Chapter 25 Test Bank

1. Award: 1.
00 point
The amount of the estate tax is directly related to the amount of taxable gifts made in prior years.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 25-01 Describe the three
federal transfer taxes.
2. Award: 1.00 point
The federal transfer taxes are calculated using cumulative lifetime transfers.
 True
 False
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An exemption equivalent is the amount of annual gifts that is automatically exempt from the gift tax.
 True
 False
The amount of cumulative taxable transfers a person can make without exceeding the applicable credit is the exemption
equivalent.
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True / False Difficulty: 2 Medium Learning Objective: 25-01 Describe the three
The exemption equivalent was repealed in 2010.
 True
 False
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The applicable credit is designed to allow a minimum amount of lifetime transfers without triggering the imposition of a
transfer tax.
 True
 False
The 2020 applicable credit eliminates tax on cumulative transfers of $11.58 million for single taxpayers.
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For 2020, the exemption equivalent for the estate tax is $11.58 million.
 True
 False
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True / False Difficulty: 3 Hard Learning Objective: 25-01 Describe the three
The marital and charitable deductions are common to both the estate tax and the gift tax formulas.
 True
 False
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The estate tax is imposed on testamentary transfers.
 True
 False
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The gift tax is imposed on inter vivos (lifetime) transfers.
 True
 False
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The tax rate schedule on taxable transfers has a maximum tax rate of 40 percent.
 True
 False
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A couple who is married at the time of completing a gift can elect to file a joint gift tax return.
 True
 False
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True / False Difficulty: 2 Medium Learning Objective: 25-02 Calculate the federal
gift tax.
Only complete gifts are subject to the federal gift tax.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 25-02 Calculate the federal
gift tax.
In order for a transfer to be treated as a complete gift, the transfer must be irrevocably relinquished by the donor.
 True
 False
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gift tax.
A gratuitous transfer of cash made directly to an individual who uses the entire amount of the cash to pay medical
expenses is not subject to a gift tax.
 True
 False
The payment must be made directly to the health care provider to be eligible for exclusion from taxable gifts.
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True / False Difficulty: 3 Hard Learning Objective: 25-02 Calculate the federal
gift tax.
A future interest is a right to receive income or property in the future.
 True
 False
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gift tax.
The annual exclusion eliminates relatively small transfers of present interests in property.
 True
 False
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gift tax.
The annual exclusion applies to cumulative gifts made to each donee over the course of the year.
 True
 False
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gift tax.
A transfer of cash to a bank account held in joint tenancy with the right of survivorship is not a complete gift.
 True
 False
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gift tax.
A withdrawal of money from a bank account held in joint tenancy with the right of survivorship may constitute a complete
gift.
 True
 False
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gift tax.
When a gift-splitting election is made, gifts made by either spouse during the year will be treated as if each spouse made
one-half of the transfer.
 True
 False
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gift tax.
Both spouses must consent to any gift-splitting election.
 True
 False
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gift tax.
The gift-splitting election only applies to gifts made by taxpayers who reside in community-property states.
 True
 False
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gift tax.
A transfer of a terminable interest will not generally qualify for a marital deduction.
 True
 False
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gift tax.
A terminable interest in property is any interest that terminates during the current year.
 True
 False
A terminable interest is the right to possess and/or collect income from property for a specific period of time or until the
occurrence of a specific event.
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gift tax.
A gift tax return does not need to be filed unless the taxpayer has made current gifts in excess of the applicable credit.
 True
 False
A gift tax return must be filed if aggregate gifts to at least one recipient exceed the annual exclusion for the year.
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gift tax.
The tax on cumulative taxable gifts is reduced by the applicable credit regardless of whether any applicable credit was
used in prior years.
 True
 False
Only the unused portion of the applicable credit can be applied against the gift tax.
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gift tax.
The probate estate consists of all property owned by the decedent that is excluded from the gross estate.
 True
 False
The gross estate consists of the probate estate plus the value of certain automatic property transfers that take effect at
death.
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True / False Difficulty: 1 Easy Learning Objective: 25-03 Compute the federal
estate tax.
No deductions are allowed when calculating the taxable estate.
 True
 False
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estate tax.
Including adjusted taxable gifts in the taxable estate causes these gifts to be taxed twice, once under the gift tax and
again under the estate tax.
 True
 False
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True / False Difficulty: 2 Medium Learning Objective: 25-03 Compute the federal
estate tax.
The gross estate may contain property transfers that are not included in the probate estate.
 True
 False
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estate tax.
The gross estate will not include the value of clothes and other personal items owned by the decedent at the time of
death.
 True
 False
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estate tax.
