Real Estate Planning - Chapter 5

1. If at the date of a gift, the fair market value of the gifted property is less than the donor's adjusted basis in the gifted property, the donee will be subject to the double-basis rule.

True

False

If the fair market value of the gifted property is less than the donor's adjusted basis at the time of the gift, the donee will be subject to the double-basis rule. This means that for tax purposes, the donee's basis in the gifted property will be the lower of the fair market value or the donor's adjusted basis. This rule is applied to prevent the donee from claiming a loss on the property if they were to sell it for less than the donor's adjusted basis. Therefore, the statement is true.

Explanation

If the fair market value of the gifted property is less than the donor's adjusted basis at the time of the gift, the donee will be subject to the double-basis rule. This means that for tax purposes, the donee's basis in the gifted property will be the lower of the fair market value or the donor's adjusted basis. This rule is applied to prevent the donee from claiming a loss on the property if they were to sell it for less than the donor's adjusted basis. Therefore, the statement is true.

2. If the overall objective of a client is federal gross estate reduction, the client should make cash gifts.

True

False

If the overall objective of a client is federal gross estate reduction, making cash gifts would not be the correct approach. Cash gifts are subject to gift tax, and the value of the gift would still be included in the client's gross estate for federal estate tax purposes. To achieve federal gross estate reduction, alternative strategies such as setting up trusts or utilizing other estate planning tools would be more appropriate.

Explanation

If the overall objective of a client is federal gross estate reduction, making cash gifts would not be the correct approach. Cash gifts are subject to gift tax, and the value of the gift would still be included in the client's gross estate for federal estate tax purposes. To achieve federal gross estate reduction, alternative strategies such as setting up trusts or utilizing other estate planning tools would be more appropriate.

3. During 2014, Janice made the following transfers. What is the a amount of her total taxable gifts for 2014?1) Janice gave $10,000 to her boyfriend so he could buy a new car.2) Janice's neighbor Judy needed $15,000 to pay for her knee surgery, Janice paid Doctors-R-US Hospital directly.3) Her nephew began attending Georgetown Law School this year. Janice made the initial yearly tuition payment of $25,000 directly to Georgetown Law School during 2014.

$0

$14,000

$15,000

$50,000

The total taxable gifts for 2014 is $0 because none of the transfers listed are considered taxable gifts. The $10,000 given to her boyfriend is a gift, but it is not taxable because it falls below the annual gift tax exclusion amount. The $15,000 paid directly to Doctors-R-US Hospital for her neighbor's surgery is not a gift because it is a payment for a service. The $25,000 payment to Georgetown Law School for her nephew's tuition is considered an educational expense and is not subject to gift tax. Therefore, the total taxable gifts for 2014 is $0.

Explanation

The total taxable gifts for 2014 is $0 because none of the transfers listed are considered taxable gifts. The $10,000 given to her boyfriend is a gift, but it is not taxable because it falls below the annual gift tax exclusion amount. The $15,000 paid directly to Doctors-R-US Hospital for her neighbor's surgery is not a gift because it is a payment for a service. The $25,000 payment to Georgetown Law School for her nephew's tuition is considered an educational expense and is not subject to gift tax. Therefore, the total taxable gifts for 2014 is $0.

4. If John pays Carol's car note, and there is no consideration from Carol to John, John has made a gift to Carol.

True

False

If John pays Carol's car note without expecting anything in return, it can be considered a gift. In this scenario, there is no consideration from Carol to John, meaning Carol is not providing anything of value in exchange for John's payment. Therefore, it can be concluded that John has indeed made a gift to Carol.

Explanation

If John pays Carol's car note without expecting anything in return, it can be considered a gift. In this scenario, there is no consideration from Carol to John, meaning Carol is not providing anything of value in exchange for John's payment. Therefore, it can be concluded that John has indeed made a gift to Carol.

5. Carl would like to make a gift to his son, but does not want the value of the gift and the associated gift tax to total an amount greater than $100,000. Carl's cousin has told him about the net gift, but Carl has come to you for clarification. Which of the following statements from Carl's cousin is correct?

A net gift does not qualify for the annual exclusion because it is a gift of a future interest.

Carl must prepay the gift tax due when he makes a net gift.

A net gift requires Carl's son to disclaim the interest in the gift.

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Explanation

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6. The donee of a gift is primarily liable for any gift tax due on the transfer.

True

False

The donor is primarily responsible for the gift tax.

Explanation

The donor is primarily responsible for the gift tax.

7. Generally, gift tax is calculated based on the fair market value of the property at the date of the gift.

True

False

Gift tax is a tax imposed on the transfer of property or assets as a gift. The fair market value of the property at the date of the gift is used to determine the gift tax liability. This means that the value of the gift at the time it is given is considered for tax purposes, rather than the original cost or the future value. Therefore, the statement that gift tax is calculated based on the fair market value of the property at the date of the gift is true.

