Prentice Hall's Federal Taxation 2011: Corporations, 24e (Pope) Chapter 12 The Gift Tax

1) The gift tax is a wealth transfer tax that applies to transfers during a person's lifetime and transfers at death. Answer: FALSE
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") The annual ex$lusion permits donors to ma%e gifts of &1'())) ea$h to multiple donees. Answer: T *E
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') ,oll- sells her $ar( .alued at &')()))( to her nephew Todd for &1/())). ,oll- has made a taxa0le gift. Answer: T *E
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2) A 3ualified dis$laimer must 0e made within nine months after 4a) the da- the propert- is transferred or 40) the da- the person re$ei.ing the propert- 0e$omes age "1( whi$he.er is later. Answer: T *E
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+) Phil transfers &+)())) to a re.o$a0le trust 0enefiting his son( 6osh. The transfer is a taxa0le gift. Answer: FALSE
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7) ,ia ma%es a taxa0le gift when she ma%es her mother a 8oint owner on ,ia's 0an% a$$ount. ,ia has &"+())) in the a$$ount. Answer: FALSE
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1) The $hanging of a life insuran$e poli$- 0enefi$iar- from a spouse to an adult daughter $onstitutes a gift for transfer tax purposes. Answer: FALSE
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/) A net gift o$$urs when a donor ma%es a gift su08e$t to the agreement that the re$ipient agrees to pa- the gift tax. Answer: T *E
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5) ,i%e transfers se$urities to an irre.o$a0le trust and gi.es a$hel the power to determine who will re$ei.e the trust's in$ome and assets. a$hel( her estate( and her $reditors $annot 0e 0enefi$iaries or re$ei.e the trust assets. a$hel has a general power of appointment. Answer: FALSE
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1)) A 9!rumme- demand power9 in a trust do$ument allows the donor to demand a distri0ution from the trust in -ears in whi$h earnings exist within the trust. Answer: FALSE
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11) :ift tax returns are filed on a $alendar#-ear 0asis. Answer: T *E

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1") The pur$hase of a &1+())) engagement ring generates a taxa0le gift ne$essitating the filing of a gift tax return. Answer: T *E
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1') ;dentif- whi$h of the following statements is true. A) The gift tax is a wealth transfer tax that applies to transfers during a person's lifetime and transfers at death. <) The gift tax is not a part of the unified transfer tax s-stem. !) *nder the unified transfer tax s-stem( taxa0le gifts made after 1517 are in$luded in the donor's death tax 0ase. =) All are false. Answer: !
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12) ;n 155/( =elores made taxa0le gifts to her son of propert- with a F,> of &"))())). ;n the $urrent -ear when =elores dies( the propert- is worth &/))())). The amount in$luded in =elores's estate tax 0ase 0e$ause of the 155/ gift is A) &). <) &1/5())). !) &"))())). =) &/))())). Answer: !
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1+) ;n the $urrent -ear( !esar( who is single( gi.es &"7())) to ea$h of his ") nie$es and nephews for a total propert- transfer of &+")())). !esar's taxa0le gifts total A) &+")())). <) &"2)())). !) &'))())). =) &"7)())). Answer: = Explanation: =) Total gifts &"7())) ? ") @ &+")())) ,inus: Ex$lusions &1'())) ? ") @ 4"7)()))) Taxa0le gifts &"7)()))
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17) ;dentif- whi$h of the following statements is true. A) ;f the annual ex$lusion for gifts is not used in the $urrent -ear( the unused portion $an 0e $arried forward to su0se3uent -ears. <) ;ndi.iduals ma- not gi.e more than &1'())) per person in gifts ea$h -ear 0efore 0eing taxed on the transfer. !) For transfer tax purposes( 0oth the $harita0le $ontri0ution dedu$tion and the marital dedu$tion are unlimited. =) All are false. Answer: !
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11) ;n Ao.em0er 1517( :rant uses &')())) of the spe$ifi$ exemption a.aila0le at that time. The unified $redit a.aila0le to :rant for post#1517 transfers is redu$ed 0A) &). <) &7())). !) &1+())). =) &')())). Answer: < Explanation: <) &')())) ? ).") @ &7()))
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1/) <ar0ara sells a house with a F,> of &11)())) to her daughter for &1")())). From this transa$tion( <ar0ara is deemed to ha.e made a gift 40efore the annual ex$lusion) of A) &+)())). <) &11)())). !) &1")())). =) &). Answer: A Explanation: A) &11)())) # &1")())) @ &+)()))
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15) ;n the $urrent -ear( <onnie( who is single( sells sto$% .alued at &7)())) to Linda for &1+())). Later that -ear( <onnie gi.es Linda &"+())) in $ash. <onnie's taxa0le gifts from these transfers total A) &1)())). <) &+5())). !) &+1())). =) &"+())). Answer: ! Explanation: !) Total gifts B4&7)())) # &1+()))) C &"+()))D &1)())) ,inus: Ex$lusion 4 1'()))) Taxa0le gifts &+1()))
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")) ;dentif- whi$h of the following statements is true. A) A taxa0le gift ma- o$$ur when propert- is sold in an arm's length transa$tion for less than its F,>. <) An indi.idual $an inad.ertentl- ma%e a gift 0- underestimating a propert-'s fair mar%et .alue and selling it to a relati.e for a pri$e 0elow its fair mar%et .alue. !) The statutor- exemption from the gift tax for pa-ments for medi$al $are re3uires that the pa-ment 0e made for a relati.e. =) All are false. Answer: <
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"1) >in$ent ma%es the following propert- transfers in the $urrent -ear. E &+())) tuition for a grandson paid dire$tl- to the s$hool E &1())) medi$al expense for a $hild paid dire$tl- to a hospital E &+)) donation to the =emo$rati$ partE &1)())) propert- settlement in $on8un$tion with a di.or$e E &'())) room and 0oard at $ollege for a grandson paid dire$tl- to the s$hool >in$ent's gifts for the -ear 0efore $onsidering the annual gift tax ex$lusion total A) &15(+)). <) &15())). !) &'())). =) &). Answer: !
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"") ;dentif- whi$h of the following statements is true. A) !ash paid dire$tl- to a medi$al s$hool for room and 0oard is a 93ualified transfer9 and not su08e$t to the gift tax. <) Transfers 0- an indi.idual to a politi$al part- $onstitute a gift su08e$t to the gift tax rules. !) A statutor- exemption from the gift tax is a.aila0le for propert- transfers 0etween di.or$ed indi.iduals when the di.or$e o$$urs during a three#-ear period 0eginning one -ear 0efore the transfer agreement is made. =) All are false. Answer: !
