500,000 held in joint tenancy to the wife according to the divorce decree

A)Results in a taxable gift(T)
B)Not result in a taxable gift(N)

Question 14

Indicate by a T if the following results in a taxable gift and an N if it does not result in a taxable gift.

-$60,000 value of a remainder interest in a trust created this year

A)Results in a taxable gift(T)
B)Not result in a taxable gift(N)

Question 15

Indicate by a T if the following results in a taxable gift and an N if it does not result in a taxable gift.

-$30,000 transferred into a minor's trust

A)Results in a taxable gift(T)
B)Not result in a taxable gift(N)

Question 16

Indicate by a T if the following results in a taxable gift and an N if it does not result in a taxable gift.

-$100,000 diamond ring given to a fiancé

A)Results in a taxable gift(T)
B)Not result in a taxable gift(N)

Question 17

Carl gave his six children gifts of $14,000 each in the current year.

A) Carl has made $78,000 of taxable gifts.
B) Carl has made $6,000 of taxable gifts.
C) Carl has made no taxable gifts if he and his wife elect gift splitting.
D) (a) and (b) are both true.
E) (b) and (c) are both true.

Question 18

Charles gave his three grandsons $20,000 each, his friend, Joe, $15,000, and his daughter $30,000. His second wife, Marla, gave her three children $50,000 each and $50,000 to her church.

-Refer to the information above . What are Charles and Marla's taxable gifts if they elect gift splitting?

A) $76,000
B) $104,000
C) $151,000
D) $176,000

Question 19

Chloe gave $15,000 to her son, $20,000 to her daughter, and paid $18,000 to the University of Delaware for her niece's tuition. She gave $12,000 to the United Way campaign, and $18,000 to her church. What is the amount of Chloe's taxable gifts?

A) $ 9,000
B) $11,000
C) $43,000
D) $53,000
E) $83,000

Question 20

Morrow died on January 15, 2011 leaving the following assets:
$$\begin{array} { l r r } \text { Assets } & \begin{array} { r } \text { Date of Death } \\\text { Fair Market Value }\end{array} & \begin{array} { r } \text { Alternate Valuation } \\\text { Date Value }\end{array} \\\hline\text { Home } & \$ 600,000 & \$ 610,000 \\\text { Stocks } & \$ 300,000 & \$ 270,000 \\\text { Bonds } & \$ 400,000 & \$ 402,000 \\\text { Rolls Royce } & \$ 75,000 & \$ 78,000\end{array}$$
What is the value of the estate if the alternative valuation date is elected and the house was sold on March 10 for $605,000 and the stocks were sold on June 30 for $265,000?

A) $1,375,000
B) $1,360,000
C) $1,350,000
D) $1,343,000

Question 21

The unified credit for 2011 gifts is equivalent to an exemption amount of:

A) $ 600,000
B) $1,000,000
C) $3,500,000
D) $5,000,000