SMCHAP025

Chapter 25 - Transfer Taxes and Wealth Planning
Chapter 25
Transfer Taxes and Wealth Planning
SOLUTIONS MANUAL
DISCUSSION QUESTIONS
1.
[LO 1] Identify the features common to the gift tax formula and the estate tax formula.
The integration of the estate and gift taxes in 1976 provided for a cumulative
progressive transfer tax rate schedule. In this integrated formula the cumulative effect
of transfers in prior periods are taken into account when calculating the tax for a
current gift or for the assets in an estate. The taxable gifts in prior years are added to
the current transfer, and the tax is computed on total (cumulative) transfers. The tax
on the earlier gifts is then subtracted from the total tax to prevent the earlier gifts from
being taxed twice. The unified credit is a second common element that was designed to
prevent taxation of all but the largest transfers. The amount of taxable transfers that
can be made without exceeding the unified credit is referred to as the exemption
equivalent. A final important feature of the unified taxes is the application of two
common deductions. Each transfer tax provides for an unlimited deduction for
charitable contributions and a generous deduction for transfers to a spouse (the
marital deduction).
2.
[LO 1] Explain why Congress felt it necessary to enact a gift tax to complement the
estate tax.
Without a gift tax, the estate tax was easily avoided by making intervivos gifts
including deathbed transfers.
3.
[LO 1] Describe the unified credit and the purpose it serves in the gift and estate tax.
The objective of the unified credit is to prevent the application of either the gift or
estate tax to taxpayers who would not accumulate a relatively large amount of property
transfers during their lifetime and/or would not have a relatively large value of assets
to pass on to heirs upon their death. The amount of cumulative taxable transfers that
can be made without exceeding the unified credit is referred to as the exemption
equivalent and is scheduled is $5.25 million for both the estate and gift taxes in 2013.
4.
[LO 1] Fred is retired and living on his pension. He has accumulated almost $1
million of property he would like to leave to his children. However, Fred is afraid
much of his wealth will be eliminated by the federal estate tax. Explain whether this
fear is well founded.
The gift and estate taxes generally do not apply to taxpayers who have not
accumulated a relatively large estate. Currently, the exemption equivalent is set at
$5.25 million for the estate tax. Freds pension will likely terminate at his death and
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will not be included in his estate. Hence, unless Fred has made significant taxable gifts
during his life, he is unlikely to have an estate that is sufficiently large to be subjected
to the federal estate tax.
5.
[LO 2] Explain why the gross estate includes the value of certain property transferred
by the decedent at death, such as property held in joint tenancy with the right of
survivorship, even though this property is not subject to probate.
The gross estate includes testamentary transfers even though this property is
transferred outside of the probate court (automatically through operation of law).
While he didnt own the property at death, the decedent had control of the ultimate
disposition of the property.
6.
[LO 2] Identify the factors that determine the proportion of the value of property held
in joint tenancy with the right of survivorship that will be included in a decedents
gross estate.
The amount includible for property held as joint tenancy with the right of survivorship
depends upon the marital status of the owners. For property jointly owned by a
husband and wife with the right of survivorship, half of the value of the property is
automatically included in the estate of the first spouse to die. For other property held
in joint tenancy with the right of survivorship by unmarried co-owners, the proportion
of the value included in the decedents gross estate is the proportion of the
consideration that the decedent provided to acquire the property. In the extreme cases,
either the entire value of property is included in the gross estate (where the decedent
provided the entire purchase price of the property) or none of the value (where the
decedent didnt provide any of the consideration for the purchase).
7.
[LO 2] Define fair market value for transfer tax purposes.

According to the regulations, fair market value is the price at which such property
would change hands between a willing buyer and a willing seller, neither being under
any compulsion to buy or to sell, and both have reasonable knowledge of the relevant
facts.
8.
[LO 2] {Research} Harold owns a condo in Hawaii that he plans on using for the rest
of his life. However, to ensure his sister Maude will own the property after his death,
Harold deeded the remainder of the property to her. He signed the deed transferring the
remainder in July 2009 when the condo was worth $250,000 and his life estate was
worth $75,000. Harold died in January 2011, at which time the condo was worth
$300,000. What amount, if any, is included in Harolds gross estate? Explain.
The value of the condo at the time of Harolds death, $300,000, is included in his estate
under Section 2036 and Reg. Section 20.2036-1(b)(2).
9.
[LO 2] Paul is a widower with several grown children. He is considering transferring

his residence into a trust for his children and retaining a life estate in it. Comment on
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whether this plan will prevent the value of the home from being included in Pauls
gross estate when he dies.
The value of the residence will still be included in Pauls gross estate. Property
transferred before the death of the decedent where the decedent retained an interest or
a power is also specifically included in the gross estate.
10.
[LO 2] Explain how a remainder and an income interest are valued for transfer tax
purposes.
A remainder interest is essentially a promise of a future payment (upon the expiration
of the temporary interest). As such, the value of the future payment can be estimated
with a present value. For example, suppose that property worth $100 is placed in a
trust with the income to be paid each year for 10 years after which time the principal
(corpus) of the trust will be distributed. In such an instance, the remainder is
estimated by the present value of a payment of $100 in 10 years as follows:
Remainder interest = future payment / (1 + r) n
Where r is the market rate of interest and n is the number of years. The interest rate
for this calculation is referred to as the Section 7520 rate and is published monthly by
the Treasury. The value of the income interest is merely the difference between the
value of the remainder and the total value of the property
11.
[LO 2] Explain why the fair market value of a life estate is more difficult to estimate
than an income interest.
The calculation of a value of a life estate is a bit more complicated that an income
interest because the time delay for the future payment of the remainder is unknown. To
estimate this delay, the calculation is based upon the number of years the life tenant is
expected to live. To facilitate the calculation, the regulations provide a table where the
discount rate is calculated by including the life tenants age and life expectancy.
12.
[LO 2] Describe a reason why transfers of terminable interests should not qualify for
the marital deduction.
If terminable interests qualified for the marital deduction, then property would pass
from the first spouse (upon death or gift) to the second spouse without transfer tax
(because of the marital deduction). The interest would then terminate and the property
would pass from the second spouse to the eventual owners without transfer tax because
upon termination the second spouse had no property to transfer. Hence, if terminable
interests qualified for the marital deduction, no transfer tax would be imposed on the
transfer of this property.
13.
[LO 2] True or false? Including taxable gifts when calculating the estate tax subjects
these transfers to double taxation. Explain.
False. The objective of adding previously taxed transfers to the taxable estate is to
allow the estate tax base to reflect all transfers, both intervivos and testamentary.
Under a progressive tax rate schedule such an adjustment is designed to increase the
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marginal tax rate on the estate. Adjusted taxable gifts are not, however, subject to tax
in the estate formula. To prevent double taxation of prior taxable gifts, the tentative
estate tax is reduced by a credit for the taxes that would have been payable on the
adjusted taxable gifts under the current tax rate schedule.
14.
[LO 2] People sometimes confuse the unified credit with the exemption equivalent.
Describe how these terms differ.
The unified credit is the tax calculated on an amount of transfers that Congress
intended to pass without imposition of either transfer tax (gift or estate). The amount
of cumulative taxable transfers that can be made without exceeding the unified credit is
called the exemption equivalent.
15.
[LO 3] Describe the requirements for a complete gift, and contrast a gift of a present
interest with a gift of a future interest.
A gift is only complete with delivery (of control of the gift) and acceptance by the
donee. A present interest is one that the donee can enjoy immediately such as an
unrestricted use of property or income. In contrast, a future interest is one that cannot
be enjoyed immediately the enjoyment is postponed until sometime in the future.
16.
[LO 3] Describe a property transfer or payment that is not, by definition, a transfer for
inadequate consideration.
A gift is defined as a transfer for inadequate consideration. The gift tax is not imposed
on payments associated with sales of goods or services because these transfers occur
in a business context where consideration (money) is exchanged for the goods or
services. That is, there is adequate consideration. Neither is the satisfaction of an
obligation considered a gift. For example, tuition payments for a childs education
would satisfy a support obligation and would not be considered a gift.
17.
[LO 3] Describe a situation in which a transfer of cash to a trust might be considered