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"') :reg transfers propert- on August / of the $urrent -ear with an ad8usted 0asis of &2)())) and a F,> of &5)())) to his ex#wife as a propert- settlement that is part of their di.or$e agreement. The propert- settlement agreement and the di.or$e were 0oth finaliFed on 6une ' of the $urrent -ear. :reg has made a gift of A) &). <) &2)())). !) &/)())). =) &5)())). Answer: A
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"2) Ghi$h of the following transa$tions $onstitutes a $ompleted gift made 0- Ellen( a widow( in the $urrent -earH A) Ellen deposits &1))())) $ash and ,att deposits &+())) $ash into a 8oint sa.ings a$$ount. ,att does not withdraw an-thing during the $urrent -ear. <) Ellen names Larr- the 0enefi$iar- of a &1))())) life insuran$e poli$- on Ellen's life. The 0enefi$iar- designation is re.o$a0le. !) Ellen transfers propert- to a re.o$a0le trust( naming the 0an% as trustee. The trustee must pa- out all the in$ome to Ed o.er Ed's lifetime( 0eginning next -ear. =) Ellen reim0urses her granddaughter &1+())) for her tuition at medi$al s$hool. Answer: =
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"+) ;dentif- whi$h of the following statements is true. A) An indi.idual ma%ing a 3ualified dis$laimer $an determine to whom the dis$laimed propert- will pass. <) A 3ualified dis$laimer must 0e made within six months after 4a) the da- the propert- is transferred or 40) the da- the person re$ei.ing the propert- 0e$omes age "1( whi$he.er is later. !) Ine of the tests that a 3ualified dis$laimer must meet is that it must 0e an irre.o$a0le( un3ualified( written refusal to a$$ept propert-. =) All are false. Answer: !
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"7) ;dentif- whi$h of the following statements is false. A) A gift o$$urs when a re.o$a0le trust is funded. <) A gift does not o$$ur until the transfer is $omplete. !) A transfer is in$omplete 4and not su08e$t to the gift tax) if the donor retains the power to name new 0enefi$iaries or to $hange the interests of the 0enefi$iaries. =) Transfers to an irre.o$a0le trust $an 0e deemed in$omplete. Answer: A
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"1) Ghi$h of the following transfers is su08e$t to the gift taxH A) ,atilda $ontri0utes &+())) to a Senate $andidate's politi$al organiFation. <) Fran% gi.es &')())) to a lo00-ing group promoting stri$ter en.ironmental regulations. !) 6ulia esta0lishes a trust 0enefiting her nie$es and nephews. 6ulia will determine the amount of an- distri0utions made. =) Lan$e pur$hases land( titling it in the names of Lan$e and Sher-l( 8oint owners. Answer: =
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"/) :ordon died on 6anuar- 1 and 0- his will left land with an ad8usted 0asis of &7)())) and a F,> of &1))())) to <e$%-. <e$%- dis$laims the propert- on =e$em0er '1 of the -ear of death( when the land was still worth &1))())). <e$%- has made a gift 40efore the annual gift tax ex$lusion) of A) &1))())). <) &7)())). !) &+)())). =) &). Answer: A Explanation: A) The dis$laimer is not effe$ti.e sin$e it was made more than nine months after the date of :ordon's death.
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"5) 6a$% transfers propert- worth &"+)())) to a re.o$a0le trust on 6anuar- 1. Two and one# half -ears later( when the propert- is worth &'))()))( the trust 0e$omes irre.o$a0le. Ghi$h of the following statements is $orre$tH A) A &'))())) gift o$$urs when the trust 0e$ame irre.o$a0le. <) A &"+)())) gift o$$urs when the original transfer was made. !) A &"+)())) gift o$$urs when the trust 0e$ame irre.o$a0le. =) 6a$% ma- ele$t whi$h amount to report as a gift. Answer: A
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')) Ghi$h of the following statements is trueH A) Transfers to an irre.o$a0le trust $an 0e deemed in$omplete due to powers retained 0the grantor. <) ;f the donor retains the power to $hange the trust 0enefi$iar-( the gift is $omplete. !) Transfers to a re.o$a0le trust are $ompleted gifts. =) All are false. Answer: A
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'1) !al.in transfers land to a trust. !al.in retains the right to the in$ome from the land for the rest of his life. *pon his death( the land is to 0e transferred to his daughter( ,elissa. !al.in's interest is A) a remainder interest. <) a life estate. !) a re.ersionar- interest. =) a term $ertain. Answer: <
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'") !al.in transfers land to a trust. !al.in retains the right to the in$ome from the land for the rest of his life. *pon his death( the land is to 0e transferred to his daughter( ,elissa. ,elissa's interest is A) a remainder interest. <) a life estate. !) a re.ersionar- interest. =) a term $ertain. Answer: A
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'') !al.in transfers land to a trust. Jis daughter ,elissa will re$ei.e the in$ome from the land for ten -ears. After ten -ears( the land is returned to !al.in. !al.in's interest is A) a term $ertain. <) a life estate. !) a re.ersionar- interest. =) Aone of the a0o.e. Answer: !
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'2) ;dentif- whi$h of the following statements is false. A) ;f an indi.idual transfers propert- in trust and reser.es the right to the trust's in$ome for life( the indi.idual retains a life estate. <) An indi.idual who re$ei.es a remainder interest will re$ei.e propert- after the death of the holder of a life estate. !) ;f a grantor transfers propert- in trust and names a 0enefi$iar- to re$ei.e onl- a term $ertain interest and then the propert- is to return to the grantor( the transa$tion is not su08e$t to gift tax. =) Life estates are .alued using a$tuarial ta0les. Answer: !
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'+) ;dentif- whi$h of the following statements is true. A) The $reation of a 8oint 0an% a$$ount $onstitutes a taxa0le gift. <) The $reation of a 8oint tenan$- 0- one person will result in a gift e3ual to the other 8oint tenant's pro rata interest in the propert-. !) The naming of a life insuran$e poli$- 0enefi$iar- $onstitutes a gift for transfer tax purposes. =) Sin$e muni$ipal 0ond interest is exempt from federal in$ome taxation( gifting the 0onds es$apes the gift tax. Answer: <
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'7) ;dentif- whi$h of the following statements is false. A) The interpolated terminal reser.e is similar to a life insuran$e poli$-'s $ash surrender .alue. <) A gift o$$urs when the owner of an insuran$e poli$- irre.o$a0l- assigns all ownership rights in the poli$- to another. !) The pa-ment of premiums on an insuran$e poli$- that is owned 0- another does not $onstitute a gift. =) The .alue of the gift of a life insuran$e poli$- is the amount it would $ost to pur$hase a $ompara0le poli$- on the date of the gift. Answer: !
