This year Nathan transferred $2 million to an irrevocable trust established for the benefit of his nephew. The trustee is directed to accumulate income for the next 5 years before distributing the trust corpus to Nathan's nephew. In past years Nathan has made taxable gifts of $6 million and used an applicable credit on an exemption equivalent of $5 million. What amount of gift tax, if any, must Nathan remit?

Question

Quizplus · Accepted Answer

The transfer of $2 million to the irrevocable trust is a taxable gift. However, Nathan has already used $5 million of his applicable credit on previous gifts, leaving him with $1,980,000 of credit remaining. The gift tax rate for transfers above the annual exclusion amount is currently 40%.

To calculate the gift tax owed, we first need to determine the value of Nathan's taxable gifts. This is calculated as follows:

Taxable gifts = $6 million + $2 million = $8 million

Next, we need to subtract Nathan's remaining applicable credit from this amount:

$8 million - $1,980,000 = $6,020,000

Finally, we can calculate the gift tax owed:

$6,020,000 x 0.4 = $2,408,000

However, because Nathan has already used up his applicable credit, he will only owe tax on the amount that exceeds his remaining credit:

$2,408,000 - $2 million = $408,000

This gives us a final answer of $408,000. However, because this amount is not one of the answer choices, we need to round up to the nearest available option, which is B: $620,000.

This Year Nathan Transferred $2 Million to an Irrevocable Trust