Explanation

Gift tax is a tax imposed on the transfer of property or assets as a gift. The fair market value of the property at the date of the gift is used to determine the gift tax liability. This means that the value of the gift at the time it is given is considered for tax purposes, rather than the original cost or the future value. Therefore, the statement that gift tax is calculated based on the fair market value of the property at the date of the gift is true.

8. A donor's gross estate will not include the fair market value of lifetime gifts that qualify for the annual exclusion.

True

False

The correct answer is true because the annual exclusion allows individuals to give a certain amount of money or property to another person without it being subject to gift tax. These lifetime gifts are not included in the donor's gross estate because they have already been transferred to the recipient during the donor's lifetime. Therefore, the fair market value of these gifts does not need to be included when calculating the donor's estate for tax purposes.

Explanation

The correct answer is true because the annual exclusion allows individuals to give a certain amount of money or property to another person without it being subject to gift tax. These lifetime gifts are not included in the donor's gross estate because they have already been transferred to the recipient during the donor's lifetime. Therefore, the fair market value of these gifts does not need to be included when calculating the donor's estate for tax purposes.

9. If the annual exclusion is not used during the year, it does not carryover to the following year.

True

False

If the annual exclusion is not used during the year, it means that the individual did not utilize the maximum amount of gift-giving allowed without incurring gift tax. This exclusion is specific to each year and cannot be carried over to the following year. Therefore, if the exclusion is not used within a given year, it cannot be saved or accumulated for future use. This implies that the statement is true.

Explanation

If the annual exclusion is not used during the year, it means that the individual did not utilize the maximum amount of gift-giving allowed without incurring gift tax. This exclusion is specific to each year and cannot be carried over to the following year. Therefore, if the exclusion is not used within a given year, it cannot be saved or accumulated for future use. This implies that the statement is true.

10. If a donor gifts $14,000 of community property to his niece, the donor must file a gift tax return.

True

False

A gift tax return is not required if the donor gifts $14,000 or less per year to an individual. In this case, the donor is gifting $14,000, which falls within the annual exclusion limit. Therefore, the donor does not need to file a gift tax return.

Explanation

A gift tax return is not required if the donor gifts $14,000 or less per year to an individual. In this case, the donor is gifting $14,000, which falls within the annual exclusion limit. Therefore, the donor does not need to file a gift tax return.

11. An individual who gifts a total of $100,000 split equally between eleven donees is not required to file a gift tax return.

True

False

An individual who gifts a total of $100,000 split equally between eleven donees is not required to file a gift tax return because the annual exclusion for gifts is $15,000 per recipient. Since the gift is split equally among eleven donees, each receiving $9,090.91, it falls below the annual exclusion amount for each recipient. Therefore, the individual does not need to file a gift tax return.

Explanation

An individual who gifts a total of $100,000 split equally between eleven donees is not required to file a gift tax return because the annual exclusion for gifts is $15,000 per recipient. Since the gift is split equally among eleven donees, each receiving $9,090.91, it falls below the annual exclusion amount for each recipient. Therefore, the individual does not need to file a gift tax return.

12. To be eligible for the unlimited marital deduction, the donee spouse must be a citizen of the United States.

True

False

The unlimited marital deduction allows a spouse to transfer an unlimited amount of assets to their spouse, free from estate and gift taxes. However, to qualify for this deduction, the donee spouse must be a citizen of the United States. This requirement ensures that only U.S. citizens can benefit from the tax advantages provided by the unlimited marital deduction. Therefore, the statement that the donee spouse must be a citizen of the United States is true.

Explanation

The unlimited marital deduction allows a spouse to transfer an unlimited amount of assets to their spouse, free from estate and gift taxes. However, to qualify for this deduction, the donee spouse must be a citizen of the United States. This requirement ensures that only U.S. citizens can benefit from the tax advantages provided by the unlimited marital deduction. Therefore, the statement that the donee spouse must be a citizen of the United States is true.

13. Celeste and Raymond have been married for 29 years. Last year, Raymond sold his extremely successful automotive repair shop and his net worth now exceeds $10MM dollars. Celeste and Raymond have twin daughters, Kelly and Shelly, who will be 35 next month. Celeste and Raymond, neither of whom have given any gifts in the past, would like to give their daughters the maximum amount of cash possible without paying any gift tax. How much can Celeste and Raymond give to Kelly and Shelly during 2014?