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'1) In April 1( ,artha opens a 8oint 0an% a$$ount with Aed and deposits &1())). Aed deposits &+)) into the a$$ount on April ". In ,a- "( ,artha withdraws &1+). Two da-s later Aed withdraws &7)). A) ,artha has made a gift to Aed of &1)). <) Aed has made a gift to ,artha of &+)). !) ,artha has made a gift to Aed of &7)). =) ,artha has made a gift to Aed of &1())). Answer: A
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'/) =amitria transfers her rights in a &1))())) insuran$e poli$- on 6une 1 to Trema-ne. The poli$- has a $ash .alue of &5())) and an interpolated terminal reser.e of &/(+)). The annual poli$- premium of &1"())) had 0een paid on 6anuar- 1. =amitria's gift 40efore the annual gift tax ex$lusion) to Trema-ne is A) &/(+)). <) &5())). !) &1+(+)). =) &")(+)). Answer: ! Explanation: !) &/(+)) C 41K1" ? &1"()))) @ &1+(+))
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'5) Ghi$h of the following is a $ompleted giftH A) :reta transfers &+)())) to a re.o$a0le trust 0enefiting her $hildren Jans and 6ulio. <) 6uan pur$hases a s%i $halet using his own funds( 0ut listing Penelope as a 8oint owner. !) Joratio transfers &7)())) to a 0an% a$$ount with JaFel. JaFel does not $ontri0ute anmone- to the a$$ount. =) ,i%e $hanges the 0enefi$iar- of his poli$- to ,eredith. Answer: <
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2)) ;dentif- whi$h of the following statements is false. A) A power of appointment exists when a person transfers propert- and grants someone else the power to spe$if- who e.entuall- will re$ei.e the propert-. <) A person possesses a general power of appointment if the person has the power to appoint propert- to himself( his $reditors( his estate( or the $reditors of his estate. !) The donee's pa-ment of the gift tax does not redu$e the amount of the gift 0e$ause it is treated as $onsideration paid to the donor. =) The donor must re$ogniFe as a gain the ex$ess of the gift tax pa-a0le o.er the ad8usted 0asis of the propert-. Answer: !
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21) Tia funds an irre.o$a0le trust with &1))()))( naming >onda to re$ei.e in$ome for life. Tia also grants >onda a general power of appointment during her life. =uring the next -ear( >onda dire$ts the trustee to gi.e &1))())) to i$%. Ghi$h of the following statements is not $orre$tH A) Tia made a &1))())) gift to i$%. <) >onda ma%es a &1))())) gift to i$%. !) Tia has made a gift of &1()))())) to >onda. =) Exer$ising a general power of appointment $onstitutes a gift. Answer: A
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2") ;dentif- whi$h of the following statements is true. A) A purpose of the annual ex$lusion is to eliminate the ne$essit- of a$$ounting for and reporting small gifts su$h as those made for weddings and !hristmas. <) The gift tax ex$lusion is a.aila0le onl- for a gift of a present interest. !) A present interest is an unrestri$ted right to the immediate use( possession( or en8o-ment of propert- or the in$ome from propert-. =) All are true. Answer: =
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2') ;dentif- whi$h of the following statements is false. A) A future interest in$ludes re.ersions( remainders( and other interests( whi$h are limited to $ommen$e in use( possession or en8o-ment at some future date or time. <) The gift tax ex$lusion is a.aila0le onl- for a gift of a present interest. !) A trust for a minor 4Se$. "+)'4$) trust) must distri0ute all of its in$ome $urrentl- in order to 3ualif- for the annual ex$lusion. =) For a transfer made in trust( ea$h 0enefi$iar- is deemed to 0e a separate donee. Answer: !
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22) ;dentif- whi$h of the following statements is true. A) The trustee of a Se$. "+)'4$) trust must distri0ute all of the $orpus and a$$umulated in$ome when the 0enefi$iar- rea$hes the age of "+. <) The gift tax ex$lusion is a.aila0le for a gift of a present or future interest. !) A 9!rumme- demand power9 in a trust do$ument allows the donor to demand a distri0ution from the trust in -ears in whi$h assets are transferred to the trust. =) All are true. Answer: !
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2+) :eorge transfers propert- to an irre.o$a0le trust for the 0enefit of his adult $hildren and names himself as trustee. The trust do$ument re3uires the trustee to distri0ute trust propert- to the 0enefi$iaries at the trustee's dis$retion with the possi0ilit- of no distri0ution to $ertain 0enefi$iaries as the trustee deems appropriate. The trust will terminate at the end of nine -ears( and the propert- will pass to :eorge's $hildren. Ghi$h of the following statements is $orre$tH A) The 0enefi$iaries re$ei.e a present interest in the trust propert- when :eorge transfers the assets to the trust. <) The transfer 0- :eorge is eligi0le for the annual gift tax ex$lusion. !) :eorge's transfer of propert- to the trust is not taxed under gift tax rules at the date of transfer. =) :eorge's transfer of propert- to the trust is a gift of a future interest. Answer: =
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27) A Se$. 9"+)'4$) trust9 A) is a dis$retionar- trust for a 0enefi$iar- of an- age. <) is intended for 0enefi$iaries o.er the age of "). !) re3uires distri0ution of trust assets to the 0enefi$iar- at age "1. =) $an 0e formed onl- 0- the parent4s) of the 0enefi$iaries. Answer: !
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21) ,aril-n and Earl esta0lish a trust 0enefiting their grand$hild( !ourtne-( age 2. !ourtneis to re$ei.e the a$$umulated in$ome and $orpus when she rea$hes age '). ;n the -ear of the transfer( !ourtne- has a two wee% period in whi$h to re3uest distri0utions. This trust is a A) "+)'4$) trust. <) !lifford trust. !) !rumme- trust. =) Aone of the a0o.e. Answer: !
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2/) A !rumme- trust A) pro.ides the donor with the a0ilit- to retrie.e the propert-. <) prohi0its the 0enefi$iar- from withdrawing assets. !) allows the donor an annual ex$lusion for transfers. =) re$ei.es propert- whi$h is not eligi0le for the annual ex$lusion. Answer: !
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25) Gh- are !rumme- trusts popular for minorsH A) The- are $onsidered gifts of a future interest and allow the donor to ta%e an ex$lusion. <) The- are $onsidered gifts of a present interest( permitting an annual gift tax ex$lusion. !) !rumme- trusts re3uire annual distri0utions to minors. =) =onors are onl- su08e$t to the gift tax when funds are distri0uted from !rumme- trusts. Answer: <
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+)) ;dentif- whi$h of the following statements is false. A) The marital dedu$tion for gift tax purposes is limited to one#half the .alue of the properttransferred. <) The marital dedu$tion is generall- allowed sin$e the transfer remains within the e$onomi$ 4hus0andKwife) unit. !) The marital dedu$tion for gift tax purposes is limited to the amount of the in$ludi0le gift 4e.g.( the amount of the gift that is in ex$ess of the annual ex$lusion). =) Transfers of $ommunit- propert- are eligi0le for the marital ex$lusion. Answer: A
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+1) ;dentif- whi$h of the following statements is true. A) Ghen ma%ing a LT;P transfer( the donor does not $ontrol who will re$ei.e the propert- on the death of the donee#spouse. <) The marital dedu$tion is limited to the amount of the gift that ex$eeds the annual ex$lusion. !) !laiming the marital dedu$tion on a LT;P transfer is mandator-. =) Terminal interests $annot 0e eligi0le for the marital dedu$tion. Answer: <
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+") A hus0and transfers &5)())) 0- gift dire$tl- to his wife. The marital dedu$tion for the transfer is A) &) unless he ele$ts to $laim one. <) &5)())). !) &11())). =) none of the a0o.e Answer: ! Explanation: !) :ift & 5)())) ,inus: Annual ex$lusion 4 1'()))) Eligi0le for marital dedu$tion & 11()))
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+') ;n the $urrent -ear( ,elanie ma%es two transfers to Peter( her hus0and. ;n 6une she gi.es him land .alued at &+)())). ;n =e$em0er( she transfers &+))())) to a trust with a 0an% named as trustee. All in$ome must 0e paid to Peter monthl- for life. At Peter's death( the propert- passes to their $hildren. !ompute the maximum marital dedu$tion assuming ,elanie ma%es the appropriate ele$tions. A) &++)())) <) &+'1())) !) &+))())) =) &+)())) Answer: < Explanation: <) &++)())) # &1'())) annual ex$lusion @ &+'1()))
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+2) A split#interest gift transfer A) in.ol.es two pu0li$ 4$harita0le) organiFations. <) in.ol.es two present interests. !) 3ualifies for a $harita0le $ontri0ution dedu$tion if the re$ipient $harit- re$ei.es a guaranteed annuit- whi$h is a present interest. =) $annot 3ualif- for a dedu$tion if a future interest is gi.en to a $harita0le organiFation. Answer: !
