Chapter 27 Homework Solutions

CHAPTER 27 HOMEWORK SOLUTIONS

20. a. No gift took place when Mike created the trust in 2004 because the transfer was incomplete. In 2009, however, the release of the power to revoke made the gift complete. Now Mike has made two gifts: a life estate to his wife and a remainder interest to the children. The life estate probably qualifies for the annual exclusion, while the remainder interest does not (it is a gift of a future interest). Unless a QTIP election is made to avoid the terminable interest limitation, the life estate does not qualify for a marital deduction. Examples 9 and 10

b. Without knowing the fair market value of the real estate, it is impossible to ascertain whether a gift took place. If the selling price was less than value, then the difference is a gift. If they are the same, no gift occurs. If the selling price was more than value, then the daughter has made a gift to Carrie. Examples 11 and 12

c. Subject to the gift tax. The IRS does not recognize such agreements as being supported by full and adequate consideration. p. 27-11

d. Under § 2516, these settlements are deemed to be for adequate consideration. Therefore, no gift takes place. p. 27-11

e. No gift occurs because Paula is probably satisfying her obligation of support. Depending on the provisions of state law, furnishing a college education may constitute support. If not, Paula has made a gift because § 2503(e) does not apply—room and board are involved and not tuition and Paula did not make the payment directly to the educational institution. p. 27-9

f. Probably subject to the gift tax. As the facts do not state otherwise, it is assumed that no interest is provided for in the loan arrangement. Consequently, Herman has made a gift of the interest element. Example 14

g. Because of the medical care exception, not subject to the gift tax. p. 27-9

h. The payment represents a gift, but this result would be neutralized by the availability of the marital deduction. Nevertheless, the possibility exists that the payment could represent the satisfaction of a prenuptial agreement. In such a case, the marital deduction would not be available as the obligation arose prior to marriage. p. 27-9

i. Political contributions are excluded from the application of the Federal gift tax. p. 27-9

j. Did Morgan accept the inheritance and later change her mind? If not, was the disclaimer timely? A timely disclaimer where the taxpayer has not acted inconsistently will avoid a gift tax result. p. 27-11 28. a. NT The transfer is incomplete. Example 13

b. ET A testamentary transfer occurred. Example 13

c. GT Marcus has made a gift of one-half the purchase price of the property.

d. NT Kendal made no contribution to the cost of the property, so nothing is included in his gross estate. p. 27-22

e. NT Merely purchasing life insurance is not a taxable event. p. 27-23

f. GT Winston has made a gift of the proceeds to Sophia. Example 50

g. NT No gift takes place when the account is established. p. 27-23

h. GT A gift now occurs. p. 27-23

i. ET Since this is a testamentary transfer, the estate tax applies. p. 27-23

34. a. Alicia’s gift tax is computed as follows. Amount of gift $1,200,000 Less annual exclusion (13,000) Taxable gift $1,187,000

Gift tax on $1,187,000 per Appendix A, p. A-7

$345,800 + 41%($1,187,000 – $1,000,000) $ 422,470 Less maximum credit allowed for 2009 (345,800) Gift tax due on 2009 gift $ 76,670

b. If the § 2513 election is made:

Alicia Mitch Amount of gift ($1,200,000 ÷ 2) $600,000 $600,000 Less annual exclusions (13,000) (13,000) Taxable gifts $587,000 $587,000 Add prior taxable gift –0– 100,000 Current and prior taxable gifts $587,000 $687,000 Alicia’s gift tax on $587,000 per Appendix A, p. A-7 $155,800 + 37%($587,000 – $500,000) $187,990 Less maximum credit allowed for 2009 (345,800) Gift tax attributed to Alicia $ –0– Mitch’s gift tax on $687,000 per Appendix A, p. A-7 $155,800 + 37%($687,000 – $500,000) $224,990 Less: Deemed paid tax on 2002 gift (23,800) Maximum credit allowed for 2009 (345,800) Gift tax attributable to Mitch $ –0– By making the § 2513 election to split, Alicia saves $76,670. Examples 21 and 22 30. a. $3,430,000. $1,380,000 (apartment building) + $50,000 (accrued rents) + $1,300,000 (Carmine stock) + $700,000 (Garnet stock) = $3,430,000. The accrued rents are determined as of date of death.

b. $3,330,000. As the Garnet stock was sold within the six month period after death, value on date of disposition controls.

c. $3,550,000. $1,400,000 + $50,000 + $1,200,000 + $900,000 = $3,550,000.

37. $1,450,000 ($300,000 + $1,000,000 + $150,000).

The stock in Green Corporation is included based on the assumption that Katie did not change the ownership designation. On her death, therefore, the transfer becomes complete and the stock passes to Travis. By virtue of § 2035 and the 3-year rule, both the insurance proceeds ($1 million) and the gift tax ($150,000) are included in the gross estate. Note, however, that the gift of land is not included.

46. $3,750,000. [$900,000 + $750,000 (1/2 × $1,500,000) + $1,600,000 ($1,800,000 – $200,000) + $500,000 (1/3 × $1,500,000)].

The tenancy by the entirety is subject to the 50% inclusion rule applicable to spouses. Regarding the tenancy in common, Bob can dispose of only the one-third undivided interest that he owns. The cemetery lots are not included in Bob’s gross estate and, therefore, cannot “pass” to Harriet.

49. Decedent Ryan

Taxable estate $1,400,000 Add: gift made in 2003 1,100,000 Tax base $2,500,000

Tentative tax on total transfers $780,800 + 45%($2,500,000 – $2,000,000) $1,005,800 Less: Unified tax credit for 2008 $780,800 Gift tax paid on 2003 gift* 41,000 (821,800) Estate tax due $ 184,000

*Computation of gift tax on 2003 gift

Tentative tax $345,800 + 41%($1,100,000 – $1,000,000) $ 386,800 Less unified tax credit for 2003 (345,800) Gift tax due for 2003 $ 41,000