an incomplete gift.
In some instances a donor may relinquish some control over transferred property, but
retain other powers to influence the enjoyment or disposition of the property. If the
retained powers are important, then the transfer will not be a complete gift. For
example, a transfer of property to a trust where the grantor retains the power to revoke
the trust will not be a complete gift. In instances where the grantor retains important
powers, the gift will generally be complete once the powers are released or the
property is no longer subject to the donors control. For example, a distribution of
property from a revocable trust will be a completed gift because the grantor would no
longer have the ability to revoke the distribution.
18.
[LO 3] Identify two types of transfers for inadequate consideration that are specifically
excluded from imposition of the gift tax.
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Political contributions are specifically excluded from the gift tax as are the payment of
medical or educational expenses on behalf of an unrelated individual. To avoid
confusing a division of property with a gift, a transfer of property in conjunction with a
divorce is treated as nongratuitious (e.g., a transfer for consideration) if the property is
transferred within three years of the divorce under a written property settlement.
19.
[LO 3] Under what circumstances will a deposit of cash to a bank account held in joint
tenancy be considered a completed gift?
A deposit to a joint account is viewed as an incomplete gift until the donee withdraws
cash from the account because the donor (depositor) can withdraw the deposit at any
time.
20.
[LO 3] Explain how a purchase of realty could result in a taxable gift.

A completed gift results when realty is purchased in the name of a donee as sole owner
of the property, as tenants in common, or as joint tenants with the right of survivorship
if the donee does not provide adequate consideration for their ownership interest.
21.
[LO 3] Describe the conditions for using the annual exclusion to offset an otherwise
taxable transfer.
The annual exclusion can only offset a gift of present interest. A gift of a future interest
is not eligible for an annual exclusion. The only exception is a transfer in trust for a
minor (under age 21) where the property can be used to support the minor and any
remaining property is distributed once the child reaches age 21.
22.
[LO 3] List the conditions for making an election to split gifts.

In order to utilize gift splitting, each spouse must be a citizen or resident of the United
States, be married at the time of the gift and not remarry during the remainder of the
calendar year. In addition, both spouses must consent to the election by filing a timely
gift tax return.
23.
[LO 3] Describe the limitations on the deduction of transfers to charity.

As long as a qualifying charity receives the donors entire interest in the property, the
amount of the charitable deduction is only limited to the value of the gift after the
annual exclusion.
24.
[LO 3] Explain the purpose of adding prior taxable gifts to current taxable gifts and
show whether these prior gifts could be taxed multiple times over the years.
With a progressive tax rate schedule, adding to the tax base increases the likelihood
that a higher marginal tax rate will apply to the latest increment (transfer). To prevent
double taxation of prior gifts, the gift tax on prior taxable gifts is then subtracted from
the total gift tax.
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25.
[LO 4] Describe a reason why a generation-skipping tax was necessary to augment the
estate and gift taxes?
Donors discovered that transfers across multiple generations avoided the imposition of
any gift or estate taxes until the termination of the remainder interest. For example, a
gift of a terminable interest to a child with the remainder to a grandchild spans two
generations. When this childs interest terminates, no gift or estate tax is imposed even
though the child had the full use of the property perhaps throughout his (or her)
lifetime. The strategy here could be expanded to multiple generations with remainder
interest transferred far into the future. Indeed, some states now allow perpetual trusts
which in the absence of a generation-skipping tax would allow grantors to avoid all
transfer taxes save the initial transfer to the trust.
26.
[LO 4] Explain why an effective wealth transfer plan necessitates cooperation between
lawyers, accountants, and investment advisors.
An integrated team is essential to a successful wealth transfer plan because transfer
and income taxes only represent one piece of the puzzle. Lawyers are critical to
constructing property rights to achieve tax and nontax objectives while investment
advisors provide the economic input necessary for long-term plans. Obviously
accountants provide much of the necessary tax expertise.
27.
[LO 4] Describe how to initiate the construction of a comprehensive and effective