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++) Ju ma%es a gift of his home to a lo$al homeless shelter 4a +)14$)4') $harit-). Ju will retain his home for 1) -ears( after whi$h the homeless shelter will ta%e possession. The .alue of Ju's 1)#-ear interest is &')())) and the remainder interest is .alued at &1")())). Ghi$h of he following statements is $orre$tH A) Ju is allowed a $harita0le dedu$tion on his gift tax return for &1+)())) in the $urrent -ear. <) Ju is allowed an ex$lusion of &1'())) on his gift of &1")())) to the $harit-. !) Ju is not allowed to dedu$t the $ontri0ution until the $harit- ta%es possession in 1) -ears. =) Ju has a $harita0le $ontri0ution dedu$tion of &1")())) on his $urrent gift tax return. Answer: =
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+7) ;dentif- whi$h of the following statements is false. A) The gift#splitting ele$tion will appl- to all transfers made during the portion of an- -ear that the spouses ele$ting gift splitting are married to ea$h other. <) The gift#splitting ele$tion is made separatel- on ea$h gift either spouse ma%es. !) ,a%ing gifts during one's lifetime helps to redu$e the amount of estate taxes owed at death. =) ;n order to use gift splitting( 0oth spouses must 0e *.S. $itiFens or residents at the time of the transfer. Answer: <
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+1) A gift#splitting ele$tion A) re3uires ea$h spouse to gi.e propert-. <) ma- result in lower marginal gift tax rates. !) results in a &7(+)) per donee annual ex$lusion for ea$h spouse. =) is 0inding on future -ears. Answer: <
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+/) Sandra( who is married( $reates an irre.o$a0le trust in the amount of &"))())) for her 1/#-ear#old daughter( Mell-. She names the 0an% as trustee. <efore Mell- rea$hes age "1( the trustee ma- pa- the in$ome to Mell-. Mell- will re$ei.e an- undistri0uted assets when she rea$hes age "1. ;f Mell- dies 0efore age "1( the assets will 0e paid to her estate. ;n addition( Sandra $reates an irre.o$a0le trust for her son( Me.in( age "1. Je is entitled to withdraw up to &"7())) per -ear. Sandra $ontri0utes &1'())) in the $urrent -ear. Sandra ele$ts gift#splitting with her hus0and. Jer hus0and ma%es no gifts in the $urrent -ear. Sandra's annual ex$lusions to 0e $laimed on her gift tax return total A) &"7())). <) &1+(+)). !) &1"())). =) &). Answer: A Explanation: A) <e$ause of gift splitting( Sandra is treated as gifting &1))())) to Mell4&1'())) ex$lusion) and &1'())) to Me.in 4&1'())) ex$lusion)
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+5) ;n the $urrent -ear( =onna gi.es &+)())) $ash and &')())) of sto$% to ,i%e. She also gi.es &2)())) of tax#exempt 0onds to Angela. Jer hus0and( And-( gi.es &"))())) of land to Angela. Assume the $ouple ele$ts gift splitting for the $urrent -ear. =onna's taxa0le gifts total A) &1'2())). <) &12/())). !) &11)())). =) &7)())). Answer: A Explanation: A) =onna's gifts: ,i%e & /)())) Angela 2)())) Total gifts &1")())) ,inus: Ine#half of =onna's gift deemed made 0- And- 4 7)()))) Plus: Ine#half of And-'s gifts deemed made 0- =onna 1))())) ,inus: Ex$lusions 4,i%e and Angela) 4 "7()))) Taxa0le gifts &1'2()))
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7)) The $omputation of the gift tax lia0ilit- for a $urrent -ear A) is made without referen$e to pre.ious -ears. <) re3uires the use of $urrent -ear tax rates onl-. !) re3uires the use of different rates( depending on when the gifts were made. =) re3uires %nowledge of the total gift taxes paid in pre.ious -ears. Answer: <
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71) :loria ma%es the following gifts during the -ear: &1+())) $ash to her son( AndSto$% with a 0asis of &1)())) and a &')())) fair mar%et .alue to her sister( Jelen &1))())) to a re.o$a0le trust 0enefiting her nephew( :eorge Land with a 0asis of &7)())) and a fair mar%et .alue of &+)())) to the Ameri$an !an$er So$iet<efore $onsidering the unified $redit( what are :loria's taxa0le giftsH A) &15())) <) &2+())) !) &5+())) =) &1"1())) Answer: A Explanation: A) 4&1+())) N 1'()))) C 4&')())) N 1'()))) @ &15())). The transfer to a trust is not a $ompleted gift sin$e it is re.o$a0le( and the transfer to $harit- is ex$luded
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7") Ste.e ga.e sto$% with an ad8usted 0asis of &1())) and a F,> of &1)())) to Ali$e. Ao gift tax was paid. Later( Ali$e sold the sto$% for &1"())). The gain Ali$e will re$ogniFe on the sale is A) &+())). <) &"())). !) &). =) none of the a0o.e Answer: A Explanation: A) &1"())) # &1())) @ &+()))
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7') >irginia ga.e sto$% with an ad8usted 0asis of &/())) and a F,> of &1)())) to !armen. Ao gift tax was paid on the transfer. !armen then sold the sto$% for &5())). The gain or loss !armen will re$ogniFe on the sale is A) &"())) gain. <) &1())) gain. !) &1())) loss. =) none of the a0o.e Answer: < Explanation: <) &5())) # &/())) @ &1())) gain
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72) Tra$- ga.e sto$% with an ad8usted 0asis of &1/())) and a F,> of &1+())) to her nephew Phil. Ao gift tax was paid. Phil sold the sto$% for &17())). The gain or loss Phil will re$ogniFe on the sale is A) &1())) gain. <) &). !) &1(+)) loss. =) none of the a0o.e Answer: < Explanation: <) Phil's 0asis for determining gain is &1/())). Jis 0asis for determining loss is &1+())). ;f the gift propert- is sold for an amount 0etween two 0asis amounts( then no gain or loss is re$ogniFed
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7+) ,iguel gi.es o0erta land with an ad8usted 0asis of &+)())) and a F,> of &2)())). Ao gift tax is paid. o0erta sells the land for &'7())). o0erta re$ogniFes A) no loss. <) a &2())) loss. !) a &12())) loss. =) none of the a0o.e Answer: < Explanation: <) *se lower of the donor's 0asis or the propert-'s F,> on the gift date in $omputing the loss
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14 Copyright 2011 Pearson Education, Inc.