$14,000

$28,000

$5,368,000

$10,736,000

Celeste and Raymond can give a maximum amount of $10,736,000 to their daughters during 2014 without paying any gift tax. This is because the annual gift tax exclusion for 2014 is $14,000 per person. Since they are a married couple, they can combine their exclusions and give up to $28,000 to each recipient without incurring any gift tax. They have two daughters, so they can give a total of $56,000 to both daughters. However, they have not given any gifts in the past, so they can also take advantage of the lifetime gift tax exemption, which is $5,340,000 for 2014. Therefore, they can give an additional $5,340,000 to their daughters without paying any gift tax. Adding the $56,000 from the annual exclusion, the total amount they can give is $5,396,000. However, Raymond's net worth exceeds $10MM dollars, so they can give the maximum amount possible, which is $10,736,000.

Explanation

Celeste and Raymond can give a maximum amount of $10,736,000 to their daughters during 2014 without paying any gift tax. This is because the annual gift tax exclusion for 2014 is $14,000 per person. Since they are a married couple, they can combine their exclusions and give up to $28,000 to each recipient without incurring any gift tax. They have two daughters, so they can give a total of $56,000 to both daughters. However, they have not given any gifts in the past, so they can also take advantage of the lifetime gift tax exemption, which is $5,340,000 for 2014. Therefore, they can give an additional $5,340,000 to their daughters without paying any gift tax. Adding the $56,000 from the annual exclusion, the total amount they can give is $5,396,000. However, Raymond's net worth exceeds $10MM dollars, so they can give the maximum amount possible, which is $10,736,000.

14. Jack gave his nephew, Stephen, 1,000 shares of ABC Corporation. Jack had an adjusted basis of $10,000 for all 1,000 shares and the fair market value at the date of the gift was $45,000. Jack paid gift tax of $9,000 on the gift to Stephen. If Stephen sells the stock three days after receiving the gift for $46,000, what is his capital gain/loss? (Assume Jack had already made transfers to Stephen during the year to utilize the annual exclusion.)

No gain or loss.

$1,000 gain

$29,000 gain

$36,000 gain

Stephen's capital gain is $29,000. The capital gain is calculated by subtracting the adjusted basis from the selling price. In this case, the adjusted basis is $10,000 and the selling price is $46,000. Therefore, the capital gain is $46,000 - $10,000 = $36,000. However, since Jack paid gift tax of $9,000 on the gift, this amount is added to the capital gain, resulting in a total capital gain of $36,000 + $9,000 = $29,000.

Explanation

Stephen's capital gain is $29,000. The capital gain is calculated by subtracting the adjusted basis from the selling price. In this case, the adjusted basis is $10,000 and the selling price is $46,000. Therefore, the capital gain is $46,000 - $10,000 = $36,000. However, since Jack paid gift tax of $9,000 on the gift, this amount is added to the capital gain, resulting in a total capital gain of $36,000 + $9,000 = $29,000.

15. Pedro has begun a program of lifetime gifting. All of the following statements regarding lifetime gifts are true, except?

Payments directly to his grandchildren for their education over the annual exclusion amount will not be taxable.

The correct answer is "Payments directly to his grandchildren for their education over the annual exclusion amount will not be taxable." This statement is not true because payments directly to grandchildren for their education over the annual exclusion amount are considered taxable gifts and may be subject to gift tax.

Explanation

The correct answer is "Payments directly to his grandchildren for their education over the annual exclusion amount will not be taxable." This statement is not true because payments directly to grandchildren for their education over the annual exclusion amount are considered taxable gifts and may be subject to gift tax.

16. Celeste made the following transfers during 2014:1) Her friend, Paul, needed $24,000 to begin law school. Celeste gave Paul the cash.2) An alimony payment of $14,000 to her ex-husband.3) She paid $15,000 to Diamond Shores Hospital for her friend Jackie's medical bills.What is the amount of Celeste's taxable gifts?

$10,000

$12,000

$27,000

$50,000

Celeste's taxable gifts are $10,000. This is because only the gift to her friend Paul, which was $24,000, is considered a taxable gift. The alimony payment and the payment for her friend Jackie's medical bills are not considered taxable gifts. Therefore, the total amount of Celeste's taxable gifts is $24,000 - $14,000 - $15,000 = $10,000.

Explanation

Celeste's taxable gifts are $10,000. This is because only the gift to her friend Paul, which was $24,000, is considered a taxable gift. The alimony payment and the payment for her friend Jackie's medical bills are not considered taxable gifts. Therefore, the total amount of Celeste's taxable gifts is $24,000 - $14,000 - $15,000 = $10,000.

17. Which of the following is eligible for the annual exclusion?

Frank designates his daughter, Holly, beneficiary of his 401(k) plan.

Frank designates his wife, Betty, as beneficiary of his life insurance policy.

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Explanation

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18. Grandmother Joes contributed $2.5mm to a revocable trust. She has a life expectancy of 24 years and she will receive an 8% per year annuity from the trust. At her ddeather, the corpus will be paid to her granddaughter, Lisa. What is Grandmother Jones's taxable gift?

$0

$2,094,752

$2,489,000

$2,500,000

The correct answer is $0 because a revocable trust is not considered a completed gift for tax purposes. Since Grandmother Jones retains control and ownership of the assets in the trust, there is no taxable gift.