wealth plan.
Wealth planning typically begins with understanding the individuals goals and
objectives. These objectives include immediate goals, such as assuring a steady source
of income, and longer term goals, such as providing for a specific division of assets or
providing educational support for dependents. Most wealth plans will likely have
significant tax and nontax consequences. When considering tax factors, however, an
effective wealth transfer plan should also anticipate the economic and legal
ramifications that will accompany any transfer of wealth.
28.
[LO 4] List two questions you might pose to a client to find out whether a program of
serial gifts would be an advantageous wealth transfer plan.
The most obvious question would be whether the client could afford to make gifts given
the level of income expected to be necessary to support the client in the future.
Another important question involves the health/age of the client and the past and
expected rate of appreciation for the proposed gift property. Serial giving is less
beneficial for clients who might be expected to die soon and for property that has
substantially appreciated in the past.
29.
[LO 4] A client in good health wants to support the college education of her teenage
grandchild. The client holds various properties but proposes to make a gift of cash in
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the amount of the annual exclusion. Explain to the client why a direct gift of cash may
not be advisable and what property might serve as a reasonable substitute.
Transfers to support the education of a teenager should probably be made in trust
because the donee will be able to spend any amounts given directly. Rather than cash,
the gift could consist of property that is expected to appreciate rapidly in value thereby
allowing the appreciation to escape the transfer tax.
30.
[LO 4] An elderly client has a life insurance policy worth $40,000 that upon her death
pays $250,000 to her sole grandchild (or his estate). The client still retains ownership
of the policy. Outline for her the costs and benefits of transferring ownership of the
policy to a life insurance trust.
The benefit of the transfer is that the value of the policy ($250,000) would not be
subject to the estate tax upon the clients death if the client lives for at least three years
after the transfer. The cost is that the transfer of the policy would constitute a taxable
gift (to the extent that the value exceeds the annual exclusion) and might also be
subject to the generation skipping tax. In addition, in order to complete the transfer
the client would need to give up (among other rights) the right to change the
beneficiary of the policy.
31.
[LO 4] Describe the conditions in which a married couple would benefit from the use
of a bypass provision or a bypass trust.
The couple must expect to have an estate whose tax will exceed the unified credit upon
the death of the last spouse. In addition, the couple must have sufficient assets to
provide for the support of the surviving spouse after transferring assets through the
bypass of the first spouse to die.
32.
[LO 4] Under what conditions can an executor or trustee elect to claim a marital
deduction for a transfer of a terminable interest to a spouse?
The QTIP option provides an exception to the general prohibition against claiming a
marital deduction for a transfer of a terminable interest. The conditions are that the
(surviving) spouse is entitled to all of the income from the property payable at least
annually and no person has the power to appoint any part of the property to anyone
other than the (surviving) spouse until the death of the surviving spouse. For an
intervivos transfer, the spouse must include the value of the property in her taxable
gifts and for a testamentary transfer the executor must include the value of the
property in the estate of the surviving spouse.
33.
[LO 4] Explain how a transfer of property as a gift may have income tax implications
to the donee.
Although a gift is not taxable income to the donee, there is no step-up in the tax basis
of the transferred property. Hence, if the donee sells the property, any appreciation
(including appreciation up to the date of the gift) will be taxed to the donee.
25-7
PROBLEMS
34.
[LO 2] Hal and Wendy are married, and they own a parcel of realty, Blackacre, as joint
tenants with the right of survivorship. Hal owns an additional parcel of realty, Redacre,
in his name alone. Suppose Hal should die when Blackacre is worth $800,000 and
Redacre is worth $750,000, what value of realty would be included in Hals probate
estate, and what value would be included in Hals gross estate?
Redacre ($750,000) would be included in Hals probate estate because the title of this
parcel would need to be changed through probate. In contrast, the title to Blackacre
would not be included in Hals probate estate because the title would be changed
automatically to Wendys name. Hals gross estate would include the value of the
property subject to probate ($750,000) and half the value of the property held by
husband and wife with the right of survivorship ($400,000).
35.
[LO 2] Walter owns a whole-life insurance policy worth $52,000 that directs the
insurance company to pay the beneficiary $250,000 on Walters death. Walter pays the
annual premiums and has the power to designate the beneficiary of the policy (it is
currently his son, James). What value of the policy, if any, will be included in Walters
estate upon his death?
The face value of $250,000 will be included in Walters estate upon his death despite
the fact that the proceeds will not need to go through probate and, instead, will be paid
directly to the beneficiary.
36.
[LO 2] Many years ago James and Sergio purchased property for $450,000. Although
they are listed as equal co-owners, Sergio was able to provide only $200,000 of the
purchase price. James treated the additional $25,000 of his contribution to the
purchase price as a gift to Sergio. Suppose the property is worth $900,000 at Sergios
death, what amount would be included in Sergios estate if the title to the property was
tenants in common? What if the title were joint tenancy with right of survivorship?
If the title to the property is held as tenants in common Sergio would include half the
value of the property ($450,000) in his estate. In contrast, if the title is held as joint
tenancy with right of survivorship, Sergio would include the proportion of the value as
the amount of the purchase price he initially provided. Sergio provided 4/9ths of the
price ($200/$450) so his estate would include $400,000.
37.
[LO 2] Terry transferred $500,000 of real estate into an irrevocable trust for her son,
Lee. The trustee was directed to retain income until Lees 21st birthday and then pay
him the corpus of the trust. Terry retained the power to require the trustee to pay
income to Lee at any time, and the right to the assets if Lee predeceased her. What
amount of the trust, if any, will be included in Terrys estate?
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The value of the trust assets would be included in Terrys estate because she retains
control over the income (the ability to force the trustee to distribute income) and has a
contingent right of reversion.
38.
[LO 2] Last year Robert transferred a life insurance policy worth $45,000 to an
irrevocable trust with directions to distribute the corpus of the trust to his grandson,
Danny, upon his graduation from college, or to Dannys estate upon his death. Robert
paid $15,000 of gift tax on the transfer of the policy. Early this year, Robert died and
the insurance company paid $400,000 to the trust. What amount, if any, is included in
Roberts gross estate?
Robert died within three years of the date of gifting the life insurance, so the face value
of the policy ($400,000) and the gift tax ($15,000) is included in his gross estate.
39.
[LO 2] {Research} Willie purchased a whole-life insurance policy on his brother,

Benny. Under the policy, the insurance company will pay the named beneficiary
$100,000 upon the death of the insured, Benny. Willie names Tess the beneficiary, and
upon Bennys death, Tess receives the proceeds of the policy, $100,000. Identify and
discuss the transfer tax implications of this arrangement.
Under Section 2511, neither the purchase of the insurance policy nor the designation
of Tess as a beneficiary constitutes a taxable gift from Willie to Tess. Benny has never
had any incidents of ownership, so under Section 2042 none of the proceeds is
included in Bennys estate at his death. However, under Goodman v. Comm., (2nd Cir,
1946), 156 F.2d 218, the payment of the proceeds to Tess constitutes a taxable gift from
Willie to Tess of $86,000 (after application of the $14,000 annual exclusion).
40.
[LO 2] Jimmy owns two parcels of real estate, Tara and Sundance. Tara is worth
$240,000 and Sundance is worth $360,000. Jimmy plans to bequeath Tara directly to
his wife Lois and leave her a life estate in Sundance. What amount of value will be
included in Jimmys gross estate and taxable estate should he die now?
Both parcels will be included in Jimmys gross estate, but his executor will be able to
claim a marital deduction for the value of Tara, $240,000. However, Jimmy will leave
Lois a terminable interest in Sundance and this will not qualify for the marital
deduction. Hence, Jimmys taxable estate will include the value of Sundance,
$360,000.
41.
[LO 2] Roland had a taxable estate of $5.5 million when he died this year. Calculate
the amount of estate tax due (if any) under the following alternatives.
a.
Rolands prior taxable gifts consist of a taxable gift of $1 million in 2005.
b.
Rolands prior taxable gifts consist of a taxable gift of $1.5 million in 2005.
c.
Explain how the tax calculation would change if Roland made a $1 million
taxable gift in the year prior to his death.
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a.
The exemption equivalent for gifts in 2005 was $1 million so Roland paid no gift
tax with the 2005 transfer. Rolands executor would calculate the estate tax as
follows:
Adjusted taxable gifts
Taxable estate
Cumulative taxable transfers
$ 1,000,000
+ 5,500,000
$ 6,500,000
Tax on cumulative taxable transfers

Gift tax paid or payable on prior gifts
Tax on taxable estate
Unified credit
Estimated estate tax due
$ 2,555,800
0
$ 2,545,800
- 2,045,800
$ 500,000
Note that the top estate tax rate is 40 percent of the cumulative transfers in
excess of the exemption equivalent ($6.5 million - $5.25 million = $1.25 million
and $1.25 million x 40% = $500,000).
b.
Note that because the exemption equivalent in 2005 was only $1 million, Roland
had a taxable gift of $500,000 in 2005. Rolands executor would calculate the
credit for prior taxable gifts at the current rate ($175,000) and calculate the
unified credit for the 2005 exemption equivalent at the current tax rate. The
credit for prior taxable gifts would be calculated as follows:
Current tax on prior taxable transfers ($1.5 million)
Unified credit under current rate
($1 million 2005 exemption equivalent)
Credit for prior taxable gifts
$ 545,800
- 345,800
$ 200,000
The estate tax would be calculated as follows:

Taxable estate
$ 1,500,000
+ 5,500,000
$ 7,000,000
Tax on cumulative transfers

Credit for prior gifts at current rate
Unified credit
$ 2,745,800
- 200,000
$ 2,545,800
- 2,045,800
$ 500,000
Note that this solution is equivalent to the prior problem. Here the estate tax
payable is 40 percent of the cumulative transfers in excess of the exemption
equivalent and the previously taxed gift ($7 million - $5.25 million - $500,000 =
$1.25 million).
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c.
42.
If Roland died within 3 years of the $1 million gift, the estate would be grossed
up by the amount of any gift tax paid on the gift because the gift was made within
three years of the decedents death. However, if the gift did not exceed Rolands
unused exemption equivalent, then no gift tax would be due.
[LO 2] {Forms} Brad and Angelina are a wealthy couple who have three children,
Fred, Bridget, and Lisa. Two of the three children, Fred and Bridget, are from Brads
previous marriages. On Christmas this year Brad gave each of the three children a cash
gift of $10,000 and Angelina gave Lisa an additional cash gift of $40,000. Brad also
gave stock worth $40,000 (adjusted basis of $10,000) to the Actors Guild (an A
charity).
a.
Brad and Angelina have chosen to split gifts. Calculate Brads gift tax. Assume
that Angelina has no previous taxable gifts, but Brad reported previous taxable
gifts of $2 million in 2009 when he used $345,800 of unified credit and paid
$435,000 of gift taxes.
a.
Before gift splitting Brad has made personal gifts totaling $70,000 ($10,000 to
three children and $40,000 to charity). With gift splitting Brads personal gifts
are reduced to $35,000 but he must include half of Angelinas gift and this
increases his gifts to $55,000. Brad is allowed to claim annual exclusions for the
gifts to his three children (limited to the amount of the gift for Fred and Bridget)
and an additional annual exclusion for the charitable gift. The remainder of the
charitable gift qualifies for a charitable deduction.
25-11
Donees
Brad
Fred
Bridget
Lisa from Brad
Lisa from Angelina
Actors Guild
Total Gifts
Annual Exclusions ($5+$5+$14+$14)
Charitable Deduction
Total Taxable Gifts
Angelina
$ 5,000
$ 5,000
$ 5,000
$ 20,000
$ 20,000
$ 5,000
$ 5,000
$ 5,000
$ 20,000
$ 20,000
$ 55,000
- 38,000
- 6,000
$ 55,000
- 38,000
- 6,000
$ 11,000
$ 11,000
Brad would then calculate his gift tax as follows:

Previous taxable gifts (2009)
Current taxable gift
$ 2,000,000
11,000
$ 2,011,000
Current tax on cumulative transfers

Current tax on prior taxable gifts
Current tax on current taxable gifts
Unified credit used this year
$ 750,200
- 745.800
$ 4,400
- 4,400
Gift tax due
Note that Brads gift is taxed at the highest gift tax rate ($11,000 x 40% =
$4,400) and he will have an unused exemption equivalent of $3,248,900
available for future use ($5.25 million less $2 million less $11 thousand).
b.
Fill out parts 1 and 4 of Form 709 for Brad.
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Part 1Gifts Subject Only to Gift Tax. Gifts less political organization, medical, and educational exclusions. (see
instructions)
A Item
number
B
Donees name and address
Relationship to donor (if any)
Description of gift
If the gift was of securities, give CUSIP no.
If closely held entity, give EIN
D
Donors adjusted
basis of gift
FRED child
BRIDGET child
LISA child
ACTOR'S GUILD
E
Date
of gift
10,000
10,000
10,000
10,000
G
For split
gifts, enter
1/2 of
column F
F Value at
date of gift
12/25
12/25
12/25
12/25
10,000
10,000
10,000
40,000
H
Net transfer
(subtract
col. G from
col. F)
5,000
5,000
5,000
20,000
5,000
5,000
5,000
20,000
20,000
20,000
55,000
Gifts made by spouse complete only if you are splitting gifts with your spouse and he/she also made gifts.
LISA child
Total of Part 1. Add amounts from Part 1, column H .
40,000
12/25
40,000
1
Total value of gifts of donor. Add totals from column H of Parts 1, 2, and 3 . .
2
Total annual exclusions for gifts listed on line 1 (see instructions) . . . . .
3
Total included amount of gifts. Subtract line 2 from line 1 . . . . . . .
Deductions (see instructions)
4
Gifts of interests to spouse for which a marital deduction will be claimed, based
on item numbers
of Schedule A
. .
5
Exclusions attributable to gifts on line 4 . . . . . . . . . . . .
6
Marital deduction. Subtract line 5 from line 4 . . . . . . . . . . .
4
7
Charitable deduction, based on item nos.
less exclusions
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1
2
55,000
38,000
17,000
.
.
8
9
10
6,000
11,000
Form 709
Page 3
Part 4Taxable Gift Reconciliation
8
9
10
11
4
5
6
7
6,000
Total deductions. Add lines 6 and 7

. . . . . . . . . . . . . . . . . . .
Subtract line 8 from line 3 . . . . . . . . . . . . . . . . . . . . . .
Generation-skipping transfer taxes payable with this Form 709 (from Schedule C, Part 3, col. H, Total)
Taxable gifts. Add lines 9 and 10. Enter here and on page 1, Part 2Tax Computation, line 1 . .
.
.
. .
. .
11
25-13
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
0
11,000
00
43.
[LO 3] {Forms} Tom Hruise was an executive with an entertainment film who had a fatal accident on a
film set. Toms will directed his executor to distribute the cash and stock to his wife, Kaffie, the real estate
to his church, The First Church of Methodology, and the remainder in trust for his three children. Toms
estate consisted of the following:
Assets:
Personal assets
Cash and stock
Intangible assets (film rights)
Real estate
Liabilities:
Mortgage
Other liabilities
a.
800,000
24,000,000
71,500,000
15,000,000
$ 111,300,000
$ 3,200,000
4,100,000
$ 7,300,000
Tom made a taxable gift of $3 million in 2010. Compute the estate tax for Toms estate.
Note that the exemption equivalent in 2010 was $3.5 million so Tom did not pay gift tax in 2010.
Toms estate will owe estate tax of $22.05 million calculated as follows:
Gross Estate
Marital Deduction
Charitable Deduction
Debts
Taxable Estate
Prior taxable gifts
$ 111,300,000
- 24,000,000
- 15,000,000
- 7,300,000
$ 65,000,000
3,000,000
$ 68,000,000
Gross estate tax

Unified Credit
Estate Tax Due
$ 27,145,800
2,045,800
$ 25,100,000
Toms estate is taxed at the highest estate tax rate. Hence, the estate tax ($25.1 million) is equal to
the taxable estate in excess of the exemption equivalent ($62.75 million) times 40 percent.
b.
Fill out lines 1 through 12 in part 2 of Form 706 for Toms estate.
25-14
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1
Total gross estate less exclusion (from Part 5Recapitulation, item 12) . . . . .
1
2
Tentative total allowable deductions (from Part 5Recapitulation, item 22) . . . .
2
3a Tentative taxable estate (before state death tax deduction) (subtract line 2 from line 1)
3a b State death tax deduction . . . . . . . . . . . . . . . . .
.
3b c Taxable estate (subtract line 3b from line 3a) . . . . . . . . . . .
. .
3c
.
.
.
.
.
.
.
.
. .
. .
. . .
4
Adjusted taxable gifts (total taxable gifts (within the meaning of section 2503) made by the
decedent
after December 31, 1976, other than gifts that are includible in decedents gross estate (section 2001(b)))
8
8
4
Add lines 3c and 4
Tentative tax on the amount on line 5 from Table A in the instructions
.
.
.
.
.
.
65,000,000
3,000,000
68,000,000
27,145,800
27,145,800
Total gift tax paid or payable with respect to gifts made by the decedent after December 31, 1976. Include gift
taxes by the decedents spouse for such spouses share of split gifts (section 2513) only if the decedent was
the donor of
these gifts and they are includible in the decedents gross estate (see instructions) . . . . . . . . .
7
Gross estate tax (subtract line 7 from line 6) . . . . . . . . . . . . . . . . . .
Part 2Tax Computation
5
5
6
6
111,300,000
46,300,000
65,000,000
9
Maximum unified credit (applicable credit amount) against
estate tax
(see instructions) . . . . . . . . . . . . . . . .
2,045,800
9
10
Adjustment to unified credit (applicable credit amount). (This adjustment