77) Ed gi.es Ste.e land with an ad8usted 0asis of &2)())) and a F,> of &5)())). Ed paid no gift tax. Ed then inherits the same land 0a$% from Ste.e at Ste.e's death eight months later. At Ste.e's death( the land is worth &1")())). Ed's 0asis in the land 0e$omes A) &1")())). <) &5)())). !) &2)())). =) !annot 0e determined from the fa$ts gi.en. Answer: !
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71) ;n "))/( Lett- ma%es taxa0le gifts totaling &2 million. Jer onl- other taxa0le gifts amount to &1 million( all of whi$h were made in 15/7. Ghat is Lett-'s "))/ gift tax lia0ilit0efore the unified $reditH A) &"("")(/)) <) &1(/1+())) !) &1(/2)(/)) =) &1(1/+())) Answer: = Explanation: =) Tax on &+()))())) &"(1')(/)) ,inus: Tax on &1()))())) 4$urrent rate s$hedule) 4 '2+(/))) Tax on &2()))())) &1(1/+()))
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7/) ;dentif- whi$h of the following statements is true. A) ;f the gifted propert-'s F,> on the date of the gift ex$eeds its ad8usted 0asis and the donor pa-s no gift tax( the donee's 0asis is the same as the donor's 0asis if the propert- is sold for a loss. <) Prospe$ti.e donors should not dispose of propert- that has de$lined in .alue 0- selling it rather than gifting it. !) A &1'())) annual ex$lusion per donee is a.aila0le for 0oth gift tax and estate tax purposes. =) All are false. Answer: A
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75) ;nterest#free or 0elow mar%et loans A) must alwa-s ha.e interest imputed on them. <) ma- result in treating the 0orrower as pa-ing interest. !) result in treating the entire loan pro$eeds as a gift. =) will alwa-s result in at least &1())) of interest in$ome 0eing imputed. Answer: <
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1)) In 6ul- 1( Fran% loans his 0rother ,att &"))())). The loan is e.iden$ed 0- an interest# free demand note. The loan is still outstanding on =e$em0er '1. The appli$a0le interest rate is 1"O. Fran% is treated as ha.ing made a gift of A) &"))())). <) &"2())). !) &1"())). =) &). Answer: ! Explanation: !) &"))())) ? ).1" ? 7K1" @ &1"()))
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11) Elaine loaned her 0rother( ,i%e( &11+())) to pur$hase a new home. Elaine does not $harge ,i%e an- interest on the loan. Ghat are the tax $onse3uen$es to Elaine and ,i%eH A) Elaine is treated as ha.ing made a gift of the forgone interest on the &11+())) loan to ,i%e. <) Elaine onl- has to impute interest on &1+())) of the loan to ,i%e. !) ;f ,i%e has no net in.estment in$ome( Elaine does not ha.e to treat the foregone interest as a gift. =) ,i%e $an dedu$t the interest that he is deemed to ha.e paid Elaine. Answer: A
Page ef.: !:1"#"/( Example !:1"#22

1") In 6anuar- 1( 6eff loans his friend Patri$% &1())) to 0u- a used $ar. Patri$% signs a noninterest#0earing( demand note. The appli$a0le interest rate is +O. Ghi$h of the following statements is $orre$tH A) 6eff has made a taxa0le gift to Patri$% of &'(+)). <) 6eff must report interest in$ome of &'(+)) from Patri$%. !) 6eff has made a gift to Patri$% whi$h is not taxa0le sin$e it is less than &11())). =) ;nterest does not ha.e to 0e imputed on the gift sin$e the loan amount is less than &1)())) and does not ha.e a tax a.oidan$e moti.e. Answer: =
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1') oger ma%es a &1()))())) $ash gift on 6anuar- 1 of the $urrent -ear( and dies on Fe0ruar- 1 of the $urrent -ear. oger's gift tax return is due A) April 1+ of the $urrent -ear. <) =e$em0er '1 of the $urrent -ear. !) April 1+ of the next -ear. =) nine months after his date of death. Answer: =
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12) ;dentif- whi$h of the following statements is false. A) :ift tax returns are due annuall- 0- April 1+ following the -ear of the gift. Ao extensions are allowed. <) The donor pa-s the gift tax generall-. !) :ift tax returns are filed on a $alendar#-ear 0asis. =) e$eipt of an extension of time for filing a gift tax return does not extend the due date for pa-ment of the gift tax. Answer: A
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16 Copyright 2011 Pearson Education, Inc.

1+) Ghi$h of the following situations re3uires that a gift tax return 0e filedH A) :eorge gi.es wife( Laura( a new $ar for her 0irthda-. <) Panisha ma%es gifts of &'())) of present interest propert- to ea$h of her nie$es and nephews. !) Ar$hie pa-s the hospital medi$al 0ills for his friend Paige. =) ;da pur$hases a 0ea$h home( listing ,ar% as a 8oint tenant. ,ar% pro.ides no $onsideration for the home. Answer: =
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17) Ghi$h of the following statements is trueH A) ;f the donor does not pa- the gift tax( the donee is personall- lia0le for the tax. <) Ghen a married $ouple ele$ts gift splitting( ea$h spouse is potentiall- lia0le for +)O of the gift tax. !) :ift tax returns are due ,ar$h 1+ in the -ear following the gift. =) =onors $an re3uest an automati$ extension of time to pa- their gift tax e.en when thedon't re3uest to ha.e an in$ome tax extension. Answer: A
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11) =is$uss the wa-s in whi$h the estate and gift tax s-stem is a unified s-stem. Answer: The same tax rates appl- for 0oth gift and estate tax purposes. Taxa0le gifts made su0se3uent to 1517 affe$t the estate tax 0ase and( $onse3uentl-( the rates at whi$h the estate is taxed. The same unified $redit is used for 0oth gift and estate tax purposes. Jowe.er( the unified $redit for the gift tax is limited to &'2+(/)) whereas the unified $redit for estates is &1/)(/)) in "))7 through "))/.
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1/) 6ennifer and Terr-( a married $ouple( li.e in ;llinoisQ whi$h is a $ommon law state. ;n the $urrent -ear( Terr- gi.es his sister &"))())) $ash. 6ennifer and Terr- agree to gift splitting. Aeither 6ennifer nor Terr- has made an- taxa0le gifts in prior -ears. Ghat are 6ennifer and Terr-'s taxa0le giftsH Answer: Sin$e the- ele$t gift splitting( ea$h spouse is $onsidered to ha.e gi.en &1))())). Ea$h spouse in entitled to a &1'())) annual ex$lusion. Therefore( ea$h spouse's taxa0le gift is &/1())). The tax on the taxa0le gifts will 0e offset 0- the unified $redit a.aila0le to ea$h spouse and no gift tax will 0e due.
