Taxation in Estate Planning Flashcards

A decedent's estate includes a closely held business valued at $5 million out of a $10 million gross estate. Which IRC section may allow the estate to pay the estate tax in installments over up to 14 years?

Answer: IRC §6166

IRC §6166 allows estates where a closely held business exceeds 35% of the adjusted gross estate to pay the attributable estate tax in installments over up to 14 years.

The three-year rule under IRC §2035 requires inclusion in the gross estate of life insurance policies transferred within three years of death primarily to prevent:

Answer: Deathbed transfers designed to avoid estate tax on life insurance proceeds

IRC §2035 recaptures life insurance policies transferred within three years of death into the gross estate to prevent deathbed transfers intended to exploit the ILIT exclusion.

In a net gift arrangement, the donee agrees to pay the gift tax due on the transfer. This reduces the taxable gift because:

Answer: The gift tax paid by the donee is subtracted from the gift's fair market value

Because the donee's assumption of the gift tax liability reduces what the donor actually transfers, the taxable gift equals the FMV of the property minus the gift tax paid by the donee.

Under IRC §2503(c), a trust qualifies for the annual gift tax exclusion for transfers to minors if the assets must be distributed to the minor by age:

Answer: 21

A §2503(c) minor's trust must provide that the trust property and its income may be expended for the minor's benefit and must pass to the minor at age 21 to qualify for the annual exclusion.

Which of the following correctly describes the income tax basis of inherited property under the stepped-up basis rules?

Answer: The heir's basis is the fair market value of the property on the date of death

Under IRC §1014, inherited property receives a basis equal to its fair market value on the date of death, eliminating income tax on appreciation that occurred during the decedent's lifetime.

A dynasty trust is designed to last for multiple generations primarily to avoid which tax?

Answer: Generation-skipping transfer (GST) tax on repeated transfers

By allocating GST exemption to a dynasty trust at inception, assets can pass through multiple generations without incurring GST tax each time they transfer.

Which of the following transfers is subject to both gift tax and GST tax simultaneously?

Answer: A direct skip to a grandchild

A direct skip—a transfer directly to a skip person such as a grandchild—triggers both gift tax (or estate tax) and GST tax on the same transfer.