may not exceed $6,000. See instructions.) . . . . . . . .
10
25-15
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
11
12
Allowable unified credit (applicable credit amount) (subtract line 10 from line 9)
11
Subtract line 11 from line 8 (but do not enter less than zero) . . . . . .
12
2,045,800
25,100,000
44.
[LO 3] Raquel transferred $100,000 of stock to a trust, with income to be paid to her
nephew for 18 years and the remainder to her nephews children (or their estates).
Raquel named a bank as independent trustee but retained the power to determine how
much income, if any, will be paid in any particular year. Is this transfer a complete gift?
Explain.
Raquel has retained sufficient control that the transfer of the income interest to her
nephew is incomplete the gift to the nephew will be completed as income is actually
distributed to him. However, the portion of the transfer representing the remainder
interest is a complete gift because Raquel can no longer control this portion of the
property.
45.
[LO 3] This year Gerrys friend, Dewey, was disabled. Gerry paid $15,000 to Deweys
doctor for medical expenses and paid $12,500 to State University for college tuition for
Deweys son. Has Gerry made taxable gifts, and if so, in what amounts?
Both payments were complete gifts, but both are exempt from the gift tax as long as the
payments were made directly to the college or doctor.
46.
[LO 3] This year Dan and Mike purchased realty for $180,000 and took title as equal
tenants in common. However, Mike was able to provide only $40,000 of the purchase
price and Dan paid the remaining $140,000. Has Dan made a complete gift to Mike,
and if so, in what amount?
Dan has made a complete gift to Mike of $50,000 ($90,000[$180,000*50%] - $40,000)
and the gift is eligible for an annual exclusion of $14,000.
47.
[LO 3] Last year Nate opened a savings account with a deposit of $15,000. The
account was in the name of Nate and Derrick, joint tenancy with the right of
survivorship. Derrick did not contribute to the account, but this year he withdrew
$5,000. Has Nate made a complete gift, and if so, what is the amount of the taxable gift
and when was the gift made?
No gift was made at the time of the deposit, but a complete gift of $5,000 was made
once Derrick made the withdrawal.
48.
[LO 3] Barry transfers $1,000,000 to an irrevocable trust with income to Robin for her
life and the remainder to Maurice (or his estate). Calculate the value of the life estate
25-16
and remainder if Robins age and the prevailing interest rate result in a Table S discount
factor for the remainder of 0.27.
25-17
The remainder is valued at $270,000 ($1 million *.27). Accordingly, the value of the
life estate is $730,000 ($1,000,000 less $270,000).
49.
[LO 3] This year Jim created an irrevocable trust to provide for Ted, his 32-year-old
nephew, and Teds family. Jim transferred $70,000 to the trust and named a bank as the
trustee. The trust was directed to pay income to Ted until he reaches age 35, and at that
time the trust is to be terminated and the corpus is to be distributed to Teds two children
(or their estates). Determine the amount, if any, of the current gift and the taxable gift.
If necessary, you may assume the relevant interest rate is 6 percent and Jim is
unmarried.
The $70,000 transfer to the trust is a current gift but only the income interest qualifies
for an annual exclusion. The remainder interest is valued as follows:
Remainder interest = $70,000 / (1 + .06) 3 = $70,000 / (1.191) = $58,774
The income interest is $70,000 - $58,774 =$11,226. Because the annual exclusion
exceeds the income interest, the income interest of $11,226 is completely offset by the
annual exclusion. The total taxable gift is the amount of the remainder, $58,774.
50.
[LO 3] This year Colleen transferred $100,000 to an irrevocable trust that pays equal
shares of income annually to three cousins (or their estates) for the next eight years. At
that time, the trust is terminated and the corpus of the trust reverts to Colleen.
Determine the amount, if any, of the current gifts and the taxable gifts. If necessary, you
may assume the relevant interest rate is 6 percent and Colleen is unmarried. What is
your answer if Colleen is married and she elects to gift-split with her spouse?
The $100,000 transfer to the trust is a current gift only to the extent of the income
interest (the corpus returns to Colleen). In other words, Colleen has not transferred the
reversion interest because it will return to her. The reversion interest is valued as
follows:
Reversion interest = $100,000 / (1+.06)8 = $100,000 / (1.594) = $62,740 (rounded)
The income interest is $100,000 - $62,740 =$37,260 (rounded). Because the income
interest is paid currently and to three donees, the gift will qualify for three $14,000
annual exclusions. In other words, Colleen made three gifts of $12,420 each. Hence,
Colleen did not make any taxable gifts with this transfer because the annual exclusions
completely offset each gift. If Colleen is married and elects to gift split, then the gifts
would be evenly split between the spouses.
51.
[LO 3] Sly wants to make annual gifts of cash to each of his four children and six
grandchildren. How much can Sly transfer to his children this year if he makes the
maximum gifts eligible for the annual exclusion, assuming he is single?
Sly can exclude $14,000 for each donee (four plus six is ten donees). Hence, he can
exclude $140,000 of gifts this year. If Sly is married and makes gifts from community
25-18
property or elects to gift split with his spouse, then $280,000 of gifts would be excluded
this year (assuming the spouse didnt make any gifts to these donees).
52.
[LO 3] Jack and Liz live in a community property state and their vacation home is
community property. This year they transferred the vacation home to an irrevocable
trust that provides their son, Tom, a life estate in the home and the remainder to their
daughter, Laura. Under the terms of the trust, Tom has the right to use the vacation
home for the duration of his life, and Laura will automatically own the property after
Toms death. At the time of the gift the home was valued at $500,000, Tom was 35
years old, and the 7520 rate was 5.4 percent. What is the amount, if any, of the taxable
gifts? Would your answer be different if the home were not community property and
Jack and Liz elected to gift-split?
Lauras remainder is worth $71,020 ($500,000*0.14204) so the value of Toms life
estate is $428,980 ($500,000 - $71,020). Since the gift is from community property, half
of the gift was made by each spouse. In other words, Jack and Liz each made a gift of
$35,510 to Laura and $214,490 to Tom. After applying the annual exclusion to the life
estate (the remainder is a future interest and does not qualify for an annual exclusion),
Jack and Liz each made taxable gifts of $35,510 and $200,490 ($214,490-$14,000).
53.
[LO 3] David placed $80,000 in trust with income to Steve for his life and the
remainder to Lil (or her estate). At the time of the gift, given the prevailing interest rate,
Steves life estate was valued at $65,000 and the remainder at $15,000. What is the
amount, if any, of Davids taxable gifts?
The life estate is a present interest but Lils remainder is a future interest. Hence, only
the value of Steves life estate can be reduced by the annual exclusion. Hence, David
has made two taxable gifts: a taxable gift of $51,000 to Steve ($65,000 less the annual
exclusion of $14,000) and a taxable gift of $15,000 to Lil (no annual exclusion is
available).
54.
[LO 3] Stephen transferred $15,000 to an irrevocable trust for Graham. The trustee has
the discretion to distribute income or corpus for Grahams benefit but is required to
distribute all assets to Graham (or his estate) not later than Grahams 21st birthday.
What is the amount, if any, of the taxable gift?
Stephen will be entitled to an annual exclusion for the transfer because the trust fits the
description of a trust for the benefit of a minor. Hence, the taxable gift will be $1,000
($15,000-$14,000 annual exclusion).
55.
[LO 3] For the holidays, Marty gave a watch worth $25,000 to Emily and jewelry
worth $40,000 to Natalie. Has Marty made any taxable gifts this year and, if so, in what
amounts? Does it matter if Marty is married to Wendy and they live in a community
property state?
After reducing each transfer for the annual exclusion, Marty has made a taxable gift of
$11,000 to Emily and $26,000 to Natalie. However, if the gifts are from community
property (or if Marty and his spouse elect to split gifts), then both Marty and his spouse
25-19
made a gift of $12,500 to Emily and $20,000 to Natalie. After applying the annual
exclusion, neither Marty nor his spouse made a taxable gift to Emily but each of them
made a taxable gift of $6,000 to Natalie.
56.
[LO 3] This year Jeff earned $850,000 and used it to purchase land in joint tenancy
with a right of survivorship with Mary. Has Jeff made a taxable gift to Mary and, if so,
in what amount? What is your answer if Jeff and Mary are married?
In a common law state, Jeff has made a gift to Mary of $425,000. However, if the
couple is married, the entire transfer will be offset by an annual exclusion and a marital
deduction, so there is no taxable gift.
57.
[LO 3] Laura transfers $500,000 into trust with the income to be paid annually to her
spouse, William, for life (a life estate) and the remainder to Jenny. Calculate the amount
of the taxable gifts from the transfers.
The life estate is not eligible for the marital deduction because this interest will
terminate upon a future event (Williams death) and then pass to another person
(Jenny). Hence, the entire amount of the gift, less an annual exclusion for Williams life
estate, will be a taxable gift ($500,000- $14,000 = $486,000).
58.
[LO 3] Red transferred $5,000,000 of cash to State University for a new sports
complex. Calculate the amount of the taxable gift.
The gift qualifies for an annual exclusion and the remainder qualifies for the charitable
gift tax deduction. Hence, there is no taxable gift. If Red makes no other gifts this year,
he need not even file a gift tax return. Red can also claim an income tax deduction for
the transfer.
59.
[LO 3] In 2010 Casey made a taxable gift of $5 million to both Stephanie and Linda (a
total of $10 million in taxable gifts). Calculate the amount of gift tax due this year and
Caseys unused exemption equivalent under the following alternatives.
a.
This year Casey made a taxable gift of $1 million to Stephanie. Casey is not
married, and the 2010 gift was the only other taxable gift he has ever made.
b.
This year Casey made a taxable gift of $5 million to Stephanie. Casey is not
married, and the 2010 gift was the only other taxable gift he has ever made.
c.
This year Casey made a gift worth $5 million to Stephanie. Casey is married to
Helen in a common law state, and the 2010 gift was the only other taxable gift he
or Helen has ever made. Casey and Helen elect to gift split.
a.
In 2010 Casey used $3.5 million of his exemption equivalent so in 2013 Casey
would have an unused exemption equivalent of $1.75 million.
Current taxable gifts
Prior taxable gifts
Cumulative taxable gifts
$ 1,000,000
+10,000,000
$ 11,000,000
25-20
Tax on cumulative taxable gifts