The probate estate will include the total value of all real property owned by the decedent at the time of death regardless
of whether the decedent co-owned the property as a tenant in common or as a joint tenant with the right of survivorship.
 True
 False
Property passing by operation of law is not included in the probate estate.
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estate tax.
Proceeds of life insurance paid due to the death of the decedent are included in the decedent's gross estate if the
decedent had the right to designate the beneficiary of the policy.
 True
 False
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estate tax.
The gross estate includes the value of half of real property owned by a decedent and spouse in joint tenancy with the
right of survivorship.
 True
 False
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estate tax.
The gross estate always includes the value of half of any real property owned by a decedent and another person in joint
tenancy with the right of survivorship.
 True
 False
The value of realty owned in joint tenancy to be included in the gross estate depends on the amount contributed by
each owner toward the purchase of the property.
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True / False Difficulty: 3 Hard Learning Objective: 25-03 Compute the federal
estate tax.
Proceeds of life insurance paid to the decedent's estate due to the death of the decedent are included in the decedent's
gross estate even if the decedent had no ownership rights in the policy at the time of death.
 True
 False
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True / False Difficulty: 3 Hard Learning Objective: 25-03 Compute the federal
estate tax.
Property is included in the gross estate at the value a willing buyer would pay a willing seller, neither being under any
compulsion to buy or to sell, and both having reasonable knowledge of the relevant facts.
 True
 False
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estate tax.
A present interest is the right to currently enjoy property or receive income payments from property.
 True
 False
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estate tax.
The debts of the decedent at the time of death are deducted in calculating the taxable estate.
 True
 False
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estate tax.
The theft of property included in the gross estate is only deductible in calculating the taxable estate if the loss exceeds
10 percent of the decedent's adjusted gross estate.
 True
 False
Casualty and theft losses are deductible without any floor limitation.
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estate tax.
The testamentary transfer of property to a qualified charity is deductible in calculating the taxable estate without any
ceiling limitation.
 True
 False
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estate tax.
Adjusted taxable gifts are included when calculating the taxable estate but are not subject to double taxation because a
tax credit is provided for taxes payable on adjusted taxable gifts.
 True
 False
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estate tax.
A trust is a legal entity whose purpose is to hold and administer property for the benefit of beneficiaries.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 25-04 Understand how

income and transfer taxation interact to affect
wealth planning.
A trust is a legal entity that can only exist for a year.
 True
 False
The life of a trust is not necessarily limited to a specific period.
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wealth planning.
A serial gift strategy consists of arranging a trust to maximize the value of the applicable credit.
 True
 False
A serial gift strategy maximizes the value of the annual exclusion.
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True / False Difficulty: 2 Medium Learning Objective: 25-04 Understand how

wealth planning.
A serial gift strategy uses multiple gifts to maximize the value of the annual exclusion.
 True
 False
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wealth planning.
A bypass provision in a will requires a decedent to have a taxable estate in order to use an applicable credit to reduce
total estate taxes on a married couple.
 True
 False
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True / False Difficulty: 3 Hard Learning Objective: 25-04 Understand how

wealth planning.
Property inherited from a decedent has an adjusted basis equal to the value of the property included in the decedent's
estate.
 True
 False
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wealth planning.
When creating an estate tax planning strategy, the income tax benefit derived from a step-up in tax basis on assets
should be measured against the estate tax cost of including the assets in the decedent's gross estate.
 True
 False
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wealth planning.
Life insurance is an asset that can be used to fund a trust to support a surviving spouse and yet may not be included in
the decedent's gross estate.
 True
 False
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True / False Difficulty: 3 Hard Learning Objective: 25-04 Understand how

wealth planning.
A gratuitous transfer of property made during the lifetime of the donor is called:
 an incomplete gift.
 a testamentary transfer.
 a taxable gift.
 an inter vivos transfer.
 All of the choices are correct.
Inter vivos comes from Latin meaning "during the life of."
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Multiple Choice Difficulty: 1 Easy Learning Objective: 25-01 Describe the three
The applicable credit is designed to:
 apply only to taxable transfers included in the gross estate.
 prevent taxation of cumulative transfers that do not exceed a certain minimum amount.
 apply to amounts not already eliminated by the exemption equivalent.
 exclude up to $15,000 per individual per year on any individual transfer.
 None of the choices are correct.
The applicable credit was designed to prevent taxation of all but the largest cumulative transfers called the exemption
equivalent.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 25-01 Describe the three
The estate and gift taxes share several common features. Which of the following characteristics is common to both the
estate and gift taxes?
 An applicable credit and a marital deduction.
 A charitable deduction and an annual exclusion.
 A gift-splitting election and a deduction for income taxes paid by the fiduciary.
