Chapter 27 The Federal Gift And Estate Taxes

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Discussion Questions
1. LO.1 Why can the unified transfer tax be categorized as an excise tax? In this regard, how does it differ from an income tax?
2. LO.1 Kim, a wealthy Korean national, is advised by his physicians to have an operation performed at the Mayo Clinic. Kim is hesitant to come to the United
States because of the possible tax consequences. If the procedure is not successful,
Kim does not want his wealth to be subject to the Federal estate tax. Are Kim’s concerns justified? Explain.
3. LO.1 Arturo is a citizen and resident of Argentina. Attracted by the low prices due to the housing slump, Arturo buys developed real estate in various locations within the United States. What are the U.S. transfer tax consequences if Arturo:
a. Makes gifts of the properties to his children during his lifetime?
b. Dies and passes the properties to his children?
4. LO.2 A new out-of-state client, Robert Ball, has asked you to prepare a Form 709 for a large gift he made in 2016. When you request copies of any prior gift tax returns he may have filed, he responds, “What do gifts in prior years have to do with 2016?”
Send a letter to Robert at 4560 Walton Lane, Benton, AR 72015, clarifying this matter.
5. LO.2, 4, 5 Regarding the formula for the Federal gift tax (see Concept Summary 27.1), comment on the following observations.
a. A credit is allowed for the gift taxes actually paid on prior gifts.
b. The annual exclusion is adjusted each year for inflation.
c. The charitable and marital deductions play an important role.
d. Some gratuitous transfers might not be subject to the gift tax.
6. LO.3 Regarding the formula for the Federal estate tax (see Concept Summary 27.2), comment on the following.
a. The gross estate includes only property interests owned by the decedent at the time of death.
b. The gross estate is not the same as the probate estate.
c. In arriving at the taxable estate, all prior gifts must be added to the gross estate.
d. Taxable estate _ Applicable unified transfer tax rate ? Estate tax due.
7. LO.3 As to the alternate valuation date of § 2032, comment on the following.
a. The justification for the election.
b. The main heir prefers the date of death value.
c. An estate asset is sold seven months after the decedent’s death.
d. Effect of the election on income tax basis.
8. LO.4 Gus (age 84) and Belle (age 18) are married in early 2016. Late in 2016, Belle confronts Gus about his failure to transfer to her the considerable amount of property he previously promised. Gus reassures Belle that she will receive the property when he dies. Because the transfer occurs at death, the estate tax marital deduction will avoid any taxes. Comment on the issues involved and any misconceptions
Gus may have.
9. LO.4, 6 At a local bank, Jack purchases for $100,000 a five-year CD listing title as follows: “Meredith, payable on death to Briana.” Four years later, Meredith dies. Briana, Meredith’s daughter, then redeems the CD when it matures. Discuss the transfer tax consequences if Meredith is:
a. Jack’s wife.
b. Jack’s ex-wife.
c. Jack’s girlfriend.
10. LO.4 Derek dies intestate (i.e., without a will) and is survived by a daughter, Ruth, and a grandson, Ted (Ruth’s son). Derek’s assets include a large portfolio of stocks and bonds and a beach house. Ruth has considerable wealth of her own, while Ted has just finished college and is unemployed. Under applicable state law, the order of priority as to heirship favors children followed by grandchildren.
a. To minimize future transfer taxes, what action might Ruth take?
b. What if Ruth wants only the beach house?
11. LO.4 Qualified tuition programs under § 529 enjoy significant tax advantages.
Describe these advantages with regard to the Federal:
a. Income tax.
b. Gift tax.
c. Estate tax.
12. LO.5 Regarding the gift-splitting provision of § 2513, comment on the following.
a. What it was designed to accomplish.
b. How the election is made.
c. The treatment of any taxable gifts previously made by the nonowner and nondonor spouse.
d. The utility of the election in a community property jurisdiction.
13. LO.5 In connection with the filing of a Federal gift tax return, comment on the following.
a. No Federal gift tax is due.
b. The gift is between spouses.
c. The donor uses a fiscal year for Federal income tax purposes.
d. The donor obtained from the IRS an extension of time for filing his or her
Federal income tax return.
14. LO.4 In each of the following independent situations, indicate whether the transfer is subject to the Federal gift tax.
a. Asa contributes to his mayor’s reelection campaign fund. The mayor has promised to try to get some of Asa’s property rezoned from residential to commercial use.
b. Mary Ann inherits her father’s collection of guns and mounted animals. Five months later, she disclaims any interest in the mounted animals.
c. Same as part (b). Ten months later, Mary Ann disclaims any interest in the guns.
d. Haydon pays an orthodontist for the dental work performed on Michele, his dependent cousin.
e. Same as part (d), except that Michele is not Haydon’s dependent.
f. Floyd creates a revocable trust with his children as the beneficiaries.
g. Florence purchases a U.S. savings bond listing herself and Taylor (her daughter) as joint owners.
h. Same as part (g). One year later, Taylor predeceases Florence.
i. Same as part (g). One year later, Florence predeceases Taylor.
15. LO.6 At the time of Emile’s death, he was a joint tenant with Colette in a parcel of real estate. With regard to the inclusion in Emile’s gross estate under § 2040, comment on the following independent assumptions:
a. Emile and Colette received the property as a gift from Douglas.
b. Colette provided the entire purchase price of the property.
c. Colette’s contribution was received as a gift from Emile.
d. Emile’s contribution was derived from income generated by property he received as a gift from Colette.
16. LO.6 With regard to “life insurance,” comment on the following.
a. What the term includes (i.e., types of policies).
b. The meaning of “incidents of ownership.”
c. When a gift occurs upon maturity of the policy.
d. The tax consequences when the owner of the policy predeceases the insured and the beneficiary.
e. The tax consequences when the owner-insured gives the policy to the beneficiary and dies shortly after making the gift.
17. LO.6, 7 Due to the negligence of the other driver, Adam’s car is completely destroyed, and he is seriously injured. Two days later, Adam dies from injuries suffered in the accident.
a. What, if any, are the estate tax consequences of these events?
b. Are there any income tax consequences to Adam or his estate? Explain.
18. LO.7 Bernice dies and, under a will, passes real estate to her surviving husband.
The real estate is subject to a mortgage. For estate tax purposes, how will any marital deduction be determined? Can Bernice’s estate deduct the mortgage under § 2053? Explain.
19. LO.8 Three unmarried and childless sisters live together. All are of advanced age and in poor health, and each owns a significant amount of wealth. Each has a will that passes her property to her surviving sister(s) or, if no survivor, to their church. Within a period of two years and on different dates, all three sisters die. Discuss the Federal estate tax consequences of these deaths.