Less: Current tax on prior taxable gifts
Tax on current taxable gifts
Unified credit on current taxable gifts
Gift tax due
$ 4,345,800
- 3,945,800
$ 400,000
- 400,000
$
0
Note that Casey is in the top marginal gift tax rate and that $1 million times 40%
equals the gift tax on current gifts of $400,000. Note also that at the end of 2013,
Harry would have a $750,000 unused exemption equivalent ($5.25 million - $3.5
million - $1 million).
b.
In 2010 Casey used $3.5 million of his exemption equivalent so in 2013 Casey
would have an unused exemption equivalent of $1.75 million. This means that
$3.25 million of the current gift will not be covered by the exemption equivalent.
Prior taxable gifts
$ 5,000,000
+10,000,000
$ 15,000,000
To calculate the unused unified credit is the difference in the tax on the entire
exemption equivalent less the tax on the used exemption equivalent calculated as
follows:
Current tax on full exemption equivalent ($5.25 million)
Less: tax on used equivalent ($3.5 million)
$ 2,045,800
- 1,345,800
$ 700,000

Gift tax due
$ 5,945,800
- 3,945,800
$ 2,000,000
- 700,000
$ 1,300,000
Note that Casey is in the top marginal gift tax rate and that $5 million times 40%
equals the gift tax on current gifts of $2 million and that $3.25 million (the
taxable gift after application of the unused exemption equivalent) times 40%
equals the gift tax due of $1.3 million. At the end of 2013, Harry would not have
any unused exemption equivalent.
c.
Under gift splitting Casey and Helen will each be treated having made a gift of
$2.5 million and both gifts would be eligible for owe an annual exclusion. Hence,
each would be treated as making a gift of $2,486,000 ($2.5 million - $14,000). In
2010 Casey used $3.5 million of his exemption equivalent so in 2013 Casey would
have an unused exemption equivalent of $1.75 million (a unified credit of
$700,000 as calculated above). Casey will calculate the gift tax on his share of
the gift as follows:
25-21

Prior taxable gifts
$ 2,486,000
+10,000,000
$ 12,486,000

Gift tax due
$ 4,940,200
- 3,945,800
$ 994,400
- 700,000
$ 294,400
Helens share of the gift will not result in any tax because she has the full $5.25
exemption equivalent available. After application of the $5.25 exemption
equivalent, Helen will have $2,764,000 of exemption equivalent remaining.
Prior taxable gifts
$ 2,486,000
0
$ 2,486,000

Gift tax due
60.
$ 940,200
0
$ 940,200
- 940,200
$
0
[LO 4] {Planning} Jones is seriously ill and has $6 million of property that he wants to
leave to his four children. He is considering making a current gift of the property
(rather than leaving the property to pass through his will). Assuming any taxable
transfer will be subject to the highest transfer tax rate, determine how much gift tax
Jones will owe if he makes the transfers now. How much estate tax will this gift save
Jones if he dies after three years during which time the property appreciates to $6.8
million?
There are two critical assumptions here. First because the top transfer tax rate applies
to all transfers (currently and for future transfers), it would appear that Jones has
already used his exemption equivalent. Second, Jones survives at least three years
(otherwise, the gift tax on any current transfer would be included in his estate). Under
these assumptions a current gift of $6 million will result in a taxable gift of $5,944,000
(after four annual exclusions) and a gift tax of $2,377,600. In contrast, the same
property transferred via the estate will trigger $2,720,000 in estate taxes. The
difference in the amount transferred ($342,400) represents the $22,400 savings from the
annual exclusions ($56,000 x 40%) and the $320,000 of estate tax on the $800,000 of
appreciation. Below is the calculation of the tax savings and the net amount transferred
to the children under both scenarios.
25-22
Current value of property

