Evaluate Estate And Gift Taxes - Series 65

1. Identify what a "taxable gift" means for federal gift tax purposes.

   Gift amount exceeding exclusions and deductions for the year. Taxable gifts are calculated after subtracting the annual exclusion and any applicable deductions, forming the base for gift tax liability.

2. Which payments are excluded from gift tax when paid directly to the provider for someone else?

   Direct tuition payments and direct medical payments. These payments are exempt to support education and health without triggering gift tax, provided they are made directly to the institution or provider.

3. What is the basic rule for valuing a gift for gift tax purposes?

   Fair market value at the date of the gift. FMV determines the gift's value for tax purposes, reflecting the amount that would be exchanged between willing parties.

4. Identify what the federal estate tax exemption (applicable exclusion amount) represents.

   Amount transferable free of estate tax, reduced by lifetime taxable gifts. The exemption shields a portion of transfers from tax, adjusted for prior gifts to maintain unified taxation across lifetime and death.

5. Calculate total annual-exclusion gifts: married couple gift-splits $36,000$ to one child in a year with $18,000$ exclusion.

   $0$ taxable gift (treated as $18,000$ from each spouse). Splitting allows each spouse to use their full exclusion, covering the entire gift without exceeding individual limits.

6. What is the key requirement for a gift to qualify for the annual exclusion?

   It must be a present-interest gift (immediate use/enjoyment). The exclusion applies only to gifts where the recipient has immediate rights, ensuring it's not a future interest that could defer taxation.

7. What is the "three-year rule" commonly tested for life insurance and estate inclusion?

   Insurance transferred within $3$ years of death is pulled back into the estate. This rule claws back transfers to deter deathbed planning, including the policy's value in the estate if transferred recently.

8. What is the income tax basis rule for property received from a decedent (inheritance)?

   Basis is stepped up (or down) to fair market value at death. Step-up basis resets the value at death, eliminating unrealized capital gains tax for heirs on inherited assets.

9. What is "portability" of the estate tax exemption between spouses?

   A surviving spouse may use the deceased spouse's unused exemption (DSUE). Portability preserves the unused exemption for the survivor, enhancing estate planning flexibility for married couples.

10. What is the relationship between the federal gift tax and estate tax under the unified transfer tax system?

    They are unified; lifetime taxable gifts reduce the estate tax exemption. The unified system integrates gift and estate taxes, applying cumulative lifetime transfers against the exemption to prevent tax avoidance through gifting.

11. Identify the consent requirement for gift splitting on federal gift tax returns.

    Both spouses must consent (typically by filing/consenting on Form 709). Consent ensures both spouses agree to the splitting, reported on the gift tax return to comply with IRS requirements.

12. What is "gift splitting" for married couples for federal gift tax purposes?

    Treat a gift by one spouse as made $\frac{1}{2}$ by each spouse. Gift splitting doubles the annual exclusion for couples, treating the gift as equally divided to maximize tax-free transfers.

13. What is the purpose of the unified credit in transfer taxation?

    It offsets transfer tax; effectively shelters transfers up to the exemption. The credit equals the tax on the exemption amount, effectively exempting transfers up to that threshold from gift or estate tax.

14. Identify the taxable gift: $10,000$ paid directly to a university for tuition plus $18,000$ cash to the student.

    $0$ taxable gift (tuition excluded; cash covered by annual exclusion). Unlimited exclusions for direct tuition and medical payments, combined with the annual exclusion, eliminate tax on these transfers.

15. What is the general rule for the charitable deduction in gift and estate taxation?

    Qualified transfers to charities are fully deductible (no limit). This deduction encourages philanthropy by allowing full subtraction of qualified charitable gifts from the taxable amount without caps.

16. What is the unlimited marital deduction rule for gifts between spouses (both U.S. citizens)?

    Unlimited transfers to a U.S.-citizen spouse are deductible. The deduction promotes spousal wealth transfer without tax, applicable only if both are U.S. citizens to align with estate planning goals.

17. What is "gross estate" in federal estate taxation?

    All property interests owned or controlled at death (broad inclusion). The gross estate encompasses all assets to ensure comprehensive taxation of wealth transfers at death.

18. What is the donor's income tax basis rule for property received by gift (general carryover rule)?

    Donee generally takes the donor's carryover basis. Carryover basis preserves the donor's adjusted basis, preventing income tax avoidance on appreciated property through gifting.

19. What is the difference between gross estate and taxable estate?

    Taxable estate = gross estate minus deductions (marital, charity, debts). Deductions reduce the gross estate to arrive at the taxable amount, accounting for allowable subtractions like debts and transfers.

20. What is the general estate tax treatment of jointly held property at death (non-spouse joint tenants)?

    Generally $100\%$ included unless survivor proves contribution. Full inclusion assumes the decedent funded the property, shifting the burden to the survivor to prove otherwise for exclusion.

21. Identify the general rule for including life insurance in the gross estate.

    Included if payable to the estate or if decedent had incidents of ownership. Inclusion prevents estate tax avoidance by capturing policies under the decedent's control or benefiting the estate.

22. What action is generally required to elect portability for a surviving spouse?

    Timely file an estate tax return to elect portability and claim DSUE. Filing is necessary to compute and transfer the DSUE amount, ensuring the survivor can apply it to future transfers.

23. Identify the basis rule applied: stock gifted with donor basis $5,000$ and FMV $12,000$ at gift date (general rule).

    Donee basis is $5,000$ (carryover basis). The general rule applies carryover basis when FMV exceeds donor's basis, preserving potential capital gains for the donee.

24. What is the annual gift tax exclusion amount per donee (current law commonly tested)?

    $18,000$ per donee per year. This exclusion allows tax-free gifts up to the indexed amount per recipient annually, reducing the donor's taxable transfers.

25. Calculate the taxable gift: $30,000$ cash gift to one person in a year with $18,000$ annual exclusion.

    $12,000$ taxable gift. The taxable portion is the excess over the annual exclusion, subjecting only the remainder to gift tax calculation.

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