 A charitable deduction and the unused spousal exemption equivalent.
 All of these choices are characteristics common to both the gift and the estate tax.
The applicable credit and deductions for marital and charitable transfers are features common to both the estate tax and
the gift tax. The annual exclusion and gift-splitting election are unique to the gift tax, and the amount of the exemption
equivalent for 2020 is $11.58 million for both the gift and the estate tax. The deceased spouse's unused exclusion
amount only applies to the estate tax.
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Which of the following statements is (are) true?
 The same transfer tax rate schedule is used to calculate both the estate tax and the gift tax.
 The transfer tax rate schedule is regressive in nature.
 The amount of the applicable credit varies according to whether the taxable transfer is inter vivos or
testamentary.
 The exemption equivalent automatically offsets transfers in calculating cumulative taxable transfers.
 All of the choices are true.
In 2020, the applicable credit automatically offsets $11.58 million of transfer taxes representing the lower tax rates in the
transfer tax rate schedule. The exemption equivalent represents an equivalent amount of taxable transfers necessary to
generate transfer taxes equal to the applicable credit.
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Multiple Choice Difficulty: 3 Hard Learning Objective: 25-01 Describe the three
Which of the following statements is (are) true for both gratuitous and testamentary transfers?
 An applicable credit of up to $15,000 per donee per year reduces the tax on any transfer.
 An annual exclusion offsets any transfer up to $15,000.
 An election can be made to split a transfer between spouses.
 A charitable and a marital deduction are allowed in computing the taxable transfer.
 All of the choices are true.
Both gratuitous and testamentary transfers are reduced by marital and charitable deductions. The annual exclusion and
gift-splitting election are unique to gratuitous transfers, and the applicable credit is based on the tax on $11.58 million in
2020.
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The estate and gift taxes share several common features. Which of the following characteristics is common to both the
estate and gift taxes?
 A marital deduction and a deduction for casualty losses.
 A marital deduction for transfers of all terminable interests.
 The tax rate schedule for calculating gross transfer taxes.
 A charitable deduction and an annual exclusion.
 None of these choices list characteristics common to both the gift and the estate tax.
The applicable credit and deductions for marital and charitable transfers are features common to both the estate tax and
the gift tax. Terminable transfers do not qualify for the marital deduction and an annual exclusion is only available for
gratuitous transfers.
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Multiple Choice Difficulty: 3 Hard Learning Objective: 25-01 Describe the three
Which of the following is a true statement about the federal gift tax return (Form 709)?
 Form 709 is due by the 15th day of the ninth month following the date of the gift.
 Form 709 must be filed if a taxpayer wishes to elect gift-splitting.
 Form 709 need not be filed unless a taxpayer's taxable gifts exceed the exemption equivalent.
 Form 709 is due nine months after the death of the decedent.
 None of the choices are true.
The gift tax is levied on a calendar-year basis and individual taxpayers who make a gift in excess of the annual exclusion
or wish to elect gift-splitting must file a gift tax return (Form 709) by April 15 of the year following the gift(s).
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Multiple Choice Difficulty: 1 Easy Learning Objective: 25-02 Calculate the federal
gift tax.
Which of the following transfers is a complete gift?
 Payment of child support by a former spouse.
 Transfer of property to a revocable trust.
 Transfer of cash to a bank account held in joint tenancy with the right of survivorship.
 Income paid to the beneficiary of a revocable trust.
 None of the choices is a complete gift.
If the grantor releases the powers, then the gift will generally be complete at that time, because the property is no longer
subject to the donor's control. For example, a distribution of property from a revocable trust is a complete gift because
the grantor no longer has the ability to revoke the distribution.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 25-02 Calculate the federal
gift tax.
Which of the following transactions would not utilize the "Section 7520 rate" to calculate the value of the transfer?
 A transfer of property with a retained life estate.
 A transfer of property to a spouse.
 A transfer of a remainder interest in real property.
 A transfer of a 10-year term certain in real property.
 None of these choices utilizes the "Section 7520 rate" in the calculation of the value of the property.
The value of property consists of the present interest (the right to income) and the future interest (the remainder). The
value of the remainder interest depends upon the time the property is held by the present interest and the interest rate.
The value of the income interest is the difference between the value of the remainder and the total value of the property.
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Multiple Choice Difficulty: 3 Hard Learning Objective: 25-02 Calculate the federal
gift tax.
The calculation of the value of a life estate in a trust generally does not depend upon which of the following factors?
 The age of the life tenant.
 The Section 7520 interest rate.
 The value of the property at the time of the transfer.
 The manner in which the trust corpus is invested.
 All of these factors are utilized in the calculation of the value of a life estate in a trust.