Less gift tax on transfer (40%)
Value transferred via gift
Appreciation during interim
Value transferred via estate
Estate tax at 40%
After tax value transferred
Current Gift
$ 6,000,000
- 2,377,600
$ 3,622,400
+ 800,000
$ 4,422,400
Tax savings and extra value

transferred
61
Transfer at death
$ 6,000,000
+ 800,000
$ 6,800,000
- 2,720,000
$ 4,080,000
342,400
[LO 4] Angelina gave a parcel of realty to Julie valued at $210,000 (Angelina

purchased the property five years ago for $88,000). Compute the amount of the taxable
gift on the transfer, if any. Suppose several years later Julie sold the property for
$215,000. What is the amount of her gain or loss, if any, on the sale?
The gift is $196,000 after the annual exclusion. There would likely be no gift tax due
unless Angelina has used her entire unified credit. Julie takes a carryover basis in the
property (plus the gift tax paid, if any, on the appreciation). Julie realizes a gain of
$127,000 upon the eventual sale ($215,000-$88,000).
62.
[LO 4] {Research} Several years ago Doug invested $21,000 in stock. This year he
gave his daughter Tina the stock on a day it was valued at $20,000. She promptly sold it
for $19,500. Determine the amount of the taxable gift, if any, and calculate the amount
of taxable income or gain, if any, for Tina. Assume Doug is not married and does not
support Tina, who is 28.
Doug made a current gift of $20,000 and a taxable gift of $6,000 (after the annual
exclusion. Tina will not recognize any income upon receipt of the stock, and she takes a
carryover basis of $21,000 and long-term holding period for income tax purposes. For
purposes of calculating a loss, Tinas basis in the stock is limited to the lesser of
carryover basis ($21,000) or fair market value on the date of the gift ($20,000). Hence,
upon the sale Tina recognizes a loss of $500.
63.
[LO 4] Roberta is considering making annual gifts of $14,000 of stock each to each of
her four children. She expects to live another five years and to leave a taxable estate
worth approximately $8,000,000. She requests you justify the gifts by estimating her
estate tax savings from making the gifts.
If the estimate of Robertas taxable estate is accurate and if the estate tax rates and
annual exclusions do not change, Roberta would be able to use her annual exclusion of
$14,000 to gift away $56,000 ($14,000 * 4) of property each year without incurring any
25-23
tax. Hence, she would transfer a total of $280,000 ($56,000 * 5 years) that would save
$112,000 in transfer taxes (at 40%). In addition, each transfer would eliminate the
appreciation on the property between the time of the gift and Robertas death. For
example, if the property appreciates at a 5 percent compound rate of return, the first gift
of $56,000 would eliminate an additional $15,472 of appreciation {$56,000 *[(1.05)51]} from being subject to estate tax.
64.
[LO 4] Harold and Maude are married and live in a common law state. Neither have
made any taxable gifts and Maude owns (holds title) all their property. She dies with a
taxable estate of $15 million and leaves it all to Harold. He dies several years later,
leaving the entire $15 million to their three children. Calculate how much estate tax
would have been saved if Maude had used a bypass provision in her will to direct $9
million to her children and the remaining $6 million to Harold. Ignore the time value of
money and all credits in this problem except for the unified credit.
The total estate tax savings is zero Maudes estate tax is computed using the lower tax
brackets (under $1 million) rather than being taxed at 40% (using the DSUEA).
However, the DSUEA is calculated by applying the tax rate schedules to the
combination of Harolds exemption equivalent ($5.25 million) plus Maudes unused
exemption equivalent ($5.25 million) or a total of $10.5 million. Hence, the unified
credit under the DSUEA is $4,145,800.
25-24
Alternative 1
DSUEA
$15,000,000
-15,000,000
$0
Alternative 2
Bypass
$15,000,000
-6,000,000
$9,000,000
$0
-2,045,800
$0
$3,545,800
-2,045,800
$1,500,000
$15,000,000
$6,000,000
Harold's gross estate tax

Harold's unified credit
Harold and Maudes unified credit
Harold's estate tax
$5,945,800
$2,355,800
- 2,055,800
Total estate taxes

Bypass savings
$1,800,000
Maude's gross estate

Marital deduction
Maude's taxable estate
Maude's gross estate tax
Unified Credit
Maude's estate tax due
Harold's taxable estate
- 4,145,800
$1,844,200
$300,000
$1,800,000
$
0
COMPREHENSIVE PROBLEMS
65.
{Planning} Suppose Vince dies this year with a gross estate of $15 million and no
adjusted prior gifts. Calculate the amount of estate tax due (if any) under the following
alternative conditions.
a.
Vince leaves his entire estate to his spouse, Millie.
b.
Vince leaves $10 million to Millie and the remainder to charity.
c.
Vince leaves $10 million to Millie and the remainder to his son, Paul.
d.
Vince leaves $10 million to Millie and the remainder to a trust whose trustee is
required to pay income to Millie for her life and the remainder to Paul.
a.
If all the property in Vinces estate qualifies for the marital deduction, then there
would be no taxable estate and there would be no estate tax due upon Vinces
death. If Millie dies with a taxable estate of $15 million, her estate would owe an
estate tax of $3.9 million {($15 million - $5.25 million exemption equivalent) x
40%}. If Millies estate qualified for the DSUEA, then she would owe $1.8 million
(($15 million less 10.5 million) times 40 percent). Millies estate could also
qualify for a credit on proximate deaths (if Millie die within 10 years of Vinces
death). Of course, the value of the property would likely change over time and
Millies consumption would decrease the property over the interim between the
deaths of Vince and Millie.
25-25
66.
b.
Once again, if the property left to Millie qualifies for the marital deduction and if
the property bequeathed to charity qualifies for the charitable deduction, then
there would be no taxable estate and there would be no estate tax due upon
Vinces death.
c.
Assuming that the property left to Millie qualifies for the marital deduction, the
transfer to Paul would be less than the exemption equivalent, so no estate tax
would be due.
d.
The solution is identical to (c) above because the amount left in trust is a
terminable interest that would not qualify for a marital deduction.
Hank is a single individual who possesses a life insurance policy worth $300,000 that
will pay his two children a total of $800,000 upon his death. This year Hank transferred
the policy and all incidents of ownership to an irrevocable trust that pays income
annually to his two children for 15 years and then distributes the corpus to the children
in equal shares.
a.
Calculate the amount of gift tax due (if any) on the gift. Assume that Hank has
made only one prior taxable gift of $5 million in 2011.
b.
Calculate the amount of cumulative taxable transfers for estate tax purposes if
Hank dies this year but after the date of the gift. At the time of his death, Hanks
probate estate is $10 million and it is to be divided in equal shares between his
two children.
a.
Hank will owe $10,000 in gift taxes calculated as follows:
b.
Gift of life insurance policy

annual exclusions (two children)
Prior taxable gifts
Cumulative gifts
$ 300,000
- 28,000
$ 272,000
+ 5,000,000
$ 5,272,000