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15) !onnie has some a$reage that is .alued at &1(+))())). Jer daughter would li%e to 0uild a home on it( 0ut $an onl- afford &+))())). !onnie agrees to sell it to her daughter for &+))())). ;s there an- gift tax $onse3uen$e as a result of this transa$tionH Answer: !onnie is $onsidered to ha.e made a gift to her daughter of &1()))()))( the ex$ess of the land's F,> o.er the $onsideration re$ei.ed. ;f this is the onl- gift that !onnie made to her daughter during the -ear( she will 0e a0le to su0tra$t the &1'())) annual ex$lusion to arri.e at taxa0le gifts for the $urrent period. To the remaining &5/1()))( she will add taxa0le gifts for all prior periods. The gift tax will then 0e $omputed( at $urrent rates( on the $umulati.e taxa0le gifts. Aext( she will su0tra$t the tax on prior gifts $omputed at $urrent rates and an- unified $redit a.aila0le to her. The remaining amount is her gift tax lia0ilit- for the $urrent period.
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17 Copyright 2011 Pearson Education, Inc.

/)) ;n I$to0er 1517( ,arian made a large taxa0le gift. ;t was her first gift. ,arian used her &')())) spe$ifi$ exemption to redu$e her taxa0le gift amount. Ghat impa$t does this gift ha.e on her unified $redit and death tax 0aseH Answer: ,arian's unified $redit is redu$ed 0- &7())) 4")O of &')()))). Jer death tax 0ase does not in$lude her 1517 gifts.
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/1) =is$uss the statutor- exemptions from the gift tax. Answer: Pa-ments of medi$al expenses and $ollege tuition are not gifts. The pa-ments are exempt onl- if paid dire$tl- to the ser.i$e pro.ider. Inl- tuition 3ualifies as an edu$ational expense. The 0enefi$iar- of the pa-ment need not 0e a relati.e. !ongress permitted this exemption to allow for the support of $hildren who had rea$hed ma8orit- as well as for elderl- parents who ma- 0e ill to alle.iate $on$ern o.er the gift tax. Transfers to politi$al organiFations are not su08e$t to the gift tax. Propert- settlements in $on8un$tion with di.or$e are not su08e$t to the gift tax. For the exemption to appl-( the di.or$ing parties must adopt a written agreement $on$erning their marital and propert- rights. ;n addition( the di.or$e must o$$ur during a three#-ear period 0eginning one -ear 0efore the agreement is made. !ertain 9gifts9 resulting from a dis$laimer 0- a person who is designated as a donee 0- a donor are not su08e$t to the gift tax. The dis$laiming part- is t-pi$all- elderl-( si$%( or wealth-. The 3ualified dis$laimer must 0e irre.o$a0le and in writing. The donor must re$ei.e the refusal no later than nine months after the latter of the da- the transfer is made or the da- the dis$laiming part- 0e$omes age "1. Also to ha.e a 3ualified dis$laimer the dis$laiming person must not ha.e a$$epted the propert- and the dis$laiming part- must not dire$t who is to re$ei.e the dis$laimed propert-.
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/") ;da sells some sto$% to ,ae for &")())) at a time when the sto$% is .alued at &+)())). Later in the -ear( she gi.es ,ae &1+())) in $ash. a. Ghat is the amount of ;da's taxa0le giftsH 0. Jow would -our answer to Part a $hange if ;da ga.e the $ash to 6onathan instead of to ,aeH Answer: a. ;da made gifts of &2+())) B4&+)())) # &")()))) C &1+()))D to ,ae. ;da re$ei.es an annual ex$lusion of &1'())). ;da's taxa0le gifts are &'"())). 0. ;da's taxa0le gift to ,ae is &11())) B4&+)())) # &")()))) # &1'()))D and to 6onathan is &"())) 4&1+())) # &1'()))). Total taxa0le gifts for ;da are &15())).
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/') Puli wants to help his adult grandson( 6err-( 0e$ome a !PA. Je pa-s all of 6err-'s tuition this -ear( whi$h totals &")())). Je also pa-s &5())) for 6err-'s room and 0oard at s$hool. Puli ma%es the pa-ments dire$tl- to the s$hool. Ghat are the gift tax $onse3uen$esH Answer: ; ! Se$. "+)'4$) exempts the dire$t pa-ment of tuition to the s$hool from 0eing treated as a gift. The &5())) that Puli paid for room and 0oard does not 3ualif- under Se$. "+)'4$) as exempt from gift tax. Puli has made a &5())) gift to his grandson 0ut after the &1'())) annual ex$lusion he has no taxa0le gift.
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1 Copyright 2011 Pearson Education, Inc.

/2) <r-$e pa-s &1)())) for his adult grandson's tuition at medi$al s$hool and &/())) for the grandson's room and 0oard in the medi$al s$hool's dormitor-. All pa-ments are made dire$tl- to the medi$al s$hool. =o these pa-ments 0- <r-$e 3ualif- as giftsH Answer: Se$tion "+)'4e) exempts the pa-ment of tuition from 0eing treated as a gift. The room and 0oard pa-ments are a gift to the grandson.
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/+) Gard and 6une de$ide to di.or$e after ') -ears of marriage. Gard transfers &+))())) to 6une in settlement of her propert- rights. Ghat are the gift tax $onse3uen$es of this transferH Answer: Gard is not deemed to ha.e made a gift to 6une if the re3uirements of Se$. "+17 are met.
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/7) A00- transfers &1)())) to a politi$al organiFation to promote her fa.orite $andidate for president. =oes A00-'s transfer 3ualif- as a giftH Answer: Ao( politi$al $ontri0utions do not fall within the statutor- definition of a gift.
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/1) In ,ar$h 1 <ru$e transfers &'))())) to a re.o$a0le trust with Sprint <an% as trustee. The trustee must pa- out all the in$ome to Sam during Sam's lifetime. At Sam's death( the propert- is to 0e paid to Sam( 6r. In =e$em0er '1 the trustee distri0utes &2)())) of in$ome to Sam. Ghat date did a gift o$$urH Ghat was the amount of the giftH Answer: A &2)())) gift o$$urred on =e$em0er '1 0e$ause <ru$e no longer had $ontrol o.er the distri0uted in$ome. A gift did not o$$ur on ,ar$h 1 sin$e the trust is re.o$a0le.
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//) Maren pur$hased a 0ea$h house for &'))())) and immediatel- titled it in the names of Maren and Menn-( as 8oint tenants with right of sur.i.orship. Maren and Menn- are not married. =id a gift o$$urH ;f so( for what amountH Answer: Pes( a gift of one#half the .alue of the propert- has o$$urred( &1+)()))( from Maren to Menn-.
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/5) In 6une 1( Sherri deposits &7)())) into a new 8oint 0an% a$$ount in the names of Sherri and 6ohn. Jer friend( 6ohn( ma%es no deposits. In =e$em0er 1+ th( 6ohn withdraws &"+())) from the 8oint a$$ount. Ghat are the gift tax $onse3uen$es( if an-H Answer: Ao gift arises upon the $reation of the 0an% a$$ount. In =e$em0er 1+ th( when 6ohn withdraws &"+()))( Sherri is $onsidered to ha.e made a gift to 6ohn of the ex$ess of 6ohn's withdrawal o.er his deposits 4&"+()))).