Generally, the value of a present interest, such as a life estate, does not depend on how the trustee invests the corpus
(in growth stock or high-yield money market) because the fiduciary (the trustee or executor) has a duty to invest the
property for the benefit of both the income beneficiary and the remainderman.
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gift tax.
This year Anthony transferred $250,000 of bonds to a trust with directions to the trustee to pay income to his son for the
next 20 years. After 20 years the trust corpus would revert to Anthony. Which of the following is a true statement?
 Anthony has made a $250,000 gift.
 Anthony has made a $235,000 taxable gift.
 Anthony has not yet made a complete gift.
 Anthony has made a complete gift of the income interest only.
The gift of the income interest is complete but it only constitutes a portion of the value of the property (the reversion
constitutes the remaining value).
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gift tax.
Natalie transferred $500,000 of bonds to a revocable trust with directions to the trustee to pay income to her aunt for
five years, after which the corpus is to be distributed to Natalie's niece. At year-end, the trustee paid $16,000 of income
to the aunt. Which of the following is a true statement?
 Natalie has made a complete gift of $500,000.
 Natalie has made a taxable gift of $1,000.
 Natalie has not made a complete gift because the trust is revocable.
 Natalie has made a taxable gift of $16,000.
Sufficient control is retained to cause the transfer to the trust to be an incomplete gift. Payment of income, however, is
beyond the donor's control and constitutes a complete gift eligible for the annual exclusion of $15,000 (2020).
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gift tax.
Which of the following is a complete taxable gift?
 $20,000 in cash contributed to the committee to reelect Senator BlowHard.
 $15,000 in cash given directly to Valley Hospital for the care of a neighbor who was in an auto accident.
 $18,000 in cash given directly to a needy student to pay for college tuition.
 $55,000 in cash transferred to a former spouse under a written property settlement shortly after a divorce.
 None of the choices is a complete taxable gift.
Political contributions are not gratuitous transfers, and the payment of medical or educational expenses on behalf of an
unrelated individual is not considered a gift if the payments are made directly to the health care provider or to the
educational institution. A transfer of property in conjunction with a divorce is treated as a transfer for adequate
consideration if the property is transferred within three years of the divorce under a written property settlement.
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gift tax.
This year Don and his son purchased real estate for an investment. The price of the property was $500,000, and the title
named Don and his son as joint tenants with the right of survivorship. Don provided $320,000 of the purchase price and
his son provided the remaining $180,000. Has Don made a taxable gift and, if so, in what amount?
 Don has made a taxable gift of $205,000.
 Don has made a taxable gift of $55,000.
 None of the choices are correct—Don did not make a taxable gift.
[$320,000 − ($500,000)/2] − $15,000 in 2020.

An individual who creates a joint tenancy (either a tenancy in common or joint tenancy with right of survivorship) with
someone who does not provide adequate consideration is deemed to make a gift at that time. The gift is the amount
necessary to pay for the other party's interest in the property.
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gift tax.
This year Don and his son purchased real estate for an investment. The price of the property was $612,000, and the title
named Don and his son as joint tenants with the right of survivorship. Don provided $352,000 of the purchase price and
his son provided the remaining $260,000. Has Don made a taxable gift and, if so, in what amount?
 Don has made a taxable gift of $31,000.
 None of the choices are correct—Don did not make a taxable gift.
[$352,000 − ($612,000)/2] − $15,000 in 2020.
An individual who creates a joint tenancy (either a tenancy in common or joint tenancy with right of survivorship) with
someone who does not provide adequate consideration is deemed to make a gift at that time. The gift is the amount
necessary to pay for the other party's interest in the property.
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gift tax.
This year, Brent by himself purchased season baseball tickets in the exclusive sky club. The price of the tickets was
$60,000, and Brent divided the tickets equally with his two brothers (Brent gave one-third of the tickets to each brother).
Has Brent made a taxable gift and, if so, in what amount?
 Brent made a taxable gift of $45,000.
 Brent made two taxable gifts of $17,000 each.
 Brent transferred the tickets for love and affection so no gift tax is imposed.
 Brent made two taxable gifts of $5,000.
A complete gift of $20,000 was made to each brother, or two taxable gifts of $5,000 after the annual exclusion ($20,000
− $15,000 for 2020).
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gift tax.
Christian transferred $60,000 to an irrevocable trust for the benefit of his three daughters. The three daughters share
income equally for five years and then the corpus of the trust is to be divided equally among them. What is the amount of
the taxable gifts, if any, made by Christian?
 $60,000.
 $46,000.
 $34,000.
 $18,000.
 None of the choices are correct—the amount of the taxable gifts cannot be ascertained without valuing each
income interest.
