Estate Planning Review Questions Chapter 5 Lifetime Transfers By Gift - An Overview

Front 1

Describe the factors thst must be present for a transfer to be considered a taxable gift for gift tax purposes

Back 1

1. The transfer of property must be completed, that is, a competent donor must transfer the property in a manner that divests the donor of dominion and control and places property within the control of the donee.

2. A competent donee must accept the gift.

3. The transfer must be for less than full and adequate consideration.

Front 2

Steve gives wife Ellen a $100k lump sum settlement in divorce and she agrees to give up marital rights to his estate. What requirements must be met for Steven's transfer to escape gift tax liability?

Back 2

1. The transfer must be pursuant to a written agreement between the two parties

2. The divorce must occur within a period beginning one year prior to and ending two years after the agreement.

Front 3

John lends his son $15000 with interest then cancels the note. Are there gift tax implications. Explain.

Back 3

In NONBUSINESS situations, forgiving a debt constitutes a gift. So in this case, ignoring the annual exclusion, there is a gift made to the son.

Front 4

George pays his 24 year old daughter's NYC rent while she tries to get work as an actress. Has he made a gift?

Back 4

Because George's daughter is an adult, payment of rent is not his legal obligation, so it constitutes a gift.

Front 5

Marty gives daughter Mary $15000 with the requirement that she must transfer an automobile she owns to her brother Mark. The car is worth $11000. Has a gift been made, and to whom? Ignore the annual exclusion.

Back 5

Ignoring the annual exclusion, Marty has given his daughter a direct gift of $4000, which is the excess of $15000 over the value of the car. He has also made an indirect gift of $11000 to his son.

Front 6

Steve is the sole proprietor of a small firm with a net worth of $300,000. He makes his 12 year old daughter Lara a one-third partner.

A. Has a gift been made in this transaction?

B. Has a gift been made to Lara if she is an adult and performs bookkeeping services for the firm without a salary?

Back 6

A. A gift has been made because Lara is performing no services for the partnership and has contributed no capital to its formation.

B. If a new partner contributes capital or valuable services in exchange for a share of the business, there normally would not be a gift. However, a gift is likely to exist in this case since the bookkeeping service would have a value of less than $100k. The gift value will be the $100k less the value of the services.

Front 7

Alan and wife Sally are the sole shareholders in AB Corp, a real estate development company. Alan wants AB to transfer parcels of land to his kids for prices well below their true market value. What tax problems do you see with this?

Back 7

1. The IRS might consider this to be a taxable dividend equal to the FMV of the real estate less the price paid by the kids.

2. Also, the IRS might see this as Alan and wife as making a gift to their kids that is equal to the amount of the dividend.

Front 8

Joan owns a life insurance policy on her husband's life and names her children as beneficiaries because she has a large estate. What are the potential problems of this arrangement?

Back 8

When the husband dies, the IRS could argue that Joan has made a constructive gift to her children equal to the full amount of the life insurance policy's death proceeds - as if she received the proceeds and then gave the money to her children.

Front 9

A retired executive takes over and manages the business owned by his son during his son's illness. The son would have had to pay $10k for a comparable replacement but his father does not charge him. Has a gift been made?

Back 9

The rendering of services is not considered to be a gift.

Front 10

Describe the requirements necessary to have a qualified disclaimer of gifted property.

Back 10

1. The refusal must be in writing

2. The writing must be received by the transferor, the transferor's legal representative, or the holder of the legal title to the property no later than 9 months after the later of (1) The date on which the transfer is made or (2) the date the person who is disclaiming reaches 21.

3. The person disclaiming must not have accepted the interest or any of its benefits.

4. Someone other than the disclaimant must receive the property and the disclaimant cannot influence the selection of the recipient of the disclaimed property.

Front 11

List the factors you would examine to determine whether property transferred to an employee is a gift or compensation for personal services.

Back 11

1. Length and value of the employee's services

2. The way the employer determined the amount of the reputed gift

3. How the employer treated the payment in the corporate books and tax returns

Front 12

A general agent for Wildlife of Arkansas assigns all his renewal commissions to his daughter.

1. Explain the gift tax effect of the transaction.

2. Explain the income tax effect of the transaction.

Back 12

1. The renewal commissions are treated as a gift from the general agent to his daughter.

2. The general agent is subject to income tax on the commissions.

Front 13

Identify the types of gifts that are exempt from gift tax

Back 13

1. Qualified disclaimers

2. Some transfers of property between spouses upon divorce

3. Tuition paid to an educational institution

4. Payment of medical care

5. Transfers of property or money to a political organization for that organization's use.

Front 14

What are the nontax advantages of making lifetime gifts?

