Chapter 27 The Federal Gift And Estate Taxes

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Problems
34. LO.3 In each of the following independent situations, indicate whether the alternate valuation date can be elected. Explain why or why not. All deaths occur in 2016.
Value of Gross Estate Estate Tax Liability
Decedent
Date of
Death
Six Months
Later
Date of
Death
Six Months
Later
Jayden $6,000,000 $5,900,000 $240,000 $239,000
Isabella 6,100,000 6,000,000 265,000 260,000
Liam 6,100,000 6,000,000 200,000 210,000
Lily 6,500,000 6,400,000 205,000 204,000
35. LO.4 Carl made the following transfers during the current year.
• Transferred $900,000 in cash and securities to a revocable trust, life estate to himself and remainder interest to his three adult children by a former wife.
• In consideration of their upcoming marriage, gave Lindsey (age 21) a $90,000 convertible.
• Purchased a $100,000 certificate of deposit listing title as “Carl, payable on proof of death to Lindsey.”
• Established a joint checking account with his wife, Lindsey, in December of the current year with $30,000 of funds he inherited from his parents. In January of the following year, Lindsey withdrew $15,000 of the funds.
• Purchased for $80,000 a paid-up insurance policy on his life (maturity value of $500,000). Carl designated Lindsey as the beneficiary.
• Paid $13,400 to a college for his niece’s tuition and $6,000 for her room and board. The niece is not Carl’s dependent.
• Gave his aunt $52,000 for her heart bypass operation. The aunt is not Carl’s dependent.
What are Carl’s taxable gifts for the current year?
36. LO.4, 7 In May 2015, Dudley and Eva enter into a property settlement preparatory to the dissolution of their marriage. Under the agreement, Dudley is to pay
Eva $6 million in satisfaction of her marital rights. Of this amount, Dudley pays $2.5 million immediately, and the balance is due one year later. The parties are divorced in July. Dudley dies in December, and his estate pays Eva the remaining $3.5 million in May 2016. Discuss the tax ramifications of these transactions to the parties involved.
37. LO.4 Jesse dies intestate (i.e., without a will) in May 2015. Jesse’s major asset is a tract of land. Under applicable state law, Jesse’s property will pass to
Lorena, who is his only child. In December 2015, Lorena disclaims one-half of the property. In June 2016, Lorena disclaims the other half interest. Under state law, Lorena’s disclaimer results in the property passing to Arnold (Lorena’s only child). The value of the land (in its entirety) is as follows: $2 million in May
2015, $2.1 million in December 2015, and $2.2 million in June 2016. Discuss the transfer tax ramifications of these transactions.
38. LO.5 Using property she inherited, Myrna makes a gift of $6.2 million to her adult daughter, Doris. The gift takes place in 2016. Neither Myrna nor her husband,
Greg, has made any prior taxable gifts. Determine the gift tax liability if:
a. The § 2513 election to split gifts is not made.
b. The § 2513 election to split gifts is made.
c. What are the tax savings from making the election?
39. LO.6, 7 At the time of his death this year on September 4, Kenneth owned the following assets.
Fair Market Value
City of Boston bonds $2,500,000
Stock in Brown Corporation 900,000
Promissory note issued by Brad (Kenneth’s son) 600,000
In October, the executor of Kenneth’s estate received the following: $120,000 interest on the City of Boston bonds ($10,000 accrued since September 4) and a $7,000 cash dividend on the Brown stock (date of record was September 5). The declaration date on the dividend was August 12.
The $600,000 loan was made to Brad in late 2010, and he used the money to create a very successful business. The note was forgiven by Kenneth in his will.
What are the estate tax consequences of these transactions?
40. LO.6 At the time of her death on September 4, 2016, Alicia held the following assets.
Fair Market Value
Bonds of Emerald Tool Corporation $ 900,000
Stock in Drab Corporation 1,100,000
Insurance policy (face amount of $400,000) on the life of her father, Mitch 80,000*
Traditional IRAs 300,000 * Cash surrender value.
Alicia was also the life tenant of a trust (fair market value of $2 million) created by her late husband Bert. (The executor of Bert’s estate had made a QTIP election.) In
October, Alicia’s estate received an interest payment of $11,500 ($6,000 accrued before September 4, 2016) paid by Emerald and a cash dividend of $9,000 from Drab.
The Drab dividend was declared on August 19 and was payable to date of record shareholders on September 3, 2016. Although Mitch survives Alicia, she is the designated beneficiary of the policy. The IRAs are distributed to Alicia’s children. What amount is included in Alicia’s gross estate?