The annual exclusion applies only to gifts of present interests (the income interest), and a gift of a future interest (e.g. a
remainder) is not eligible for an annual exclusion. The income interest must be valued to be certain that the present
interest is large enough to sustain the annual exclusion.
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gift tax.
This year Samantha gave each of her three nephews birthday gifts of $10,000 in cash. At Christmas, Samantha gave
each of her three nephews Christmas gifts of an additional $6,000 in cash. What is the amount of the taxable gifts, if any,
made by Samantha this year?
 $3,000.
 $33,000.
 $48,000.
 zero—none of the gifts exceed the annual exclusion.
Each taxpayer is allowed an annual exclusion of $15,000 (2020) applied to the cumulative gifts of present interests made
during the year to each donee. Hence, Samantha made three $16,000 gifts, resulting in a total taxable gift of $3,000
([$16,000 − $15,000] × 3 nephews).
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gift tax.
This year Samantha gave each of her three nephews birthday gifts of $10,450 in cash. At Christmas, Samantha gave
each of her three nephews Christmas gifts of an additional $6,180 in cash. What is the amount of the taxable gifts, if any,
made by Samantha this year?
 $4,890.
 $32,550.
 $49,890.
 zero—none of the gifts exceed the annual exclusion.
Each taxpayer is allowed an annual exclusion of $15,000 (2020) applied to the cumulative gifts of present interests made
during the year to each donee. Hence, Samantha made three $16,630 gifts, resulting in a total taxable gift of $4,890
([$16,630 − $15,000] × 3 nephews).
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gift tax.
Jonathan transferred $90,000 of cash to a trust this year for the benefit of Hannah, age 10. The trustee has the
discretion to distribute income or corpus (principal) for Hannah's benefit and is required to distribute all assets to Hannah
(or her estate) not later than Hannah's 21st birthday. What is the amount of the taxable gift?
 $90,000.
 $75,000.
 $64,000.
 zero—there is no complete gift until the trustee makes a distribution from the trust.
$90,000 minus $15,000 (2020) annual exclusion.
Gifts in trust for a minor will qualify for the annual exclusion if the property can be used to support the minor and any
remaining property is distributed to the child once he or she reaches age 21.
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gift tax.
Matthew and Addison are married and live in Michigan, a common-law state. For the holidays Addison gave cash gifts of
$40,000 to each of her two sons, and Matthew gave $40,000 to his daughter. What is the amount of Addison's taxable
gifts if Matthew and Addison opt to gift-split?
 $45,000
 $18,000.
 $15,000.
 $10,000.
$5,000 + $5,000 + $5,000.
The option to split gifts allows a couple to treat all gifts made in a year as if each spouse had made one-half of each gift.
Hence, Addison is treated as giving each of her sons $20,000 ($5,000 taxable gift after the $15,000 (2020) annual
exclusion) and making a $20,000 gift to Matthew's daughter ($5,000 after the annual exclusion).
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gift tax.
Matthew and Addison are married and live in Michigan, a common-law state. For the holidays Addison gave cash gifts of
$41,250 to each of her two sons, and Matthew gave $41,500 to his daughter. What is the amount of Addison's taxable
gifts if Matthew and Addison opt to gift-split?
 $49,000.
 $20,000.
 $17,000.
 $9,500.
$5,625 + $5,625 + $5,750.
The option to split gifts allows a couple to treat all gifts made in a year as if each spouse had made one-half of each gift.
Hence, Addison is treated as giving each of her sons $20,625 ($5,625 taxable gift after the $15,000 (2020) annual
exclusion) and making a $20,750 gift to Matthew's daughter ($5,750 after the annual exclusion).
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gift tax.
Andrew and Brianna are married and live in Texas, a community-property state. For their birthdays this year Andrew gave
cash gifts of $20,000 to each of his two daughters, and Brianna gave $34,000 to her niece. What is the amount of
Andrew's taxable gifts?
 $2,000.
 $10,000.
 $25,000.
 zero only if Andrew and Brianna elect to split gifts.
$0 + $0 + $2,000 = $2,000. Andrew is treated as giving $10,000 each to his two daughters ($0 taxable gift after the
annual exclusion for each daughter) and making a $17,000 gift to Brianna's niece ($2,000 after the $15,000 (2020)
annual exclusion). In a community-property state each gift of community property is automatically treated as being made
one-half by each spouse.
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gift tax.
Andrew and Brianna are married and live in Texas, a community-property state. For their birthdays this year Andrew gave
cash gifts of $23,600 to each of his two daughters, and Brianna gave $38,800 to her niece. What is the amount of
Andrew's taxable gifts?
 $4,400.
 $10,000.
