THE FEDERAL GIFT AND ESTATE TAXES

2238. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question MA #1-12

Match each statement with the correct choice. Some choices may be used more than once or not at all.

Payable-on-death transfersExclusion amountFederal gift tax Inheritance taxQTIP electionTenancy by the entiretyJoint tenancyTenancy in common Community property Credit for tax on prior transfers (under § 2013)Must decrease the estate tax liabilityFuture interestA certificate of deposit listed as “B. Brown, payable on proof of death to my daughter, Evelyn.” Exemption equivalent. Cumulative in effect. A type of state tax on transfers by death. Avoids the terminable interest rule of the marital deduction. Exists only if owners are husband and wife. Right of survivorship present as to type of ownership. No correct match provided. Exists only if owners are husband and wife. In the current year, Debby, a widow, dies. Two years ago she inherited a large amount of wealth from her brother. Alternate valuation date. Annual exclusion not allowed. Scheduled to be eliminated by 2010.

[a] 1. Payable-on-death transfers
[b] 2. Exclusion amount
[c] 3. Federal gift tax
[d] 4. Inheritance tax
[e] 5. QTIP election
[f] 6. Tenancy by the entirety
[g] 7. Joint tenancy
[h] 8. Tenancy in common
[i] 9. Community property
[j] 10. Credit for tax on prior transfers (under § 2013)
[k] 11. Must decrease the estate tax liability
[l] 12. Future interest

2239. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question MA #13-24
Classify each statement appearing below.Hector transfers funds to his aunt so she can obtain a much needed heart bypass operation. The aunt does not qualify as Hector’s dependent.Under a prenuptial agreement, Herbert transfers stock to Norma. One month later, Herbert and Norma are married.In full settlement of her marital rights, Henry transfers property to his wife, Nancy. Three months later, Henry and Nancy are divorced.Harry pays for the tuition for his niece to attend Drake University. The niece does not qualify as Harry’s dependent.Hugh loans his adult daughter, Nadia, $800,000 to start her own business. No interest is provided for, and Nadia signs a note that is payable in four years.Hugh loans his adult daughter, Nadia, $800,000 to start her own business. Market rate interest is provided for, and Nadia signs a note that is payable in four years. Hugh dies two years later and, in his will, cancels the note. Nadia’s business proved to be successful.Under her father’s will, Faith is to receive 10,000 shares of GE common stock. Eight months after her father’s death, Faith disclaims 5,000 shares.Under her father’s will, Faith is to receive 10,000 shares of GE common stock. Ten months after her father’s death, Faith disclaims the 10,000 shares.Darlene holds a special power of appointment over the income from a trust created by her brother. During the year, Darlene exercises the power in favor of one of the beneficiaries designated in the trust instrument.Darlene holds a general power of appointment over the income from a trust created by her brother. Darlene dies during the year without having exercised the power. The income is distributed to children of the brother in accordance with the terms of the trust instrument.Van takes out an insurance policy on his life and designates Van as the beneficiary. Van dies first.Van takes out an insurance policy on Myrna’s life and designates himself as the beneficiary. Myrna is Van’s wife. Two years later, Myrna dies, and Van collects the insurance proceeds.Gift tax applies Gift tax applies No taxable transfer occurs No taxable transfer occurs Gift tax applies Estate tax applies No taxable transfer occurs Gift tax applies No taxable transfer occurs Estate tax applies Estate tax applies No taxable transfer occurs

