CTC Estate & Gift Tax Planning 1 — Questions and Answers
Question 1: What is the primary purpose of the annual gift tax exclusion under the IRC?
- To allow taxpayers to transfer wealth tax-free up to a specified amount per recipient per year without using their lifetime exemption (Correct answer)
- To eliminate gift taxes on transfers made to qualified charitable organizations
- To provide a deduction for gifts made to political action committees
- To allow unlimited tax-free transfers between legally married spouses
Correct answer: To allow taxpayers to transfer wealth tax-free up to a specified amount per recipient per year without using their lifetime exemption
The annual gift tax exclusion permits donors to give up to the inflation-adjusted threshold per recipient per year without triggering gift tax or reducing the donor's lifetime applicable exclusion amount.
Question 2: Which of the following transfers qualifies for the unlimited marital deduction?
- A bequest to a surviving spouse who is a U.S. citizen (Correct answer)
- A bequest to a surviving spouse who is a non-citizen permanent resident
- A gift to a domestic partner registered under state law
- A transfer to a surviving spouse held in a standard testamentary trust
Correct answer: A bequest to a surviving spouse who is a U.S. citizen
The unlimited marital deduction under IRC Section 2056 applies only when the surviving spouse is a U.S. citizen; non-citizen spouses require a Qualified Domestic Trust (QDOT) to defer estate tax.
Question 3: What does the concept of 'portability' mean in the context of the federal estate tax?
- A surviving spouse may elect to use the deceased spouse's unused applicable exclusion amount (Correct answer)
- Estate tax exemptions can be transferred between different states' tax systems
- A taxpayer's gift tax exemption can be converted into an estate tax exemption upon death
- Beneficiaries may transfer inherited assets to other family members without incurring estate tax
Correct answer: A surviving spouse may elect to use the deceased spouse's unused applicable exclusion amount
Portability, enacted under the Tax Relief Act of 2010 and made permanent in 2013, allows a surviving spouse to elect the Deceased Spousal Unused Exclusion (DSUE) amount, effectively preserving the first spouse's unused exemption.
Question 4: Under IRC Section 1014, the 'step-up in basis' rule provides that:
- Inherited assets receive a new cost basis equal to the fair market value at the decedent's date of death (Correct answer)
- Assets gifted during the donor's lifetime receive a basis equal to the donor's original purchase price
- Closely held business interests inherited from a deceased owner are valued at book value
- All inherited assets must be reported at the lower of historical cost or current market value
Correct answer: Inherited assets receive a new cost basis equal to the fair market value at the decedent's date of death
IRC Section 1014 resets the cost basis of inherited assets to their fair market value on the date of death, potentially eliminating income tax on all appreciation that occurred during the decedent's lifetime.
Question 5: Which statement correctly describes the gift-splitting election under IRC Section 2513?
- A married couple may elect to treat a gift made by one spouse as if each spouse made one-half of the gift (Correct answer)
- A gift can be divided among multiple recipients to reduce each recipient's individual gift tax liability
- Gift splitting permits married couples to pool their annual exclusions only for gifts to minor children
- The election is available only when both spouses are U.S. citizens and residents
Correct answer: A married couple may elect to treat a gift made by one spouse as if each spouse made one-half of the gift
IRC Section 2513 allows married couples to elect gift-splitting, treating a gift made by one spouse as equally made by both, effectively doubling the annual exclusion per recipient and the applicable lifetime exemption used.
Question 6: The Generation-Skipping Transfer (GST) tax was enacted primarily to prevent:
- Families from avoiding estate tax by transferring wealth directly to grandchildren or more remote descendants (Correct answer)
- High-income taxpayers from shifting investment income to family members in lower tax brackets
- The use of trusts to avoid probate proceedings in multiple states simultaneously
- Donors from gifting appreciated assets to grandchildren to bypass capital gains tax at the parent level
Correct answer: Families from avoiding estate tax by transferring wealth directly to grandchildren or more remote descendants
The GST tax, under IRC Chapter 13, imposes an additional transfer tax on transfers that skip a generation (e.g., grandparent to grandchild), ensuring that estate tax cannot be avoided by bypassing one or more generations.
Question 7: Which type of trust is most commonly used to remove life insurance proceeds from the insured's taxable estate?
- Irrevocable Life Insurance Trust (ILIT) (Correct answer)
- Revocable Living Trust
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT)
Correct answer: Irrevocable Life Insurance Trust (ILIT)
An ILIT owns the life insurance policy outside the insured's estate; because the insured holds no incidents of ownership, the death benefit is excluded from the gross estate under IRC Section 2042.
CTC Estate & Gift Tax Planning 1
What is the primary purpose of the annual gift tax exclusion under the IRC?