41. LO.6 Assume the same facts as in Problem 40 with the following modifications.
• Mitch is killed in a rock slide while mountain climbing in November 2016, and the insurer pays Alicia’s estate $400,000.
• Bert’s executor did not make a QTIP election.
• Alicia’s IRAs were the Roth type (not traditional).
• The record date for the Drab Corporation dividend is September 5, 2016 (not
September 3, 2016).
• On November 7, 2016, Alicia’s estate receives from the IRS an $8,000 income tax refund on the taxes she paid for the preceding calendar year.
What amount is included in Alicia’s gross estate?
42. LO.6, 7 At the time of Matthew’s death, he was involved in the following transactions.
• Matthew was a participant in his employer’s contributory qualified pension plan.
The plan balance of $2 million is paid to Olivia, Matthew’s daughter and beneficiary.
The distribution consists of the following.
Employer contributions $900,000
Matthew’s after-tax contributions 600,000
Income earned by the plan 500,000
• Matthew was covered by his employer’s group term life insurance plan for employees.
The $200,000 proceeds are paid to Olivia, the designated beneficiary.
a. What are the estate tax consequences?
b. The income tax consequences?
c. Would the answer to part (a) change if Olivia was Matthew’s surviving spouse (not his daughter)? Explain.
43. LO.4, 6 Before her death in early 2016, Katie made the following transfers.
• In 2008, purchased stock in Green Corporation for $200,000, listing title as follows: “Katie, payable on proof of death to my son Travis.” Travis survives Katie, and the stock is worth $300,000 when Katie dies.
• In 2014, purchased an insurance policy on her life for $200,000, listing Paul, another of Katie’s sons, as the designated beneficiary. The policy has a maturity value of $1 million and was immediately transferred to Paul as a gift.
• In 2014, made a gift of land (basis of $300,000; fair market value of $1.3 million) to Adriana, Katie’s only daughter. As a result of the transfer, Katie paid a gift tax of $150,000. The value of the land is still $1.3 million at Katie’s death.
• In 2014, established a savings account with Noah, her grandfather. Title to the account was listed as “Katie and Noah, joint tenants with right of survivorship.”
Of the $200,000 deposited in the account, Katie furnished $20,000 and Noah contributed the balance. At Katie’s death, the balance was $206,000.
As to these transfers, how much is included in Katie’s gross estate?
44. LO.4, 6, 7 In 2005, using $2.5 million in community property, Quinn creates a trust, life estate to his wife, Eve, and remainder to their children. Quinn dies in
2011 when the trust is worth $3.6 million, and Eve dies in 2016 when the trust is worth $5.6 million.
a. Did Quinn make a gift in 2005? Explain.
b. How much, if any, of the trust is included in Quinn’s gross estate in 2011?
c. How much, if any, of the trust is included in Eve’s gross estate in 2016?
d. Would any of the above answers change if Quinn had used his separate property (rather than community property) when he created the trust? Explain.
45. LO.6, 9 At the time of his death, Garth held a life estate in the Myrtle Trust with the remainder passing to Garth’s adult children. The trust was created by
Myrtle (Garth’s mother) in 1984 with securities worth $900,000. The Myrtle Trust had a value of $4.7 million when Garth died. Discuss the estate tax ramifications as to Garth.
46. LO.6 At the time of his death on July 9, 2016, Aiden was involved in the following real estate.
Fair Market Value (on July 9, 2016)
Apartment building $2,100,000
Tree farm 1,500,000
Pastureland 750,000
Residence 900,000
The apartment building was purchased by Chloe, Aiden’s mother, and is owned in a joint tenancy with her. The tree farm and pastureland were gifts from Chloe to Aiden and his two sisters. The tree farm is held in joint tenancy, and the pastureland is owned as tenants in common. Aiden purchased the residence and owns it with his wife as tenants by the entirety. How much is included in Aiden’s gross estate based on the following assumptions?
a. Aiden dies first and is survived by Chloe, his sisters, and his wife.
b. Aiden dies after Chloe, but before his sisters and his wife.
c. Aiden dies after Chloe and his sisters, but before his wife.
d. Aiden dies last (i.e., he survives Chloe, his sisters, and his wife).
47. LO.4, 6, 7 In 2002, Gordon purchased real estate for $900,000 and listed title to the property as “Gordon and Fawn, joint tenants with right of survivorship.”
Gordon predeceases Fawn in 2016 when the real estate is worth $2.9 million.