[a] 1. Hector transfers funds to his aunt so she can obtain a much needed heart bypass operation. The aunt does not qualify as Hector’s dependent.
[b] 2. Under a prenuptial agreement, Herbert transfers stock to Norma. One month later, Herbert and Norma are married.
[c] 3. In full settlement of her marital rights, Henry transfers property to his wife, Nancy. Three months later, Henry and Nancy are divorced.
[d] 4. Harry pays for the tuition for his niece to attend Drake University. The niece does not qualify as Harry’s dependent.
[e] 5. Hugh loans his adult daughter, Nadia, $800,000 to start her own business. No interest is provided for, and Nadia signs a note that is payable in four years.
[f] 6. Hugh loans his adult daughter, Nadia, $800,000 to start her own business. Market rate interest is provided for, and Nadia signs a note that is payable in four years. Hugh dies two years later and, in his will, cancels the note. Nadia’s business proved to be successful.
[g] 7. Under her father’s will, Faith is to receive 10,000 shares of GE common stock. Eight months after her father’s death, Faith disclaims 5,000 shares.
[h] 8. Under her father’s will, Faith is to receive 10,000 shares of GE common stock. Ten months after her father’s death, Faith disclaims the 10,000 shares.
[i] 9. Darlene holds a special power of appointment over the income from a trust created by her brother. During the year, Darlene exercises the power in favor of one of the beneficiaries designated in the trust instrument.
[j] 10. Darlene holds a general power of appointment over the income from a trust created by her brother. Darlene dies during the year without having exercised the power. The income is distributed to children of the brother in accordance with the terms of the trust instrument.
[k] 11. Van takes out an insurance policy on his life and designates Van as the beneficiary. Van dies first.
[l] 12. Van takes out an insurance policy on Myrna’s life and designates himself as the beneficiary. Myrna is Van’s wife. Two years later, Myrna dies, and Van collects the insurance proceeds.

 

2240. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question MA #25-36
Classify each statement appearing below.Homer purchases a U.S. savings bond listing title as: “Homer, payable to Bernice upon Homer’s death.” Bernice is Homer’s sister.Homer purchases a U.S. savings bond listing title as: “Homer, payable to Bernice upon Homer’s death.” Bernice is Homer’s sister. Homer dies four years later, and Bernice cashes in the bond and keeps the proceeds.Howard establishes a trust, life estate to his children, remainder to the grandchildren. Under its terms, the trust is revocable by Howard.Howard establishes a trust, life estate to his children, remainder to the grandchildren. Under its terms, the trust is revocable by Howard. Howard later relinquishes the right to revoke the trust.Meg gives her 18-year-old son money for his college tuition and living expenses (e.g., room and board).Clarence pays the medical providers (e.g., physicians, hospital) for his aunt’s gall bladder operation. The aunt does not qualify as Clarence’s dependent.Cash donation to the reelection campaign of a member of the U.S. Congress.Maggie purchased an insurance policy on Jim’s life and designated Susan as the beneficiary.Maggie purchased an insurance policy on Jim’s life and designated Susan as the beneficiary. Four years later Jim dies, and Susan collects the insurance proceeds.Using his own funds, Horace establishes a savings account designating ownership as follows: “Horace and Nadine as joint tenants with right of survivorship.” Horace later withdraws all of the funds.Using his own funds, Horace establishes a savings account designating ownership as follows: “Horace and Nadine as joint tenants with right of survivorship.” Nadine predeceases Horace.Using his own funds, Horace establishes a savings account designating ownership as follows: “Horace and Nadine as joint tenants with right of survivorship.” Horace predeceases Nadine.No taxable transfer occurs Estate tax applies No taxable transfer occurs Gift tax applies No taxable transfer occurs No taxable transfer occurs No taxable transfer occurs No taxable transfer occurs Gift tax applies No taxable transfer occurs No taxable transfer occurs Estate tax applies

