Natalie transferred $500,000 of bonds to a revocable trust with directions to the trustee to pay income to her aunt for five years, after which the corpus is to be distributed to Natalie's niece. At year-end, the trustee paid $16,000 of income to the aunt. Which of the following is a true statement?

Question

Quizplus · Accepted Answer

By transferring $500,000 of bonds to the trust, Natalie has made a gift. However, the gift is not complete because the trust is revocable, meaning Natalie can still take back the assets. Therefore, the gift is a taxable gift. The amount of the taxable gift is not $500,000 because of the income distribution to the aunt. The taxable gift is the amount of the transfer in excess of the annual exclusion, which is $15,000 per person in 2020. So, the taxable gift is $500,000 - $15,000 = $485,000. However, since only $16,000 of income was distributed to the aunt, the gift tax is based on the $16,000 distribution. The gift tax would be owed by Natalie, not the recipient of the gift.

Natalie Transferred $500,000 of Bonds to a Revocable Trust with Directions