 $25,000.
 zero only if Andrew and Brianna elect to split gifts.
$0 + $0 + $4,400 = $4,400. Andrew is treated as giving $11,800 each to his two daughters ($0 taxable gift after the
annual exclusion for each daughter) and making a $19,400 gift to Brianna's niece ($4,400 after the $15,000 (2020)
annual exclusion). In a community-property state each gift of community property is automatically treated as being made
one-half by each spouse.
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gift tax.
Jayden gave Olivia a ring when she agreed to marry him. The ring is a family heirloom valued at $68,000. What is the
amount of the taxable gift?
 $0—the marital deduction offsets the gift as long as Jayden and Olivia are married by year-end.
 $53,000.
 $68,000.
 $0—this transfer is not gratuitous.
The gift of $68,000 is reduced by the $15,000 annual exclusion (2020). The marital deduction is only available for a
couple who is married at the time of the transfer—perhaps Jayden should have waited to make the gift until after the
ceremony.
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gift tax.
Jayden gave Olivia a ring when she agreed to marry him. The ring is a family heirloom valued at $49,750. What is the
amount of the taxable gift?
 $0—the marital deduction offsets the gift as long as Jayden and Olivia are married by year-end.
 $34,750.
 $49,750.
 $0—this transfer is not gratuitous.
The gift of $49,750 is reduced by the $15,000 annual exclusion (2020). The marital deduction is only available for a
couple who is married at the time of the transfer—perhaps Jayden should have waited to make the gift until after the
ceremony.
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gift tax.
Alexis transferred $400,000 to a trust with directions to pay income to her spouse, William, for his life. After William's
death the corpus of the trust will pass to William's son. If the life estate is valued at $72,000, what is the total amount of
the taxable gifts?
 $385,000.
 $57,000.
 $375,000.
 $328,000.
This transfer is actually two gifts, a gift of a present interest to William (a life estate worth $72,000) and a future interest
(the remainder $328,000) to the son. The gift of the life estate qualifies for the annual exclusion but not a marital
deduction because it is a terminable interest. The gift of the remainder is a future interest and does not qualify for the
$15,000 (2020) annual exclusion. So total taxable gifts = ($72,000 − $15,000) + $328,000 = $385,000.
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gift tax.
Alexis transferred $456,000 to a trust with directions to pay income to her spouse, William, for his life. After William's
death the corpus of the trust will pass to William's son. If the life estate is valued at $76,000, what is the total amount of
the taxable gifts?
 $441,000.
 $61,000.
 $431,000.
 $380,000.
This transfer is actually two gifts, a gift of a present interest to William (a life estate worth $76,000) and a future interest
(the remainder $380,000) to the son. The gift of the life estate qualifies for the annual exclusion but not a marital
deduction because it is a terminable interest. The gift of the remainder is a future interest and does not qualify for the
$15,000 (2020) annual exclusion. So total taxable gifts = ($76,000 − $15,000) + $380,000 = $441,000.
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gift tax.
This year Nathan transferred $7 million to an irrevocable trust established for the benefit of his nephew. The trustee is
directed to accumulate income for the next five years before distributing the trust corpus to Nathan's nephew. In past
years Nathan has made taxable gifts of $6 million and used an applicable credit on an exemption equivalent of $5
million. What amount of gift tax, if any, must Nathan remit?
 $168,000.
 $240,000.
 $345,800.
 zero—there is a $11.58 million exemption equivalent.
 None of the choices are correct. The amount of tax cannot be estimated without the use of a tax rate
schedule.
Nathan has prior taxable gifts of $6 million and a current taxable gift of $7 million (the transfer is a future interest and is
not eligible for an annual exclusion). Since Nathan has used an exemption equivalent of $5 million, he has $6.4 of
unused exemption equivalent remaining (2020 exemption equivalent of $11.58 million − $5 million used = $6.58 million
unused). Nathan's unused applicable credit is computed as follows:
Current tax on exemption equivalent ($11.58 million) $ 4,577,800

Less: tax on used equivalent ($5 million) − 1,945,800
Unused applicable credit $ 2,632,000
The gift tax is calculated as follows:

Tax on cumulative taxable gifts of $13 million $ 5,145,800
Less: Current tax on prior taxable gifts of $6 million − 2,345,800
Tax on current taxable gifts $ 2,800,000
Unused applicable credit on current taxable gifts − 2,632,000
Gift tax due $ 168,000
A shortcut method of calculating this tax would be to recognize that Nathan has $6.58 million of unused exemption
equivalent that will offset part of his current gift of $7 million. The remaining $420,000 of current gift is subject to the top
transfer tax rate of 40 percent. Hence, the tax due is $168,000 = $420,000 × 40%.