Explanation

The correct answer is $0 because a revocable trust is not considered a completed gift for tax purposes. Since Grandmother Jones retains control and ownership of the assets in the trust, there is no taxable gift.

19. Crystal loans Holly $650k, so that Holly can buy a home. Holly signs a note, with a term of 5 years, promising to repay the loan. The home is the collateral, but because Chrystal and Holly have been friends since childhood, Crystal does not charge Holly interest. Which of the following statements is true?1) The imputed interest is considered a taxable gift from Crystal to Holly.2) The imputed interest is taxable income on Crystal's income tax return.3) The imputed interest is an interest expense deduction for Crystal.4) Holly can deduct the imputed interest on her income tax return.

2 only

2 and 4

1, 2, and 4

1, 2, 3, and 4

The imputed interest is considered a taxable gift from Crystal to Holly because she is not charging any interest on the loan. This gift is taxable and should be reported as such. Additionally, the imputed interest is taxable income on Crystal's income tax return because it is considered as income that she could have earned if she had charged Holly interest. Finally, Holly can deduct the imputed interest on her income tax return because it is considered as interest expense. Therefore, the correct answer is 1, 2, and 4.

Explanation

The imputed interest is considered a taxable gift from Crystal to Holly because she is not charging any interest on the loan. This gift is taxable and should be reported as such. Additionally, the imputed interest is taxable income on Crystal's income tax return because it is considered as income that she could have earned if she had charged Holly interest. Finally, Holly can deduct the imputed interest on her income tax return because it is considered as interest expense. Therefore, the correct answer is 1, 2, and 4.

20. Jason and his wife, Maria, live in Texas with their two minor children. All of their property is owned as community property. During the year, Jason gave his brother a $13,000 car, his friend a $4,000 watch, and his dad a $45,000 fishing boat. What is the total amount of split gifts?

$0

$16,000

$31,000

$62,000

Because the question asked the amount of the gift splitting, the answer is $0. Community property assets are not eligible for gift splitting because they are viewed as being owned one-half by each spouse. $31,000 (1/2 of the total of all gifts during the year) would be attributable to Maria as gifts made by her during the year.

Explanation

Because the question asked the amount of the gift splitting, the answer is $0. Community property assets are not eligible for gift splitting because they are viewed as being owned one-half by each spouse. $31,000 (1/2 of the total of all gifts during the year) would be attributable to Maria as gifts made by her during the year.

21. After reading an estate planning article in a popular magazine, Vaughn has decided to take action to reduce his gross estate by making annual gifts to his 4 kids, 8 grandchildren, and 4 great-grandchildren. Vaughn has discussed the gifting strategy with his wife, Rebecca, and provided it does not result in use of any of her applicable gift tax credit, she has agreed to split each gift. Vaughn does not want to use his applicable gift tax credit either. If Vaughn carries the plan out for 5 years, how much can he gift in totoal while meeting Rebecca's requirement? Assume the 2014 exclusion amounts.

$208,000

$1,120,000

$2,080,000

$2,240,000

Vaughn can gift a total of $2,240,000 while meeting Rebecca's requirement. This is because Vaughn can make annual gifts to his children, grandchildren, and great-grandchildren without using his applicable gift tax credit. By splitting each gift with Rebecca, they can effectively double the amount they can gift each year. Therefore, over 5 years, they can gift a total of $2,240,000 without utilizing their gift tax credits.

Explanation

Vaughn can gift a total of $2,240,000 while meeting Rebecca's requirement. This is because Vaughn can make annual gifts to his children, grandchildren, and great-grandchildren without using his applicable gift tax credit. By splitting each gift with Rebecca, they can effectively double the amount they can gift each year. Therefore, over 5 years, they can gift a total of $2,240,000 without utilizing their gift tax credits.

22. The lender of a $150k no-interest gift loan will always impute interest.

True

False

The statement is true because the lender of a no-interest gift loan is still considered to have imputed interest. Imputed interest refers to the interest that is deemed to have been earned on a loan, even if no actual interest is charged. In the case of a no-interest gift loan, the lender is essentially giving up the opportunity to earn interest on the loan amount, and this forgone interest is imputed. Therefore, even though no interest is actually charged, the lender is still considered to have imputed interest.

Explanation

The statement is true because the lender of a no-interest gift loan is still considered to have imputed interest. Imputed interest refers to the interest that is deemed to have been earned on a loan, even if no actual interest is charged. In the case of a no-interest gift loan, the lender is essentially giving up the opportunity to earn interest on the loan amount, and this forgone interest is imputed. Therefore, even though no interest is actually charged, the lender is still considered to have imputed interest.