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5)) In Septem0er 1( :eorge transfers his entire ownership rights in a &"+)())) life insuran$e poli$- on his own life to his sister( Sall-. The poli$-'s interpolated terminal reser.e is &')())) as of Septem0er 1. In 6ul- 1( :eorge had paid the poli$-'s &7())) annual premium. Ghat are the gift tax $onse3uen$es( if an-H Answer: :eorge is $onsidered to ha.e made a gift to Sall- of the interpolated terminal reser.e( &')()))( plus the amount of the annual premium attri0uta0le to the period after he ga.e her the poli$-(&+())) 4&7())) ? 1)K1") for a total gift of &'+())).
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1! Copyright 2011 Pearson Education, Inc.

51) In Septem0er 1( :eorge transfers his entire ownership rights in a &"+)())) life insuran$e poli$- on his own life to his sister( Sall-. The poli$-'s interpolated terminal reser.e is &')())) as of Septem0er 1. In 6ul- 1( :eorge had paid the poli$-'s &7())) annual premium. In 6ul- 1 of the su0se3uent -ear( :eorge again paid the premium on the poli$-. Ghat are the gift tax $onse3uen$es in the su0se3uent -ear( if an-H Answer: As a result of the premium pa-ment( :eorge is $onsidered to ha.e gi.en Sall- a &7())) gift. The result would 0e the same if he had gi.en her &7())) in $ash to ma%e the pa-ment herself.
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5") =is$uss the purpose of the gift tax annual ex$lusion. Answer: !ongress ena$ted the annual ex$lusion for administrati.e simpli$it- to %eep 9routine9 gifts 4e.g.( 0irthda-( wedding( and !hristmas gifts) from needing to 0e reported for gift tax purposes.
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5') Ghat is a 9net gift9 and what is the potential in$ome tax pro0lem asso$iated with ma%ing a net giftH Answer: A potential donor who wants to freeFe a propert-'s .alue 0ut who la$%s suffi$ient li3uid assets to pa- the gift tax might 0e interested in ma%ing a net gift 4a transfer in whi$h the donee agrees to pa- the gift tax as a $ondition of re$ei.ing the gift). The donor of a net gift must re$ogniFe a gain if the gift tax the donee pa-s ex$eeds the ad8usted 0asis of the propert- transferred.
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52) =onna transfers &"))())) of propert- to an irre.o$a0le trust with a 0an% as trustee. =onna names To0- 4age 7)) to re$ei.e all of the trust in$ome for the rest of his life. At To0-'s death( the propert- is to pass to Al or Al's estate. Ghat %ind of interest do To0- and Al possessH Answer: To0- has a present interest. Al has a future interest.
Page ef.: !:1"#11( Example !:1"#')

5+) !ontrast the !rumme- trust with the Se$. "+)'4$) trust. Answer: !ontri0utions to 0oth dis$retionar- trusts are eligi0le for the annual ex$lusion( despite the fa$t that 0oth trusts limit the a0ilit- of the 0enefi$iar- to a$$ess the trust assets. The Se$. "+)'4$) trust permits the minor 0enefi$iar- 4i.e.( under "1) a$$ess to trust assets onl- at the trustee's dis$retion while the !rumme- trust permits a forfeita0le right to withdraw trust assets. The Se$. "+)'4$) trust re$ei.es its legitima$- from the statutes while the !rumme- trust re$ei.es its legitima$- through the 8udi$ial pro$ess. The trustee of a Se$. "+)'4$) trust must distri0ute the assets and a$$umulated in$ome to the 0enefi$iar- at age "1. Thus( the !rumme- trust is more flexi0le than the Se$. "+)'4$) trust 0e$ause the 0enefi$iar- $an 0e an- age when the trust is $reated and the trust $an 0e terminated at an- age. Jowe.er( under the !rumme- trust the 0enefi$iar- does ha.e the right to demand distri0ution of the $ontri0ution to the trust for a period of timeQ thus( the donor's intent ma- 0e defeated if the 0enefi$iar- exer$ises the right of withdrawal.
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20 Copyright 2011 Pearson Education, Inc.

57) ;n the $urrent -ear( ,artha ma%es the transfers 0elow to her hus0and( -an. Ghat is the amount( if an-( of her marital dedu$tionH a. ;n August( she gi.es him a house .alued at &"+)())). 0. ;n =e$em0er( she gi.es him a 1+#-ear in$ome interest in a trust with the 0an% names as trustee. She names her son as the remainderman. The trust is irre.o$a0le and is funded with &+))())) of assets( and /O is the appli$a0le interest rate. Answer: a. The marital dedu$tion is &"'1())) 4&"+)())) # &1'())) ex$lusion). 0. Ao marital dedu$tion is a.aila0le 0e$ause the transfer is of a nondedu$ti0le termina0le interest. The propert- passes to the daughter at the end of 1+ -ears.
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51) Ghat are the re3uirements for $lassif-ing a transa$tion as a transfer of a 3ualified termina0le interest propert- 4LT;P)H Answer: The re3uirements for a 3ualified termina0le interest propert- 4LT;P) transfer are that the donee spouse 0e entitled to re$ei.e all the in$ome for life and that the in$ome 0e paid out at least annuall-. ;n addition( no one $an ha.e a power to appoint an- part of the propert- to an-one other than the donee#spouse unless su$h power is not exer$isa0le while the donee#spouse is ali.e. Finall-( the donor must ele$t to $laim a marital dedu$tion.
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5/) ;n "))/( Lill- ma%es taxa0le gifts aggregating &+ million. Jer onl- other taxa0le gifts amount to &1 million( all of whi$h were made in 155/. Ghat is her gift tax lia0ilit-H Answer: Tax on &7()))())) &"(+/)(/)) ,inus: Tax on &1()))())) 4$urrent rate s$hedule) 4 '2+(/))) Tax on &+()))())) &"("'+())) ,inus: emaining unified $redit 4&'2+(/)) # &1++(/)) used) 4 15)()))) Tax pa-a0le &"()2+.)))
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55) =is$uss at least two reasons for ma%ing inter .i.os 4lifetime) gifts. Answer: The &1'())) per donee annual ex$lusion allows large sums to pass to donees without an- transfer tax 0eing imposed. There is no estate tax $ounterpart. ;nter .i.os gifts remo.e post#gift appre$iation from the tax 0ase. :ift tax amounts are also remo.ed from the tax 0ase unless the transfer o$$urs within three -ears of death. :ifts made in $ontemplation of death to a donee#spouse ma- allow use of the full unified $redit for the donee#spouse. ,ost states do not impose a gift tax. :ifts to $harit- ma- also result in an in$ome tax dedu$tion.