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Multiple Choice Difficulty: 3 Hard Learning Objective: 25-03 Compute the federal
estate tax.
At his death Trevor had a probate estate consisting of $4 million of property. Which of the following is a true statement
about Trevor's estate or estate tax?
 Trevor must have a taxable estate of at least $4 million.
 Trevor must have an adjusted gross estate of at least $4 million.
 Trevor must have an estate tax base (cumulative taxable transfers) of at least $4 million.
 Trevor must have a gross estate of at least $4 million.
 None of the choices are necessarily true.
Property included in the probate estate must be included in the gross estate but adjustments made in calculating the
adjusted gross estate (both positive and negative) make other generalizations problematic.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 25-03 Compute the federal
estate tax.
At his death Titus had a gross estate consisting of $6 million of property. Which of the following is a true statement about
Titus' estate or estate tax?
 Titus must have a probate estate of at least $6 million.
 Titus must have an adjusted gross estate of at least $6 million.
 Titus must have cumulative taxable transfers of at least $6 million.
 Titus must have a tentative transfer tax calculated on at least $2 million of transfers.
 None of the choices are necessarily true.
Probate property is not the only property included in the gross estate (certain transfers are also included in the gross
estate). Other adjustments in the formula (both positive and negative) make other generalizations problematic.
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estate tax.
At her death Tricia had an adjusted gross estate consisting of $8 million of property. Which of the following is a true
statement about Tricia's estate or estate tax?
 Tricia must have a taxable estate over $8 million.
 Tricia's taxable estate will not exceed $8 million.
 Tricia must have a probate estate tax of zero.
 Tricia must have a gross estate tax of zero.
 None of the choices are necessarily true.
Since only negative adjustments are made to the gross estate in calculating the taxable estate, the taxable estate cannot
exceed $8 million. Other adjustments (both positive and negative) make other generalizations problematic.
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estate tax.
At her death Tricia owned a life insurance policy on her life that paid her daughter $500,000 upon her death. The policy
was only valued at $25,000 prior to Tricia's death. What amount, if any, is included in Tricia's gross estate?
 $500,000.
 $25,000.
 $25,000 if Tricia transferred ownership of the policy within three years of her date of death.
 zero—life insurance proceeds due to the death of the decedent are not included in the decedent's gross
estate.
 zero if Tricia's daughter refused to accept the proceeds.
Proceeds of life insurance paid due to the death of the decedent are specifically included in the gross estate if the
decedent owned the policy.
References
Multiple Choice Difficulty: 1 Easy Learning Objective: 25-03 Compute the federal
estate tax.
At her death Siena owned real estate worth $200,000 that was titled with her sister in joint tenancy with the right of
survivorship. Siena contributed $50,000 to the total cost of the property and her sister contributed the remaining
$75,000. What amount, if any, is included in Siena's gross estate?
 $50,000.
 $125,000.
 $80,000.
 $100,000.
For unmarried co-owners, the value of property owned in joint tenancy with the right of survivorship that is included in
the decedent's gross estate is determined by the proportion contributed by the decedent to the total cost of the
property. In this instance, Siena contributed 50/125, or 40 percent. Hence, 40 percent of the $200,000 value is included
in her gross estate.
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estate tax.
At his death Tyrone's life insurance policy paid his estate $85,000. What amount, if any, is included in Tyrone's gross
estate?
 $85,000.
 $85,000 if Tyrone had an incident of ownership of the policy at the time of his death.
 zero if Tyrone did not transfer any ownership of the policy within three years of his date of death.
 zero—life insurance proceeds due to the death of the decedent are not included in the gross estate.
 zero if Tyrone's estate uses the insurance proceeds to pay Tyrone's estate tax.
Proceeds of life insurance paid due to the death of the decedent are specifically included in the gross estate if the
decedent's estate is the beneficiary of the insurance policy.
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estate tax.
At his death Stanley owned real estate worth $345,000 with two other individuals as equal tenants in common. Stanley
contributed $50,000 to the $100,000 total cost of the property. What amount, if any, is included in Stanley's gross
estate?
 $50,000.
 $172,500.
 $345,000.
 $115,000.
The value of property held by tenants in common that is included in the decedent's gross estate is determined by the
proportion owned by the decedent. In this instance, Stanley owns an equal one-third interest, so one-third of the
$345,000 value is included in his gross estate.
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estate tax.
At his death Stanley owned real estate worth $437,325 with two other individuals as equal tenants in common. Stanley
contributed $61,250 to the $122,500 total cost of the property. What amount, if any, is included in Stanley's gross estate?
 $61,250.
 $218,662.
 $437,325.
 $145,775.