[a] 1. Homer purchases a U.S. savings bond listing title as: “Homer, payable to Bernice upon Homer’s death.” Bernice is Homer’s sister.
[b] 2. Homer purchases a U.S. savings bond listing title as: “Homer, payable to Bernice upon Homer’s death.” Bernice is Homer’s sister. Homer dies four years later, and Bernice cashes in the bond and keeps the proceeds.
[c] 3. Howard establishes a trust, life estate to his children, remainder to the grandchildren. Under its terms, the trust is revocable by Howard.
[d] 4. Howard establishes a trust, life estate to his children, remainder to the grandchildren. Under its terms, the trust is revocable by Howard. Howard later relinquishes the right to revoke the trust.
[e] 5. Meg gives her 18-year-old son money for his college tuition and living expenses (e.g., room and board).
[f] 6. Clarence pays the medical providers (e.g., physicians, hospital) for his aunt’s gall bladder operation. The aunt does not qualify as Clarence’s dependent.
[g] 7. Cash donation to the reelection campaign of a member of the U.S. Congress.
[h] 8. Maggie purchased an insurance policy on Jim’s life and designated Susan as the beneficiary.
[i] 9. Maggie purchased an insurance policy on Jim’s life and designated Susan as the beneficiary. Four years later Jim dies, and Susan collects the insurance proceeds.
[j] 10. Using his own funds, Horace establishes a savings account designating ownership as follows: “Horace and Nadine as joint tenants with right of survivorship.” Horace later withdraws all of the funds.
[k] 11. Using his own funds, Horace establishes a savings account designating ownership as follows: “Horace and Nadine as joint tenants with right of survivorship.” Nadine predeceases Horace.
[l] 12. Using his own funds, Horace establishes a savings account designating ownership as follows: “Horace and Nadine as joint tenants with right of survivorship.” Horace predeceases Nadine.

2241. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question MA #37-48
Classify each statement appropriately.Mortgage on land included in gross estate and willed to decedent’s children.State death tax imposed on the estate.Selling expenses incurred to sell estate assets in order to pay administration expenses.Post-death property taxes paid to county on realty included in the gross estate.Casualty loss to property before the death of the owner.Casualty loss to property after the death of the owner.Casualty loss to property already distributed to an heir.Administration expenses attributable to handling the surviving spouse’s share of the community property.Payment by the estate of church pledge made by decedent prior to death.Transportation cost for decedent and surviving son to site of burial.State income taxes accrued prior to death.Payment of unpaid gift taxes.Deductible from the gross estate in arriving at the taxable estate. Deductible from the gross estate in arriving at the taxable estate. Deductible from the gross estate in arriving at the taxable estate. Not deductible from the gross estate in arriving at the taxable estate. Not deductible from the gross estate in arriving at the taxable estate. Deductible from the gross estate in arriving at the taxable estate. Not deductible from the gross estate in arriving at the taxable estate. Not deductible from the gross estate in arriving at the taxable estate. Deductible from the gross estate in arriving at the taxable estate. Deductible from the gross estate in arriving at the taxable estate. Deductible from the gross estate in arriving at the taxable estate. Deductible from the gross estate in arriving at the taxable estate.

[a] 1. Mortgage on land included in gross estate and willed to decedent’s children.
[b] 2. State death tax imposed on the estate.
[c] 3. Selling expenses incurred to sell estate assets in order to pay administration expenses.
[d] 4. Post-death property taxes paid to county on realty included in the gross estate.
[e] 5. Casualty loss to property before the death of the owner.
[f] 6. Casualty loss to property after the death of the owner.
[g] 7. Casualty loss to property already distributed to an heir.
[h] 8. Administration expenses attributable to handling the surviving spouse’s share of the community property.
[i] 9. Payment by the estate of church pledge made by decedent prior to death.
[j] 10. Transportation cost for decedent and surviving son to site of burial.
[k] 11. State income taxes accrued prior to death.
[l] 12. Payment of unpaid gift taxes.

