# Taxation

40 Roland had a taxable estate of \$4.5 million when he died this year.  Calculate the amount of estate tax due (if any) under the following alternatives.

a.     Roland’s prior taxable gifts consist of a taxable gift of \$1 million in 2005.

b.    Roland’s prior taxable gifts consist of a taxable gift of \$1.5 million in 2005.

c.     Roland’s prior taxable gifts consist of a taxable gift of \$2 million made in 2007 (within three years of his death).

41

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 nephew’s 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.

42

This year Gerry’s friend, Dewey, was disabled.  Gerry paid \$15,000 to Dewey’s doctor for medical expenses and paid \$12,500 to StateUniversity for college tuition for Dewey’s son.  Has Gerry made taxable gifts, and if so, in what amounts?

43.     [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?

44.     [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?

45.     [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 and remainder if Robin’s age and the prevailing interest rate result in a Table S discount factor for the remainder of 0.27.

46.     [LO 3]  This year Jim created an irrevocable trust to provide for Ted, his 32-year-old nephew, and Ted’s 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 Ted’s 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.

47.       [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?

48.     [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 in 2010 if he makes the maximum gifts eligible for the annual exclusion, assuming he is single?

49.     [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 Tom’s 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?

50.     [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, Steve’s life estate was valued at \$65,000 and the remainder at \$15,000.  What is the amount, if any, of David’s taxable gifts?

51.     [LO 3]  Stephen transferred \$15,000 to an irrevocable trust for Graham.  The trustee has the discretion to distribute income or corpus for Graham’s benefit but is required to distribute all assets to Graham (or his estate) not later than Graham’s 21st birthday.  What is the amount, if any, of the taxable gift?

52.     [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 in 2010 and, if so, in what amounts?  Does it matter if Marty is married to Wendy and they live in a community property state?

53.     [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.

54.     [LO 3]  In 2010 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.

55.     [LO 3]  Red transferred \$5,000,000 of cash to StateUniversity for a new sports complex.  Calculate the amount of the taxable gift.

56.     [LO 3]  Casey gave \$500,000 of stock to both Stephanie and Linda in 2005, 2006, and 2007.  Calculate the amount of gift tax due and the marginal gift tax rate on the next \$1 of taxable transfers under the following conditions.

a.     In 2005 the annual exclusion was \$11,000.  Casey was not married and has never made any other gifts.

b.    In 2006 the annual exclusion was \$12,000.  Casey was not married and the 2005 gift was the only other gift he has made.

c.     In 2007 the annual exclusion was \$12,000.  Casey was married prior to the date of the gift.  He and his spouse Helen live in a common law state and have elected to gift-split.  Helen has never made a taxable gift, and Casey’s only other taxable gifts were the gifts in 2005 and 2006.

57.     [LO 4] {Planning}  Jones is seriously ill and has \$2,000,000 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 Jones save if he dies after three years, during which time the property appreciates to \$2,200,000?

58      [LO 4]  In 2010 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?

59.     [LO 4] {Research}  Several years ago Doug invested \$21,000 in stock.  In 2010 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.

60.          [LO 4]  Roberta is considering making annual gifts of \$13,000 of stock each to each of her four children.  She expects to live another five years and to leave a taxable estate worth approximately \$1,000,000.  She requests you justify the gifts by estimating her estate tax savings from making the gifts.

61.     [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 \$10 million and leaves it all to Harold. He dies several years later, leaving the entire \$10 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 \$4 million to her children and the remaining \$6 million to Harold.  Ignore all credits in this problem except for the unified credit.

Comprehensive Problems

62.     {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.

63.     Hank possessed a life insurance policy worth \$50,000 that will pay his two children a total of \$400,000 upon his death.  In 2006 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 2006 gift, given Hank has made only one prior taxable gift of \$1.5 million in 2005.
b.  Estimate the amount of estate tax due if Hank were to die more than three years after transferring the insurance policy.  At the time of his death, Hank estimates he will have a probate estate of \$10 million to be divided in equal shares between his two children.

c.     Estimate the amount of estate tax due if Hank were to die within three years of transferring the insurance policy.  At the time of his death, Hank estimates he will have a probate estate of \$10 million to be divided in equal shares between his two children.

64.     Jack made his first taxable gift of \$1,000,000 in 1997, at which time the unified credit was \$192,800.  Jack made no further gifts until 2005, at which time he gave \$250,000 each to his three children and an additional \$100,000 to StateUniversity (a charity).  The annual exclusion in 2005 was \$11,000.  Recently Jack has been in poor health and would like you to estimate his estate tax should he die this year.  He estimates his taxable estate (after deductions) will be worth \$5.4 million at his death.  Assume Jack is single and has paid the proper amounts of tax in past years.

65.     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 Montgomery’s estate.  The trust is an irrevocable trust created by Montgomery’s brother 10 years ago and contains assets currently valued at \$800,000.  The income from the trust is payable to Montgomery’s 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.