Gordon and Fawn are brother and sister.
a. Did a gift occur in 2002? Explain.
b. What, if any, are the estate tax consequences in 2016?
c. Under part (b), would your answer change if it was Fawn (not Gordon) who died in 2016? Explain.
48. LO.4, 6, 7 Assume the same facts as in Problem 47, except that Gordon and Fawn are husband and wife (not brother and sister).
a. What are the gift tax consequences in 2002?
b. What are the estate tax consequences in 2016?
c. Under part (b), would your answer change if it was Fawn (not Gordon) who died in 2016? Explain.
49. LO.5, 6, 7 In each of the independent situations below, determine the transfer tax (i.e., estate and gift) consequences of what has occurred. (In all cases, assume that Gene and Mary are married and that Ashley is their daughter.)
a. Mary purchases an insurance policy on Gene’s life and designates Ashley as the beneficiary. Mary dies first, and under her will, the policy passes to Gene.
b. Gene purchases an insurance policy on his life and designates Ashley as the beneficiary. Gene gives the policy to Mary and continues to pay the premiums thereon. Two years after the gift, Gene dies first, and the policy proceeds are paid to Ashley.
c. Gene purchases an insurance policy on Mary’s life and designates Ashley as the beneficiary. Ashley dies first one year later.
d. Assume the same facts as in part (c). Two years later, Mary dies. Because Gene has not designated a new beneficiary, the insurance proceeds are paid to him.
e. Gene purchases an insurance policy on his life and designates Mary as the beneficiary. Gene dies first, and the policy proceeds are paid to Mary.
50. LO.7 While vacationing in Florida in November 2016, Sally was seriously injured in an automobile accident (she died several days later). How are the following transactions handled for tax purposes?
a. Bruce, Sally’s son and executor, incurred $6,200 in travel expenses in flying to Florida, retrieving the body, and returning it to Frankfort, Kentucky, for burial.
b. Early in 2016, Sally had pledged $50,000 to the building fund of her church.
Bruce paid this pledge from the assets of the estate.
c. Prior to her death, Sally had promised to give her nephew, Gary, $20,000 when he passed the bar exam. Gary passed the exam in late 2016, and Bruce kept
Sally’s promise by paying him $20,000 from estate assets.
d. At the scene of the accident and before the ambulance arrived, someone took
Sally’s jewelry (i.e., Rolex watch and wedding ring) and money. The property (valued at $33,000) was not insured and was never recovered.
e. As a result of the accident, Sally’s auto was totally destroyed. The auto had a basis of $52,000 and a fair market value of $28,000. In January 2017, the insurance company pays Sally’s estate $27,000.
51. LO.7 Roy dies and is survived by his wife, Marge. Under Roy’s will, all of his otherwise uncommitted assets pass to Marge. Based on the following property interests, determine the marital deduction allowed to Roy’s estate.
a. Timberland worth $1.2 million owned by Roy, Marge, and Amber (Marge’s sister) as equal tenants in common. Amber furnished the original purchase price.
b. Residence of Roy and Marge worth $900,000 owned by them as tenants by the entirety with right of survivorship. Roy provided the original purchase price.
c. Insurance policy on Roy’s life (maturity value of $1 million) owned by Marge and payable to her as the beneficiary.
d. Insurance policy on Roy’s life (maturity value of $500,000) owned by Roy with
Marge as the designated beneficiary.
e. Distribution from a qualified pension plan of $1.6 million (Roy matched his employer’s contribution of $500,000) with Marge as the designated beneficiary.
52. LO.8 On the advice of her estate planner, Grace made taxable gifts of $5 million in
2011. Grace dies in late 2016 leaving a taxable estate of $1.1 million. Grace has always been single and never made any taxable gifts before 2011. Determine her estate tax liability.
53. LO.8 Under Rowena’s will, Mandy (Rowena’s sister) inherits her property. One year later, Mandy dies. Based on the following independent assumptions, what is
Mandy’s credit for the tax on prior transfers?
a. The estate tax attributable to the inclusion of the property in Rowena’s gross estate is $700,000, and the estate tax attributable to the inclusion of the property in Mandy’s gross estate is $800,000.
b. The estate tax attributable to the inclusion of the property in Rowena’s gross estate is $1.2 million, and the estate tax attributable to the inclusion of the property in Mandy’s gross estate is $1.1 million.
c. Would your answers to parts (a) and (b) change if Mandy died seven years (rather than one year) after Rowena?