In 2026, a client transfers $100,000 to an irrevocable trust for her adult daughter. The trust gives the daughter the right to withdraw any contribution for 30 days after it is made; after that, the trustee holds the assets until the daughter reaches age 40. The annual gift tax exclusion is $19,000, and the lifetime estate and gift tax exemption is $15,000,000.
Which statement is correct regarding the gift tax consequences of the transfer? Answer: The transfer is a present interest gift to the extent of the withdrawal right, so $19,000 is excluded and $81,000 is a taxable gift.
IRC § 2503(b). A gift to a trust qualifies for the annual exclusion only if it is a gift of a present interest. The daughter's 30-day withdrawal right (a Crummey power) makes the transfer a present interest gift to the extent of the right, so $19,000 is covered by the annual exclusion and the remaining $81,000 is a taxable gift, although the lifetime exemption eliminates any tax. The future-interest option ignores the withdrawal right. The option excluding the entire $100,000 confuses the lifetime exemption with the annual exclusion: the exemption shelters the tax on the taxable gift but does not prevent the gift from being taxable. The option deferring completion until withdrawal misstates the completed-gift rule; the transfer is complete when made.
In 2026, a client owns a $2,000,000 life insurance policy on her own life. Her son is the named beneficiary, and the client retains the right to change the beneficiary and to borrow against the policy's cash value. Her other assets total $10,000,000. The estate and gift tax exemption is $15,000,000.
Upon the client's death, which statement is correct regarding the $2,000,000 of life insurance proceeds? Answer: The proceeds are included in the gross estate because the client possessed incidents of ownership, and the son receives them tax-free.
IRC § 2042(2) and § 101(a). Because the client can change the beneficiary and borrow against the cash value, she possesses incidents of ownership, so the proceeds are included in her gross estate. Life insurance death benefits are excluded from the beneficiary's gross income, so the son receives the $2,000,000 income-tax-free. The probate-avoidance option confuses probate with estate tax inclusion. The option taxing the excess over premiums applies annuity taxation to life insurance. The exemption option confuses estate tax liability with includibility: the proceeds are included in the gross estate even if the exemption ultimately eliminates the tax.
In 2026, a married client gives $38,000 to her adult son and $38,000 to her adult daughter. Her spouse consents to gift splitting. The annual gift tax exclusion is $19,000 per donee, and the lifetime estate and gift tax exemption is $15,000,000.
Which statement is correct regarding the gift tax consequences of these transfers? Answer: No taxable gift results, but the spouses must file a gift tax return to elect gift splitting.
IRC § 2513 (gift splitting) and § 2503(b) (annual exclusion). With a valid gift-splitting election, each spouse is treated as making one-half of each gift — $19,000 to the son and $19,000 to the daughter. Because the annual exclusion applies per donee, each spouse's $38,000 of deemed gifts is fully covered and no taxable gift results. The election, however, is effective only if the spouses file a gift tax return (Form 709) consenting to split the gifts, even though no tax is due. The option saying no return is required ignores the filing requirement that accompanies the election. The option attributing a $19,000 taxable gift to each spouse applies the exclusion once per donor rather than once per donee. The option charging the client with a $38,000 taxable gift ignores the consenting spouse's election entirely.
A client dies in 2026, leaving her entire $8,000,000 estate to her husband. The estate and gift tax exemption is $15,000,000.
Which statement is correct regarding the estate tax consequences? Answer: The transfer is sheltered by the unlimited marital deduction, but the unused exclusion is preserved only if the executor elects portability on an estate tax return.
IRC § 2056 and § 2010(c). A bequest to a surviving spouse qualifies for the unlimited marital deduction, so the estate owes no tax. The deceased spouse's unused exclusion is not transferred automatically; the executor must file an estate tax return and elect portability, and a return may be filed for that purpose even when no tax is due. The option claiming automatic receipt ignores the election requirement. The option claiming a return may not be filed when no tax is due is wrong because a return may be filed solely to elect portability. The option asserting estate tax is due ignores the marital deduction, which applies to bequests at death as well as to lifetime gifts between spouses.
In 2026, a married couple contributes $190,000 to a 529 college savings plan for their grandchild. The annual gift tax exclusion is $19,000 per donee, and the lifetime estate and gift tax exemption is $15,000,000. The couple plans to elect gift splitting and the special five-year election for 529 contributions.
Which statement is correct regarding the gift tax consequences of the contribution? Answer: Each spouse is treated as contributing $95,000, fully covered by the five-year election, so no taxable gift results; a return is required to make the election.
IRC § 529(c)(2)(B) and § 2513. A donor may elect to treat a 529 contribution of up to five times the $19,000 annual exclusion ($95,000) as made ratably over five years. With gift splitting, each spouse is treated as contributing one-half of the $190,000, or $95,000, so each spouse's contribution is fully covered and no taxable gift results. The election is made on a gift tax return, so the option denying a return requirement is wrong. The option excluding only $38,000 applies the current-year exclusion without the five-year election. The future-interest option is wrong because a 529 contribution is a completed gift of a present interest.