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1))) =is$uss the negati.e aspe$ts of gifts. Answer: The donor loses $omplete $ontrol of the asset prior to death. The step#up in 0asis permitted at death is not a.aila0le when gifts are made. The step#up in 0asis ma- not 0e signifi$ant if the donee has no intention of selling the asset. Also( the step#up in 0asis is not as signifi$ant if the asset is not depre$ia0le. The gift tax is a$tuall- an earl- pa-ment of the estate taxQ thus the donor loses the use of the $ash used to pa- the gift tax. Su$h $ash( howe.er( is ex$luded from the donor's estate( thus redu$ing the estate tax.
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1)1) Ghat is the due date for the gift tax returnH Are there an- ex$eptionsH ;f so( what are the-H Answer: :ifts alwa-s are reporta0le on a $alendar#-ear 0asis. The due date for a gift tax return generall- is April 1+th of the -ear following the -ear in whi$h the donor made the gifts e.en if the donor reports on a fis$al -ear for in$ome tax purposes. ;f the donor dies during the -ear( the gift tax return must 0e filed no later than the due date for the estate tax return 4nine months after the date of death). ;f an extension is re3uested for filing the donor's indi.idual in$ome tax return( an extension until August 1+ also is granted for filing the gift tax return.
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1)") =es$ri0e the penalties for under.aluing gifts on a gift tax return. Answer: Se$. 777" imposes a penalt-( at one of two rates( on underpa-ment of gift or estate taxes resulting from too low a .aluation of propert-. The penalt- is imposed on the amount of the transfer tax understatement. ;f the .aluation shown on the tax return ex$eeds +)O of the .aluation determined upon audit or $ourt trial( there is no penalt-. ;f the .alue reported on the return is +)O or less of the $orre$t .alue( the penalt- rate is: atio of .alue per return to $orre$t .alue ,ore than "+O 0ut +)O or less "+O or less Penalt- rate ")O 2)O

A taxpa-er is exempt from the penalt- if the underpa-ment is less than &+())). The ; S will not le.- the penalt- if the taxpa-er shows good faith and reasona0le $ause.
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1)') Menn- is thin%ing of ma%ing a su0stantial gift of sto$% to his fian$Re( ,aria. The wedding is s$heduled for I$to0er 1 of the $urrent -ear. Menn- alread- has exhausted his unified $redit. Je also is $onsidering gi.ing &"7())) $ash this -ear to ea$h of his three $hildren 0- a pre.ious marriage. Ghat tax issues should Menn- $onsider with respe$t to the gifts he plans to ma%e to ,aria and his three $hildrenH Answer: S Gill the gift to ,aria 0e eligi0le for the marital dedu$tionH ;f not( should he $onsider postponing the gift until after the weddingH S Gill gift splitting 0e a.aila0le on the planned gifts to the three $hildrenH S ;f gift splitting is a.aila0le( will the gift splitting ele$tion produ$e fa.ora0le tax resultsH The gift to ,aria will not 0e eligi0le for the marital dedu$tion unless he postpones the gift until after their marriage. <e$ause the anti$ipated gift to ,aria is su0stantial( and his onltax 0rea% if he ma%es the gift 0efore marriage is the &1'())) annual ex$lusion( he should $onsider postponing the gift and ha.ing it 0e nontaxa0le under the unlimited marital dedu$tion rules. :ift splitting will 0e a.aila0le on the planned gifts to the $hildren onl- if he ma%es them after marr-ing ,aria. :ift splitting would produ$e fa.ora0le tax results 0e$ause with gift splitting the &"7())) planned gift to ea$h $hild would 0e full- shielded 0- two( &1'())) per donee annual ex$lusions. Ea$h spouse is deemed to ma%e a gift.
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1)2) Terr- is $onsidering transferring assets .alued at &2))())) to an irre.o$a0le trust for the 0enefit of her son( !liff( age 1+( with First Aational <an% as trustee. Jer attorne- has drafted a trust agreement that pro.ides that !liff is to re$ei.e in$ome at the trustee's dis$retion for the next ") -ears and that at age '+ the trust assets will 0e distri0uted e3uall0etween !liff and his sister 6oanna. Terr- anti$ipates that her hus0and will $onsent to gift splitting. Ghat tax issues should Terr- and her hus0and $onsider with respe$t to the trust she is $reatingH Answer: S Gill an- portion of Terr-'s transfer 0e $lassified as a gift of a present interestH S Gill the transfer in trust 3ualif- for an annual ex$lusion under the "+)'4$) trust pro.isionsH S =oes gift splitting seem to 0e ad.isa0leH The trust is a dis$retionar- trust and so !liff is not guaranteed to re$ei.e an-thing for ") -ears. Also( 6oanna will not re$ei.e an-thing until ") -ears from now. Thus( Terr- will ma%e no transfers of present interests. The trust is not a "+)'4$) trust 0e$ause it does not terminate when !liff 0e$omes age "1 4nor does it gi.e !liff a 9window9 soon after attaining age "1 to as% for the trust assets). ;n addition( when the trust terminates( some of the assets will go to !liff's sister instead of all of them passing to !liff. Ge do not ha.e suffi$ient fa$ts a0out the spouses' prior gift histor- to gi.e a definiti.e answer a0out whether gift splitting would 0e ad.isa0le. <e$ause no annual ex$lusions will 0e allowed( the usual 0enefit of dou0ling the annual ex$lusion will not 0e a.aila0le. Jowe.er( if 0oth spouses still ha.e most of their unified $redit a.aila0le( gift splitting li%el- will 0e 0enefi$ial 0- redu$ing the tax rate on the gifts and allowing use of two unified $redits.
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1)+) 6ason funds an irre.o$a0le trust with Li0ert- <an% as trustee and reser.es the right to re$ei.e the in$ome for se.en -ears. Je pro.ides that at the end of the se.enth -ear( the trust assets will pass outright to his adult daughter( Paula( or to Paula's estate should Paula not 0e ali.e. 6ason transfers assets .alued at &1.+ million to the trustQ the assets at present are produ$ing in$ome of a0out 1.+O per -ear. Assume that the Se$. 1+") rate per the a$tuarial ta0les for the month of the transfer is 1)O. Ghat tax issues should 6ason $onsider regarding the trustH Answer: S =o the estate freeFe rules appl- to this transa$tionH S ;f the- do( what is the amount of the deemed gift from 6ason to PaulaH S Ghat is the signifi$an$e of the 7.+O in$ome -ieldH The estate freeFe rules of Se$. "1)" do appl- to this transa$tion. 6ason ma%es a transfer for the 0enefit of a famil- mem0er 4a daughter) and retains an interest in su$h trust. Jis retained interest( howe.er( is not an annuit- interest or a unitrust interest 4a spe$ified per$entage of the fair mar%et .alue of the trust assets( as redetermined annuall-). <e$ause 6ason did not %eep an annuit- interest or a unitrust interest( the .alue of his retained interest is treated as 0eing Fero. Thus( he is deemed to ha.e made a gift to Paula of the total .alue( or &1.+ million. ;f 6ason had %ept an annuit- interest or a unitrust interest( the Se$. 1+") 1)O interest rate would ha.e 0een used to .alue his interest. The a$tual in$ome -ield of 1.+O would not 0e rele.ant in arri.ing at the .aluation.
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