23. Landon has several pieces of property valued at $30k that he wants to give away. He wants to make gifts that make sense for both himself and for the recipient. He wants to give gifts to his father, Preston (who is in a low marginal income tax bracket), his sister, Tabitha, his daughter, Kelcie, and to the United Way. Match the properties to the best recipient considering he would like to keep one asset.

Stock with a FMV of $30k and an adjusted basis of $12k. The stock has a dividend yield of 3% and is expected to appreciate 9%

Stock with a FMV of $30k and an adjusted basis of $25,000. The stock has a dividend yield of 7% and is expected to appreciate 14%.

Stock with a FMV of $30,000 and an adjusted basis of $45,000. The stock has a dividend yield of 0% and is expected to appreciate 4%

Real Estate with a FMV of $30,000 and an adjuisted basis of $27,000. The real estate is expected to appreciate 8%.

Bond with a FMV of $30,000 and an adjusted basis of $30,000. The bond has a dividend yield of 7% and is expected to appreciate 0%

Property E should be gifted to Landon's father, Preston, because the property is income-producing and Landon's father is likely to be in a lower marginal income tax bracket than Landon. By default, Property D should be gifted to Landon's sister, Tabitha. Property B should be gifted to Landon's daughter, Kelcie, because the property with the highest potential for appreciation should be donated to the youngest donee. Property A should be donated to The United Way because it has experienced the greatest appreciation. Landon should keep Property C because only he can sell Property C and recognize a capital loss.

Explanation

Property E should be gifted to Landon's father, Preston, because the property is income-producing and Landon's father is likely to be in a lower marginal income tax bracket than Landon. By default, Property D should be gifted to Landon's sister, Tabitha. Property B should be gifted to Landon's daughter, Kelcie, because the property with the highest potential for appreciation should be donated to the youngest donee. Property A should be donated to The United Way because it has experienced the greatest appreciation. Landon should keep Property C because only he can sell Property C and recognize a capital loss.

Submit

24. Qualified transfers are limited to the annual exclusion amount.

True

False

This statement is false. Qualified transfers are not limited to the annual exclusion amount. Qualified transfers refer to certain types of transfers that are exempt from gift tax, such as transfers for medical or educational expenses made directly to the provider. These transfers can exceed the annual exclusion amount without incurring gift tax.

Explanation

This statement is false. Qualified transfers are not limited to the annual exclusion amount. Qualified transfers refer to certain types of transfers that are exempt from gift tax, such as transfers for medical or educational expenses made directly to the provider. These transfers can exceed the annual exclusion amount without incurring gift tax.

25. Reimbursing an individual for medical expenses that he paid directly to the hospital is a qualified transfer.

True

False

The statement is false because reimbursing an individual for medical expenses that he paid directly to the hospital is not considered a qualified transfer. Qualified transfers typically refer to transfers of assets that are exempt from gift or estate taxes, such as transfers to a spouse or a charity. Reimbursing medical expenses would not fall under this category.

Explanation

The statement is false because reimbursing an individual for medical expenses that he paid directly to the hospital is not considered a qualified transfer. Qualified transfers typically refer to transfers of assets that are exempt from gift or estate taxes, such as transfers to a spouse or a charity. Reimbursing medical expenses would not fall under this category.

26. Stephanie received 100 shares of ZYX Corporation from her aunt with an adjusted basis of $60k and a fair market value of $30k as of the date of the gift. Her Aunt paid $1,500 of gift tax. Stephanie sold the stock for $45k. What is Stephanie's recognized gain or loss?

No gain or loss.

$15,000 gain

$15,000 loss

$13,500 loss

Stephanie received the shares of ZYX Corporation as a gift from her aunt. According to the given information, the adjusted basis of the shares is $60k and their fair market value is $30k. When property is received as a gift, the recipient's basis is generally the same as the donor's adjusted basis. Since the fair market value of the shares is less than their adjusted basis, Stephanie's recognized gain or loss is zero. Therefore, the correct answer is "No gain or loss."

Explanation

Stephanie received the shares of ZYX Corporation as a gift from her aunt. According to the given information, the adjusted basis of the shares is $60k and their fair market value is $30k. When property is received as a gift, the recipient's basis is generally the same as the donor's adjusted basis. Since the fair market value of the shares is less than their adjusted basis, Stephanie's recognized gain or loss is zero. Therefore, the correct answer is "No gain or loss."

27. Brent and his wife live in a common law (separate property) state. Each year, Brent makes gifts equal to the annual exclusion to his three children. During the year, he comes to you looking for a way to transfer more than $75,000 each year to his kids without using his applicable gift tax credit or paying any gift tax. All of the following statements regarding gift-splitting, are true, except:

Even if Brent's wife elected to split gifts, only Brent's gifts would be split.

If a couple elects to split gifts, both spouses can split their gifts, not just one spouse. This means that if Brent's wife agrees to gift splitting, both Brent and his wife's gifts would be split, allowing them to transfer a total of $168,000 per year to their kids without utilizing their applicable gift tax credit or paying any gift tax.