Back 14

1. They offer the donor privacy which you don't get through a testamentary gift.

2. Probate and administrative costs may be reduced

3. A lifetime gift is protected from creditor's claims.

4. The donor can enjoy seeing the donee use the gift.

5. The donor can assess how well or how poorly the donee manages the gifted property.

6. The gift can provide for the donee' s education, support, and financial well-being.

Front 15

Are these completed gifts?

1. Ed gave his son a check in October 2015 and as of Feb 2016 the son had not yet cashed it.

2. Jim, who thought he was dying, transferred title to his shore house to his sister. He recovered. His sister deeded the house back to him after he recovered.

3. Jenny purchased a $10k savings bond and had the bond titled in her name as well as the names of her 3 adult grandchildren as co-owners. She has just told them of the gift.

4. Harry the tennis pro placed his $10k summer earnings in a joint bank account with his brother Stu. Stu withdrew $8k.

Back 15

1. There is no completed gift until the son cashes the check.

2. Neither the conveyance nor the return of the property is treated as a completed gift because the transfer of title was conditioned on Jim Johnson's death. A gift made in anticipation of death - A gift causa mortis - becomes complete only at the donor's death.

3. There is no completed gift until one of the grandchildren surrenders the bond for cash.

4. A completed gift was made when Stu withdrew funds from the joint account.

Front 16

Gloria established and irrevocable trust for her son Brian and her daughter Jamie. Gloria put $100k of common stock into the trust.

1. Explain the gift tax effect of the transfer of stock to the trust if Gloria retained the power to alter the amount of income and principal for each of her children.

2. Describe the potential result if Gloria relinquished the right to allocate income to her beneficiaries at some future date.

Back 16

1. Gift tax liability is measured at the time the gift becomes complete. There is no completed gift until Gloria relinquishes the power to alter the trust beneficiaries' interests.

2. Once Gloria relinquishes the right to allocate income to Brian and Jamie she has made a completed gift. Her tax liability is measured at that time.

Front 17

Drew owns land worth $60k with a $20k mortgage. Drew is not personally liable for the debt. Drew gives the property to his daughter

1. Compute the amount of the gift.

2. Describe how your answer would change if Drew were personally liable for the debt in a state where the donee is subrogated to the rights of Drew's creditors

3. Would the answer to 2. differ if the donee had no right to proceed against Drew to recover the debt?

Back 17

1. Because the donor is not personally liable for the debt, the amount of the gift is the property's net value, $40k

2. The amount of the gift would be the value of the property unreduced by the debt, or $60k

3. The amount of the gift would be the donor's equity or $40k. However, if the donor decides later to pay the mortgage debt then his daughter will have an additional gift of $20k

Front 18

Describe the effect of BLOCKAGE on gift taxation.

Back 18

If a transfer consists of a block of stock large enough to depress the market value of each share if the entire block is sold at once, a blockage discount may apply. This gives the taxpayer a discount below the stock's annual listed market value for determining the gift tax.

Front 19

Ben plans to transfer the ownership of three insurance policies on his life to his four adult children. Explain how the following types of policies are valued for gift tax purposes

1. A 20-pay life policy in its 21st year (a whole life policy that becomes paid up after 20 years of premium payments)

2. A 10 year old whole life policy on which Ben pays premiums annually

3. A newly purchased policy

Back 19

1. For paid up policies, the value For gift tax purposes is the amount of premium the issuing insurer would charge for the same policy of equal face amount on Ben's life based on his age at the time of transfer.

2. This policy is in the premium-paying stage when Ben makes the transfer. You add the unearned premium on the date of the gift to the interpolated terminal reserve (take the beginning terminal reserve and the ending terminal reserve and wherever you are in between is the interpolation..,halfway through, 2/3rds of the way, etc.)

3. The value of the newly purchased policy on Ben's life for gift tax purposes is the gross premium paid to the insurer.

Front 20

Alex transferred a whole life insurance policy to his son on July 1 last year. The policy terminal reserve was $25000 on January 1 last year and $28000 on Jan 1 this year. If Alex paid the full $2500 premium on Jan 1 of this year, what is the value of the policy at the time of the gift?

Back 20

The value of the policy is the interpolated terminal reserve plus the unearned premium at the time of the gift. The interpolated terminal reserve was $26500 on July 1 of last year since this is the midpoint of the year during which the reserve increases $3000. Half the premium ($1250) is unearned at this time. Therefore, the policy value was $27750 on July 1 of last year when the gift was made.