This year Nathan transferred $7 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

Nathan has prior taxable gifts of $6 million and a current taxable gift of $7 million (the transfer is a future interest and is not eligible for an annual exclusion). Since Nathan has used an exemption equivalent of $5 million, he has $6.2 of unused exemption equivalent remaining (2018 exemption equivalent of $11.18 million − $5 million used = $6.18 million unused). Nathan's unused applicable credit is computed as follows:
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The gift tax is calculated as follows:
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A short cut method of calculating this tax would be to recognize that Nathan has $6.18 million of unused exemption equivalent that will offset part of his current gift of $7 million. The remaining $820,000 of current gift is subject to the top transfer tax rate of 40%. Hence, the tax due is $328,000 = $820,000 × 40%.

This Year Nathan Transferred $7 Million to an Irrevocable Trust