- In 2026, which of the following statements regarding the federal gift tax treatment of payments made for the benefit of another person is true?
Answer: A payment made directly to a university for a student's tuition is not a taxable gift and does not reduce the donor's annual exclusion or lifetime exemption.
IRC § 2503(e) provides that a payment made directly to an educational organization for tuition, or directly to a provider for medical care, is not treated as a gift, so it does not consume the annual exclusion or the lifetime exemption. The statement that a direct medical payment is excluded only to the extent it exceeds the $19,000 annual exclusion is backwards: the entire payment is excluded, not merely the excess. The statement that the exclusion covers room and board and textbooks overstates the rule, which is limited to tuition. The statement that the exclusion applies only to dependents or immediate family is wrong; § 2503(e) has no relationship requirement.
In 2026, a client gives her brother stock that she purchased for $60,000. The stock is worth $40,000 on the date of the gift. No gift tax is paid on the transfer. The brother sells the stock three months later for $45,000.
Which statement correctly describes the brother's recognized gain or loss on the sale? Answer: He recognizes no gain or loss on the sale.
IRC § 1015(a). For gifted property whose fair market value at the date of the gift is below the donor's basis, the donee's basis for computing gain is the donor's basis ($60,000), and the basis for computing loss is the fair market value ($40,000). Because the $45,000 sale price falls between the two bases, the brother recognizes neither a gain nor a loss. The $5,000 loss option applies the fair market value basis for loss, but that basis produces a loss only when the sale price is below $40,000. The $15,000 loss option uses the donor's basis to compute a loss, which the statute disallows. The $5,000 gain option uses the fair market value basis to compute a gain, which the statute also disallows.
- Under federal income tax law, which of the following statements regarding the basis of appreciated securities transferred by gift or by inheritance is true?
Answer: A donee who receives appreciated securities by gift takes the donor's carryover basis, while an heir who inherits securities generally takes a basis equal to their fair market value at the decedent's death.
IRC § 1014 generally gives property acquired from a decedent a basis equal to its fair market value at death, while IRC § 1015 generally gives property acquired by gift the donor's carryover basis. The statement that a donee takes the carryover basis and an heir takes fair market value at death states both rules correctly. The statement that a donee takes fair market value while an heir also takes fair market value is wrong only as to gifts: a donee generally takes the donor's basis, so a sale of appreciated gift property produces gain measured from that carryover basis. The statement that both transfers use the transferor's adjusted basis ignores the step-up in basis for inherited property and confuses the nontaxable nature of the transfer with the separate basis rules. The statement that both transfers produce a stepped-up basis ignores the carryover rule for gifts; a donee who sells appreciated gift property recognizes gain measured from the donor's basis.
- In 2026, the federal gift tax annual exclusion is $19,000. Which of the following statements regarding the exclusion is true?
Answer: A donor may give $19,000 to each of any number of donees without using the unified credit, and the exclusion applies only to completed gifts of a present interest.
IRC § 2503(b) sets the 2026 gift tax annual exclusion at $19,000 per donee, and it applies only to completed gifts of a present interest. A donor may use the exclusion for each donee, so the statement that a donor may give $19,000 to each of any number of donees is correct. The statement that the donor is limited to $19,000 in total gifts misstates the per-donee structure and also misstates the tax result: gifts above the exclusion are taxable gifts that consume the unified credit rather than being immediately taxed. The statement that gifts to trusts can never qualify ignores the Crummey power, which can give a trust beneficiary a present interest. The statement that a tuition payment made directly to the school counts against the annual exclusion is wrong because IRC § 2503(e) excludes qualified tuition payments entirely.
In 2026, a client gives $19,000 to each of her three children and $30,000 to a friend. The annual gift tax exclusion is $19,000 per donee, and the lifetime estate and gift tax exemption is $15,000,000.
Which statement is correct regarding the client's gift tax consequences? Answer: The client has a taxable gift of $11,000, and a gift tax return is required even though no gift tax is due.
IRC § 2503(b) and § 6019. The annual exclusion applies per donee, so the three $19,000 gifts to the children are fully excluded. The $30,000 gift to the friend exceeds the exclusion by $11,000, making that amount a taxable gift; because the taxable gift is within the $15,000,000 exemption, no gift tax is due. A gift tax return is required whenever a gift to a donee exceeds the annual exclusion, regardless of whether the exemption eliminates the tax. The option computing a $68,000 taxable gift applies the exclusion once to all gifts for the year rather than once per donee. The option treating the full $30,000 as taxable ignores the annual exclusion. The option waiving the return because no tax is due misstates the filing requirement.
In 2026, a client receives stock from her mother. The mother's adjusted basis in the stock was $30,000, and the stock was worth $90,000 on the date of transfer. No gift tax was paid. The client sells the stock six months later for $100,000.