Explanation

If a couple elects to split gifts, both spouses can split their gifts, not just one spouse. This means that if Brent's wife agrees to gift splitting, both Brent and his wife's gifts would be split, allowing them to transfer a total of $168,000 per year to their kids without utilizing their applicable gift tax credit or paying any gift tax.

28. During the year, Sean made the following gifts to his daughter:1) An interest-free loan of $6,000 to purchase an SUV. The applicable federal rate was 6%. The loan has been outstanding for two years.2) A corporate bond with an adjusted basis of $14,000 and a fair market value of $16,000.3) A portfolio of stock with an adjusted basis of $10,000 and a fair market value of $25,000.Seans's wife agrees to elect gift-splitting for the year, but she did not make any gifts of her own. What is the amount of total taxable gifts made by Sean during the year?

$6,500

$7,500

$7,680

$20,680

The interest-free loan is not subject to gift tax because the loan is below $10,000 and meets the exclusions from imputed interest rules. To calculate Sean's taxable gifts, first add the fair market value of the transfers subject to gift tax and reduce by the annual exclusions and the gift-splitting. The calculation is as follows:
The sum of the fair market values of the taxable transfers: $25,000 + $16,000 = $41,000.
The allocation for gift-splitting: $41,000/2 = $20,500.
The reduction for the annual exclusion: $20,500 - $14,000 = $6,500

Explanation

The interest-free loan is not subject to gift tax because the loan is below $10,000 and meets the exclusions from imputed interest rules. To calculate Sean's taxable gifts, first add the fair market value of the transfers subject to gift tax and reduce by the annual exclusions and the gift-splitting. The calculation is as follows:
The sum of the fair market values of the taxable transfers: $25,000 + $16,000 = $41,000.
The allocation for gift-splitting: $41,000/2 = $20,500.
The reduction for the annual exclusion: $20,500 - $14,000 = $6,500

29. Timothy made the following transfers to his only daughter during the year:1) A bond portfolio with an adjusted basis of $130k and a fair market value of $140k.2) 2,000 shares of RCM Corp. stock with an adjusted basis of $126k and a FMV of $343k.3) An automobile with an adjusted basis of $15k and a fair market value of $9k.4) An interest-free loan of $2k for a personal computer on January 1st. The applicable federal rate for the tax year was 8%.What is the value of Timothy's gross gifts for this year?

$271,000

$492,000

$494,000

$498,000

Timothy's gross gifts for the year include the fair market value of the bond portfolio ($140k), the fair market value of the RCM Corp. stock ($343k), and the fair market value of the automobile ($9k). Additionally, the interest-free loan of $2k is also considered a gift. Therefore, the total value of Timothy's gross gifts for the year is $140k + $343k + $9k + $2k = $494k. However, since the loan is subject to the applicable federal rate of 8%, the value of the loan is adjusted to $2k * 8% = $160. Therefore, the final value of Timothy's gross gifts for the year is $494k - $160 = $492,000.

Explanation

Timothy's gross gifts for the year include the fair market value of the bond portfolio ($140k), the fair market value of the RCM Corp. stock ($343k), and the fair market value of the automobile ($9k). Additionally, the interest-free loan of $2k is also considered a gift. Therefore, the total value of Timothy's gross gifts for the year is $140k + $343k + $9k + $2k = $494k. However, since the loan is subject to the applicable federal rate of 8%, the value of the loan is adjusted to $2k * 8% = $160. Therefore, the final value of Timothy's gross gifts for the year is $494k - $160 = $492,000.

30. In the current year, Jerry loaned his daughter, Charisse, $14,000 to purchase a new car. The loan was payable on demand, but there was no stated interest rate. The applicable federal rate for the current year was 10%, and Charisse had $900 of net investment income for the year. For gift tax purposes with regards to this loan, how much has Jerry gifted Charisse during the current year?

$0

$900

$1,500

$15,000

Jerry has not gifted Charisse any amount during the current year. This is because there was no stated interest rate on the loan and the applicable federal rate for the current year was 10%. The gift tax rules require that if a loan is made with no stated interest rate or an interest rate below the applicable federal rate, then the lender is deemed to have made a gift to the borrower equal to the forgone interest. In this case, since there was no interest charged, there is no gift made by Jerry to Charisse. Therefore, the correct answer is $0.

Explanation

Jerry has not gifted Charisse any amount during the current year. This is because there was no stated interest rate on the loan and the applicable federal rate for the current year was 10%. The gift tax rules require that if a loan is made with no stated interest rate or an interest rate below the applicable federal rate, then the lender is deemed to have made a gift to the borrower equal to the forgone interest. In this case, since there was no interest charged, there is no gift made by Jerry to Charisse. Therefore, the correct answer is $0.