2242. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question MA #49-60
Classify each of the independent statements appearing below.Interest on municipal bonds accrued after death.Cash dividends on stock owned by the decedent (declaration date preceded death but record and payment dates were after death).State income tax refund received after death on a tax return filed before death.Note receivable issued by a grandson and forgiven by the decedent in her will.Ten cemetery lots purchased by decedent prior to death for use by himself and his family.Dower interest claimed by decedent’s surviving spouse.Surviving spouse’s share of the community property.Bank account held as joint tenant with mother. Mother provided all of the funds. Mother survives.Bank account held as tenants by the entirety with surviving spouse. Decedent provided none of the funds.Proceeds of an insurance policy on decedent’s life. Decedent’s son purchased the policy and is its owner and beneficiary.Decedent owned a policy on the life of his spouse with himself as the designated beneficiary. The spouse survives.Decedent holds a life estate in a trust created by her spouse who died five years ago. The executor of the spouse’s estate made no QTIP election as to the trust. Decedent’s son is the remainderman of the trust.None of the interest included in the decedent’s gross estate. None of the interest included in the decedent’s gross estate. Some or all of the interest included in the decedent’s gross estate. Some or all of the interest included in the decedent’s gross estate. None of the interest included in the decedent’s gross estate. Some or all of the interest included in the decedent’s gross estate. None of the interest included in the decedent’s gross estate. None of the interest included in the decedent’s gross estate. Some or all of the interest included in the decedent’s gross estate. None of the interest included in the decedent’s gross estate. Some or all of the interest included in the decedent’s gross estate. None of the interest included in the decedent’s gross estate.

[a] 1. Interest on municipal bonds accrued after death.
[b] 2. Cash dividends on stock owned by the decedent (declaration date preceded death but record and payment dates were after death).
[c] 3. State income tax refund received after death on a tax return filed before death.
[d] 4. Note receivable issued by a grandson and forgiven by the decedent in her will.
[e] 5. Ten cemetery lots purchased by decedent prior to death for use by himself and his family.
[f] 6. Dower interest claimed by decedent’s surviving spouse.
[g] 7. Surviving spouse’s share of the community property.
[h] 8. Bank account held as joint tenant with mother. Mother provided all of the funds. Mother survives.
[i] 9. Bank account held as tenants by the entirety with surviving spouse. Decedent provided none of the funds.
[j] 10. Proceeds of an insurance policy on decedent’s life. Decedent’s son purchased the policy and is its owner and beneficiary.
[k] 11. Decedent owned a policy on the life of his spouse with himself as the designated beneficiary. The spouse survives.
[l] 12. Decedent holds a life estate in a trust created by her spouse who died five years ago. The executor of the spouse’s estate made no QTIP election as to the trust. Decedent’s son is the remainderman of the trust.

2243. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #1
Among the assets included in Taylor’s gross estate are the following.

	Fair Market Value
	Date of Death	Six Months After Date of Death
Stock in Grebe Corporation Stock in Rail Corporation Office building	$6,000,000 800,000 900,000	$5,800,000 850,000 900,000

Three months after Taylor’s death in 2011, her executor sells the Rail stock for $840,000.

a.	What is the amount of Taylor’s gross estate if date of death value is used?
b.	What is the amount of Taylor’s gross estate if the alternate valuation date is elected?
c.	Suppose the accrued rents on the office building are as follows: $80,000 (date of death) and $75,000 (six months after death). How does this change the answers in parts a. and b.?
d.	Suppose all of Taylor’s assets pass to her surviving spouse. Does this have any impact on the choice of valuation date? Explain.

 

2244. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #2
Ben and Lynn are married and have two pre-teen grandchildren. They want to contribute to a § 529 plan on behalf of their education. For 2011, what is the maximum amount they can transfer to the plan without making a taxable gift?

2245. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #3
At the time of her death on June 4, 2011, Mary owned the following assets.

·	Taupe Corporation stock (cost $400,000, FMV $800,000). On May 5, 2011, Taupe declared a cash dividend, payable on June 16, 2011, to shareholders as of the record date of June 3. Mary’s executor received the $40,000 dividend on the scheduled payment date.
·	City of Boise bonds (cost $800,000, FMV $780,000). Interest accrued to June 4 was $42,000. The executor eventually collected $50,000 (included post-death accrual of $8,000) on July 21, 2011.

As to these transactions, how much is included in Mary’s gross estate?

2246. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #4
At the time of his death on August 7, 2011, Michael owned the following assets.

·	Green Corporation stock (cost $700,000, FMV $950,000). On July 21, 2011, Green declared a cash dividend, payable on August 18 to all shareholders as of the record date of August 8, 2011. Michael’s executor receives the $64,000 dividend on the scheduled payment date.
·	Note receivable (face amount $600,000) payable on demand. The note was received by Michael two years previously from his daughter Addison. Addison used the loan to start a business which currently is very successful. In his will, Michael forgives the note.