If the transfer was a lifetime gift, how does the client's recognized gain or loss compare with the result if she had instead inherited the stock at a date-of-death value of $90,000? Answer: A $70,000 gain if the stock was gifted; a $10,000 gain if it was inherited.
IRC § 1015(a) governs the basis of property acquired by gift; IRC § 1014 governs property acquired from a decedent. A donee takes the donor's carryover basis ($30,000), so a sale at $100,000 produces a $70,000 gain. An heir takes a stepped-up basis equal to the date-of-death value ($90,000), so the same sale produces a $10,000 gain. The option that assigns a $10,000 gain to the gift and a $70,000 gain to the inheritance swaps the carryover and step-up rules. The option showing a $70,000 gain in both cases applies carryover basis to inherited property. The option showing a $10,000 gain in both cases applies date-of-gift value basis to gifted property. The six-month holding period affects only whether the gain is long-term, not its amount.
In 2026, a client owns stock worth $100,000 with an adjusted basis of $20,000. He wants to give his adult daughter $100,000 toward a home purchase, and she will sell the stock immediately. The client's long-term capital gains rate is 20%; the daughter's is 0%. The annual gift tax exclusion is $19,000, and the lifetime estate and gift tax exemption is $15,000,000.
Which statement is correct if the client transfers the stock to the daughter by gift rather than selling it himself and giving her the cash? Answer: The daughter takes the client's $20,000 basis, recognizes the $80,000 gain on sale, and the client has an $81,000 taxable gift with no gift tax due.
IRC §§ 1015, 2501, and 2503. A gift of appreciated property does not trigger gain to the donor and does not step up the donee's basis. The daughter takes the $20,000 carryover basis and recognizes the $80,000 appreciation when she sells. For gift tax purposes the transfer is valued at fair market value ($100,000), so after the $19,000 annual exclusion the client has a taxable gift of $81,000, which is within the $15,000,000 exemption. The step-up option applies the inheritance basis rule to a gift. The option recognizing gain at the time of the gift misstates the realization rule. The option valuing the gift at the donor's basis confuses income tax basis with gift tax value.
- Assume the federal estate and gift tax exemption amount is $15,000,000 for 2026. Which of the following statements regarding the unified transfer tax system is true?
Answer: A donor who makes $2,000,000 of taxable gifts during life will have $13,000,000 of exemption remaining for later gifts and estate assets, because lifetime gifts and the estate share one exemption.
IRC §§ 2010 and 2505 provide one exemption shared by lifetime gifts and the estate at death; the 2026 estate and gift exemption is $15,000,000. A donor who uses $2,000,000 of that exemption for taxable gifts has $13,000,000 remaining. The statement that a donor may use $15,000,000 for lifetime gifts and still leave another $15,000,000 at death treats the gift and estate exemptions as separate; they are unified. The statement that a married couple is limited to a combined $15,000,000 exemption confuses the per-person exemption with portability: each spouse has a $15,000,000 exemption, and portability lets the surviving spouse use the deceased spouse's unused portion. The statement that the exemption applies only at death ignores that it also shelters lifetime taxable gifts; the annual exclusion is a separate per-donee exclusion.
- Under federal estate tax law, which of the following statements regarding the treatment of life insurance death benefits is true?
Answer: The full death benefit is included in the insured's gross estate if the insured held any incidents of ownership at death, such as the right to change the beneficiary.
IRC § 2042 includes the full death benefit in the insured's gross estate when the insured held incidents of ownership at death, such as the right to change the beneficiary, borrow against the policy, or surrender it. The statement that only proceeds payable to the estate or a revocable trust are included misstates the test: the beneficiary designation does not control when incidents of ownership exist, and avoiding probate does not avoid estate tax. The statement that only cash surrender value is included confuses the policy's living value with the death benefit that § 2042 reaches. The statement that proceeds paid to an irrevocable trust are always excluded is overbroad: the IRC § 2035 look-back rule can pull a recently transferred policy back into the estate, and the insured may still hold an incident of ownership.
- In 2026, which of the following statements regarding the federal gift and estate tax marital deduction is true?
Answer: Transfers between spouses who are both U.S. citizens qualify for an unlimited marital deduction for gift and estate tax purposes, so no transfer tax is imposed on those transfers.
IRC § 2056 (estate tax) and § 2523 (gift tax) allow an unlimited marital deduction for transfers to a U.S. citizen spouse, so no transfer tax is imposed regardless of the amount. The statement that the deduction is capped at $15,000,000 confuses the marital deduction with the unified exemption; the deduction is unlimited in amount. The statement that the deduction applies only at death is wrong because the gift tax marital deduction is equally unlimited for lifetime transfers to a U.S. citizen spouse. The statement that the deduction is available to a non-citizen spouse is wrong: the unlimited deduction is reserved for U.S. citizens, and estate-tax transfers to a non-citizen spouse qualify only through special rules such as a qualified domestic trust (QDOT).