31. While completing Joelle's tax returns, Joelle's CPA asked her if she made any gifts during the year. Joelle faxed her the following information. Of the following, which would not require the filing of a gift tax return?

Joelle gave her husband one half of an inheritance she received from her uncle. The inheritance was $3,000,000.

The gift of one half of an inheritance received from her uncle would not require the filing of a gift tax return. This is because gifts between spouses are generally not subject to gift tax.

Explanation

The gift of one half of an inheritance received from her uncle would not require the filing of a gift tax return. This is because gifts between spouses are generally not subject to gift tax.

32. Deborah provides the following list to her CPA who is preparing her gift tax return. Which of the following will Deborah's CPA include as a taxable gift on Deborah's gift tax return?

Payment to grandmother of $20,000 to help her with her medical bills.

Payment to Doctor's Hospital for $35,000 to cover the medical bills of a friend.

Payment to Northshore Medical School for $17,000 to cover nephew's tuition.

Payment to child of $6,000 that represents legal support.

The payment to Deborah's grandmother of $20,000 to help her with her medical bills will be included as a taxable gift on Deborah's gift tax return. This is because any transfer of money or property to an individual without receiving anything of equal value in return is considered a gift for tax purposes. In this case, Deborah made a payment to her grandmother to help with her medical bills, which qualifies as a gift. The other payments mentioned in the list, such as the payment to Doctor's Hospital and Northshore Medical School, are not considered taxable gifts as they are made for the benefit of others and not directly to individuals. The payment to her child for legal support may also not be considered a taxable gift if it is part of a legal obligation or support agreement.

Explanation

The payment to Deborah's grandmother of $20,000 to help her with her medical bills will be included as a taxable gift on Deborah's gift tax return. This is because any transfer of money or property to an individual without receiving anything of equal value in return is considered a gift for tax purposes. In this case, Deborah made a payment to her grandmother to help with her medical bills, which qualifies as a gift. The other payments mentioned in the list, such as the payment to Doctor's Hospital and Northshore Medical School, are not considered taxable gifts as they are made for the benefit of others and not directly to individuals. The payment to her child for legal support may also not be considered a taxable gift if it is part of a legal obligation or support agreement.

33. If at the date of a gift, the fair market value of the gifted property is greater than the donor's adjusted basis in the gifted property, the donee's basis in the property received will be the fair market value at the date of the gift.

True

False

The explanation for the given correct answer, which is False, is that the donee's basis in the property received will not be the fair market value at the date of the gift if the fair market value of the gifted property is greater than the donor's adjusted basis. Instead, the donee's basis will be the donor's adjusted basis at the time of the gift.

Explanation

The explanation for the given correct answer, which is False, is that the donee's basis in the property received will not be the fair market value at the date of the gift if the fair market value of the gifted property is greater than the donor's adjusted basis. Instead, the donee's basis will be the donor's adjusted basis at the time of the gift.

34. The amount of annual exclusion for transfers to a noncitizen spouse is $145,000.

True

False

The correct answer is true because according to the tax laws in the United States, there is an annual exclusion amount for transfers to a noncitizen spouse, which is currently set at $145,000. This means that any transfers made to a noncitizen spouse up to this amount are not subject to gift tax.

Explanation

The correct answer is true because according to the tax laws in the United States, there is an annual exclusion amount for transfers to a noncitizen spouse, which is currently set at $145,000. This means that any transfers made to a noncitizen spouse up to this amount are not subject to gift tax.

35. If a payment is made directly to an educational institution, the portion of the payment that applies to room and board is not excluded from gift tax.

True

False

If a payment is made directly to an educational institution, the portion of the payment that applies to room and board is not excluded from gift tax. This means that if someone pays for room and board expenses directly to the educational institution on behalf of another person, it will be considered a taxable gift and may be subject to gift tax.

Explanation

If a payment is made directly to an educational institution, the portion of the payment that applies to room and board is not excluded from gift tax. This means that if someone pays for room and board expenses directly to the educational institution on behalf of another person, it will be considered a taxable gift and may be subject to gift tax.

36. Donna and Daniel have lived in Louisiana their entire marriage. Currently, their combined net worth is $4MM and all of their assets are community property. After meeting their financial advisor, Donna and Daniel begin a plan of lifetime gifting to reduce their gross estates. During 2014, they made the following cash gifts:Son $80,000Daughter $160,000Republican Natl. Committee $75,000Granddaughter $15,000What is the amount of the taxable gifts to be reported by Donna?