less Current tax on prior taxable gifts ($5 million)
Unified credit ($5.25 million)
less Used unified credit ($5 million)
Unused unified credit
Gift tax due
$ 2,055,800
- 1,945,800
$ 110,000
$ 2,045,800
- 1,945,800
- 100,000
$ 10,000
Because Hank made the transfer of the life insurance within three years of his
death, his estate will include the life insurance proceeds ($800,000) as well as the
gift taxes paid on that transfer. Hence, Hanks cumulative taxable transfers will be
calculated as follows:
25-26
Probate estate
Life insurance proceeds
Gift taxes on transfer within 3 years of death
Gross estate
Prior taxable transfers
$ 10,000,000
+ 800,000
+ 10,000
$ 10,810,000
+ 5,272,000
$ 16,082,000
Note that Hanks estate will be allowed a credit for the transfer tax on the
$300,000 value of the insurance policy. To do otherwise, would subject the
transfer of the insurance policy to double tax once under the gift tax and again
under the estate tax.
67.
Jack is single and he made his first taxable gift of $1,000,000 in 2008. Jack made no
further gifts until 2009, at which time he gave $1,750,000 to each of his three children
and an additional $1,000,000 to State University (a charity). The annual exclusion in
2009 was $13,000. Recently Jack has been in poor health and would like you to
estimate his estate tax should he die this year. Jack estimates his taxable estate (after
deductions) will be worth $5.4 million at his death.
The solution begins with the estimation of Jacks cumulative taxable transfers as
follows:
Gross estate
Prior taxable transfers (2008)
Prior taxable transfers ($1,750,000 - $13,000 x 3)
$ 5,400,000
1,000,000
+ 5,211,000
$ 11,611,000
Next it is necessary to calculate the amount of credit for prior taxable transfers. The
2008 transfer was offset by Jacks unified credit ($1 million exemption equivalent) but
only $2.5 million of the taxable transfer in 2009 was offset by the remaining unified
credit. Hence, Jack made a $2.711 taxable transfer in 2009 ($5.211 million - $2.5
million). The credit for prior taxable transfers is calculated using the current rate
schedule as follows:
Tax on taxable transfers ($6.211 million)
less unified credit ($3.5 million)
Credit for current tax on prior taxable gifts
$ 2,430,200
- 1,345,800
$ 1,084,400
The calculation of the estate tax proceeds as follows:

less Credit for current tax on prior taxable gifts
less Unified credit ($5.25 million)
Estate tax due
$ 4,590,200
- 1,084,400
$ 3,505,800
- 2,045,800
$ 1,460,000
25-27
68.
Montgomery has decided to engage in wealth planning and has listed the value of his
assets below. The life insurance has a cash surrender value of $120,000 and the
proceeds are payable to Montgomerys estate. The trust is an irrevocable trust created
by Montgomerys brother 10 years ago and contains assets currently valued at $800,000.
The income from the trust is payable to Montgomerys faithful butler, Walen, for his
life, and the remainder is payable to Montgomery or his estate. Walen is currently 37
years old and the 7520 interest rate is currently 5.4 percent. Montgomery is unmarried
and plans to leave all his assets to his surviving relatives.
Property
Value
Auto
Personal effects
Checking and savings accounts
Investments
Residence
Real estate investments
Trust
20,000
75,000
250,000
2,500,000
1,400,000
1,000,000
5,125,000
800,000
Adjusted Basis
$
55,000
110,000
250,000
770,000
980,000
50,000
2,800,000
80,000
a.
Calculate the amount of the estate tax due (if any), assuming Montgomery dies
this year and has never made any taxable gifts.
b.
this year and made one taxable gift in 2006. The taxable gift was $1 million, and
Montgomery used his unified credit to avoid paying any gift tax.
c.
this year and made one taxable gift in 2006. The taxable gift was $1 million, and
Montgomery used his unified credit to avoid paying any gift tax. Montgomery
plans to bequeath his investments to charity and leave his remaining assets to his
surviving relatives.
Each part of the solution depends on the value of Montgomerys taxable estate.
Montgomerys estate includes the fair value (the adjusted basis of the assets is
irrelevant) of all of his assets except the trust because Montgomery only owns a
remainder interest in the trust at his death. Hence, only the value of the
remainder is included in his estate. The remainder is valued by identifying the
discount factor given the 7520 interest rate (5.4%) and the age of the life tenant
(37 years). The value ($123,600) is obtained by multiplying the discount factor
(0.1545 from Exhibit 25-4) times the value of the trust assets ($800,000). Hence,
the value of Montgomerys estate is calculated as follows:
25-28
Auto
Personal effects
Checking and savings accounts
Investments
Residence
Real estate investments
Trust ($800,000x.1545)
Value of estate at date of death
a.
Montgomerys estate tax is calculated as follows:

$
0
Taxable estate
+ 10,493,600
$ 10,493,600
Gift taxes paid or payable on prior transfers
Unified credit
b.
$ 4,143,240
0
$ 4,143,240
- 2,045,800
$ 2,097,440

$ 1,000,000
Taxable estate
+ 10,493,600
$ 11,493,600
Unified credit
c.
$20,000
75,000
250,000
2,500,000
1,400,000
1,000,000
5,125,000
123,600
$10,493,600
$ 4,543,240
0
$ 4,543,240
- 2,045,800
$ 2,497,440

Gross estate
$ 10,493,600
Charitable deduction
- 2,500,000
Taxable estate
$ 7,993,600
+ 1,000,000
$ 8,993,600
Unified credit
$ 3,543,240
0
$ 3,543,240
- 2,045,800
$ 1,497,440
25-29

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Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

[LO 2] Define fair market value for transfer tax purposes.

[LO 2] Paul is a widower with several grown children. He is considering transferring

Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

[LO 3] Describe a situation in which a transfer of cash to a trust might be considered

Chapter 25 - Transfer Taxes and Wealth Planning

[LO 3] Explain how a purchase of realty could result in a taxable gift.

[LO 3] List the conditions for making an election to split gifts.

[LO 3] Describe the limitations on the deduction of transfers to charity.

Chapter 25 - Transfer Taxes and Wealth Planning

[LO 4] Describe how to initiate the construction of a comprehensive and effective

Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

[LO 2] {Research} Willie purchased a whole-life insurance policy on his brother,

Rolands prior taxable gifts consist of a taxable gift of $1 million in 2005.

Chapter 25 - Transfer Taxes and Wealth Planning

Tax on cumulative taxable transfers

The estate tax would be calculated as follows:

Tax on cumulative transfers

Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

Brad would then calculate his gift tax as follows:

Cumulative taxable transfers

Current tax on cumulative transfers

Gift tax due

Fill out parts 1 and 4 of Form 709 for Brad.

Chapter 25 - Transfer Taxes and Wealth Planning

Total of Part 1. Add amounts from Part 1, column H .

Part 4Taxable Gift Reconciliation

Total deductions. Add lines 6 and 7

Chapter 25 - Transfer Taxes and Wealth Planning

Gross estate tax

Chapter 25 - Transfer Taxes and Wealth Planning

Tentative tax on the amount on line 5 from Table A in the instructions

Adjustment to unified credit (applicable credit amount). (This adjustment

Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

Tax on cumulative taxable gifts

Tax on cumulative taxable gifts

Chapter 25 - Transfer Taxes and Wealth Planning

Current taxable gifts

Tax on cumulative taxable gifts

Tax on cumulative taxable gifts

Chapter 25 - Transfer Taxes and Wealth Planning

Current value of property

Tax savings and extra value

[LO 4] Angelina gave a parcel of realty to Julie valued at $210,000 (Angelina

Chapter 25 - Transfer Taxes and Wealth Planning

Chapter 25 - Transfer Taxes and Wealth Planning

Harold's gross estate tax

Total estate taxes

Maude's gross estate