How much, as to these transactions, is included in Michael’s gross estate?

2247. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #5
At the time of her death in 2011, Karla was a participant in her employer’s qualified pension plan. Her accrued balance in the plan is:

Employer’s contribution	$1,200,000
Karla’s contribution	700,000
Income earned by plan	900,000

Karla also was covered by her employer’s group term life insurance program. Her policy (maturity value of $200,000) is made payable to Scott (Karla’s husband). Scott is also the designated beneficiary of the pension plan.

a.	Regarding these assets, how much is included in Karla’s gross estate?
b.	In Karla’s taxable estate?
c.	How much income must Scott recognize?

 

 

2248. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #6
Prior to his death in 2011, Gordon made the following taxable gifts.

	Year of Gift	Amount of Gift
Stock in Tan Corporation Term life insurance policy (maturity value of $100,000) Unimproved land	2000 2009 2010	$800,000 –0– 700,000

The policy of Gordon’s life was given to the designated beneficiary. The gift of the stock and the land generated gift taxes of $28,750 and $64,250, respectively.

As to these transfers, how much is included in Gordon’s gross estate?

2249. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #7
At the time of her death in 2011, Ruby was involved in three trust arrangements. Details regarding these trusts are summarized below.

·	Trust A (FMV of $3,000,000) was created by Ruby. Under its terms, Ruby holds a life estate, with her children designated as the remainder beneficiaries.
·	Trust B (FMV of $900,000) was created by Ruby’s father. Ruby holds a life estate, with her children designated as the remainder beneficiaries.
·	Trust C (FMV of $1,200,000) was created by Ruby’s mother. Ruby’s children hold a life estate, and the remainder interest is to pass to their children (i.e., Ruby’s grandchildren). Ruby possesses the right to determine yearly how the income is to be distributed among her children.

As to these trusts, how much will be included in Ruby’s gross estate?

2250. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #8
Burt and Eve are husband and wife and have always lived in New York, a common law state. In 1990 and using separate funds, they bought an annuity from an insurance company—the purchase price was furnished 1/3 by Burt and 2/3 by Eve. Under the terms of the contract, Burt is to receive $50,000 per month for life when he reaches age 65. If Eve survives Burt, she is to receive $30,000 per month for her life. Burt dies first in 2011, at which time the value of Eve’s survivorship annuity is $2,400,000. As to this annuity, how much (if any) is included in Burt’s gross estate?

2251. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #9
In 1990, Bret and Olivia acquire realty for $1 million, with Bret furnishing $400,000 of the purchase price and Olivia providing the balance. Title to the property is listed as: “Bret and Olivia, joint tenants with right of survivorship.” In 2011, Olivia dies first when the realty is worth $4 million. How much is included in her gross estate under the following circumstances?

a.	Bret and Olivia are brother and sister.
b.	Bret and Olivia are husband and wife.

 

2252. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #10
In 2000, Dale and Andrea acquire real estate for $1,000,000, with Dale furnishing $400,000 of the purchase price and Andrea providing the balance. Title to the property is listed as: “Dale and Andrea, equal tenants in common.” Dale dies first in 2011, when the real estate is worth $2,000,000.

a.	Were there any tax consequences in 2000? Explain.
b.	How much, as to the real estate, is included in Dale’s gross estate?
c.	As to parts a. and b., would it make any difference whether Dale and Andrea are brother and sister or husband and wife?

 

 

2253. CHAPTER 18—THE FEDERAL GIFT AND ESTATE TAXES Question PR #11
Murray owns an insurance policy on the life of his father, Ethan. Upon Ethan’s death, the policy proceeds of $2,000,000 are paid to the designated beneficiary, Grace. What are the tax consequences resulting from Ethan’s death based on the following assumptions?

a.	Grace is Murray’s daughter.
b.	Grace is Murray’s wife.
c.	What are the tax consequences if Murray dies first (i.e., predeceases both Grace and Ethan)?