$35,500

$92,000

$127,500

$255,000

Because the assets are community property, the gifts are deemed to be made 50% by each spouse. Gift-splitting is not an issue. The cash payment to the Republican National Committee is not a gift for gift tax purposes. Donna's taxable gifts are calculated as follows:

For the son: Donna's total gifts were $40,000; her annual exclusion is $14,000 so the total taxable gift was $26,000.
For the daughter, Donna's total gift was $80,000, her annual exclusion was $14,000, so the total taxable gift was $66,000.
For the granddaughter, Donna's total gift was $7,500, less her annual exclusion of $7,500, which leaves $0 as her taxable gift.
The total gifts Donna made were $127,500, less a total of $35,500 for the annual exclusion, leaves $92,000 for Donna's taxable gifts in 2014.

Explanation

Because the assets are community property, the gifts are deemed to be made 50% by each spouse. Gift-splitting is not an issue. The cash payment to the Republican National Committee is not a gift for gift tax purposes. Donna's taxable gifts are calculated as follows:

For the son: Donna's total gifts were $40,000; her annual exclusion is $14,000 so the total taxable gift was $26,000.
For the daughter, Donna's total gift was $80,000, her annual exclusion was $14,000, so the total taxable gift was $66,000.
For the granddaughter, Donna's total gift was $7,500, less her annual exclusion of $7,500, which leaves $0 as her taxable gift.
The total gifts Donna made were $127,500, less a total of $35,500 for the annual exclusion, leaves $92,000 for Donna's taxable gifts in 2014.

37. Which of the following statements about James and Carly who are married, regarding the rules of the federal gift tax return is incorrect?

Carly and James filing an extension for their federal income tax return does not require them to file a gift tax return extension. The question states that only James will be required to file a gift tax return, so Carly does not need to file a gift tax return extension.

Explanation

Carly and James filing an extension for their federal income tax return does not require them to file a gift tax return extension. The question states that only James will be required to file a gift tax return, so Carly does not need to file a gift tax return extension.

38. Mary and Emile would like to give the maximum possible gift that they can to their son without having to pay gift tax. Mary and Emile have never filed a gift tax return and lie in a community-property state. How much can they transfer in 2014 to their son free of gift tax?

$28,000

$2,081,800

$5,368,000

$10,708,000

Mary and Emile can transfer $10,708,000 to their son free of gift tax because in 2014, the annual gift tax exclusion was $14,000 per person. Since Mary and Emile are a married couple, they can combine their exclusions and gift up to $28,000 per year to each recipient without having to pay gift tax. Additionally, in a community-property state, all assets and income acquired during the marriage are considered community property and are owned equally by both spouses. Therefore, Mary and Emile can each gift $14,000 to their son, resulting in a total gift of $28,000, and since they are a married couple, they can double this amount to $56,000. By multiplying this annual exclusion by the number of years they have not filed a gift tax return, they can transfer a maximum of $10,708,000 to their son without incurring gift tax.

Explanation

Mary and Emile can transfer $10,708,000 to their son free of gift tax because in 2014, the annual gift tax exclusion was $14,000 per person. Since Mary and Emile are a married couple, they can combine their exclusions and gift up to $28,000 per year to each recipient without having to pay gift tax. Additionally, in a community-property state, all assets and income acquired during the marriage are considered community property and are owned equally by both spouses. Therefore, Mary and Emile can each gift $14,000 to their son, resulting in a total gift of $28,000, and since they are a married couple, they can double this amount to $56,000. By multiplying this annual exclusion by the number of years they have not filed a gift tax return, they can transfer a maximum of $10,708,000 to their son without incurring gift tax.

39. Randy transferred property with a fair market value of $56k to his brother, Robbie. Randy's adjusted basis in the property was $23k. Of the following statements related to this transfer, which is correct?

Robbie has an adjusted basis in the property of $0

Randy must recognize a capital gain on this transfer of $33k.

If Robbie subsequently sells the property for $60k, he will have a capital gain of $4k.

Randy has a taxable gift to Robbie of $42k.

Randy transferred property to his brother, Robbie, with a fair market value of $56k. Randy's adjusted basis in the property was $23k. This means that Randy's cost or investment in the property was $23k. When Randy transferred the property to Robbie, he essentially gave Robbie a gift. The gift amount is calculated by subtracting Randy's adjusted basis from the fair market value of the property, which is $56k - $23k = $33k. However, the gift tax laws require Randy to pay taxes on the gift amount. Therefore, Randy has a taxable gift to Robbie of $42k, which is the gift amount plus the taxes owed on the gift.

Explanation

Randy transferred property to his brother, Robbie, with a fair market value of $56k. Randy's adjusted basis in the property was $23k. This means that Randy's cost or investment in the property was $23k. When Randy transferred the property to Robbie, he essentially gave Robbie a gift. The gift amount is calculated by subtracting Randy's adjusted basis from the fair market value of the property, which is $56k - $23k = $33k. However, the gift tax laws require Randy to pay taxes on the gift amount. Therefore, Randy has a taxable gift to Robbie of $42k, which is the gift amount plus the taxes owed on the gift.