The value of property held by tenants in common that is included in the decedent's gross estate is determined by the
proportion owned by the decedent. In this instance, Stanley owns an equal one-third interest, so one-third of the
$437,325 value is included in his gross estate.
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estate tax.
At her death Serena owned real estate worth $210,000 with her spouse in joint tenancy with the right of survivorship.
Serena contributed $50,000 to the original cost of the property and her spouse contributed the remaining $100,000.
What amount, if any, is included in Serena's gross estate?
 $50,000.
 $105,000.
 $80,000.
 $0. This property qualifies for the marital deduction.
For married co-owners, half of the value of property owned in joint tenancy with the right of survivorship is included in
the decedent's gross estate. The marital deduction would only offset the gross estate in calculating the taxable estate.
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estate tax.
At her death Serena owned real estate worth $319,000 with her spouse in joint tenancy with the right of survivorship.
Serena contributed $55,000 to the original cost of the property and her spouse contributed the remaining $110,000.
What amount, if any, is included in Serena's gross estate?
 $55,000.
 $159,500.
 $132,000.
 $0. This property qualifies for the marital deduction.
For married co-owners, half of the value of property owned in joint tenancy with the right of survivorship is included in
the decedent's gross estate. The marital deduction would only offset the gross estate in calculating the taxable estate.
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estate tax.
Harold and Mary are married and live in a community-property state. During the marriage Harold bought a parcel of real
estate for $100,000 in community funds and titled the property in his name alone. Mary died on January 30th of this year
and was survived by Harold, who did not remarry. The parcel of real property was worth $250,000 on January 30th of
this year but was only worth $220,000 at year-end. What amount, if any, is included in Mary's gross estate?
 $250,000.
 $220,000.
 $125,000.
 $110,000.
 zero—Mary had no ownership interest in the property at her death.
Half of the value of community property on the date of death is included in a spouse's gross estate.
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estate tax.
Harold and Mary are married and live in a community-property state. During the marriage Harold bought a parcel of real
estate for $150,000 in community funds and titled the property in his name alone. Mary died on January 30th of this year
and was survived by Harold, who did not remarry. The parcel of real property was worth $255,000 on January 30th of
this year but was only worth $210,000 at year-end. What amount, if any, is included in Mary's gross estate?
 $255,000.
 $210,000.
 $127,500.
 $105,000.
 zero—Mary had no ownership interest in the property at her death.
Half of the value of community property on the date of death is included in a spouse's gross estate.
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estate tax.
At his death Jose owned real estate worth $22 million but subject to a mortgage of $7 million. Which of the following is a
true statement?
 $22 million is included in Jose's gross estate.
 $15 million is included in Jose's gross estate.
 The $7 million mortgage must be paid by Jose's estate.
 The $7 million mortgage is not deductible if Jose's will transfers the property to a charity.
 All of the choices are correct.
Debts of the estate, such as mortgages and accrued taxes, are deductible in calculating the adjusted gross estate.
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estate tax.
At her death Emily owned real estate worth $2.5 million and other property worth $10 million. Property taxes of
$200,000 were accrued on the real estate at the time of Emily's death. Which of the following is a true statement with
respect to these items without considering any other owned property?
 Emily's gross estate is $12.3 million.
 Emily's taxable estate is $12.5 million.
 Emily's adjusted gross estate is $12.3 million.
 Emily's estate tax base is $12.5 million.
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estate tax.
Which of the following is a true statement?
 Executor's fees paid by an estate are deductible in computing the gross estate.
 Funeral expenses for the decedent paid by an estate are deductible in computing the adjusted gross estate.
 An executor can choose to deduct the decedent's funeral expenses on either the estate tax return or the
estate's income tax return.
 An executor can only deduct the costs of administering the decedent's estate on the estate's income tax
return.
Expenses incurred in administering the estate are also deductible, such as executor's fees, attorneys' fees. Funeral
expenses are deductible, including any reasonable expenditure allowed under local law. The executor has the option of
deducting administration expenses (but not funeral expenses) and casualty and theft losses on the estate tax return or
on the estate's income tax return.
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estate tax.
The executor of Isabella's estate incurred administration expenses of $32,000 and paid $5,000 in funeral expenses. The
executor charged the estate for $24,000 in fees. What is the maximum amount Isabella's estate can deduct in computing
the adjusted gross estate?
 $32,000.
 $37,000.
 $56,000.
 $61,000.
Expenses incurred in administering the estate are also deductible, such as executor's fees, attorneys' fees. The executor
has the option of deducting administration expenses (but not funeral expenses) and casualty and theft losses on the
estate tax return or on the estate's income tax return. ($32,000 + $5,000 + $24,000)
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estate tax.
The executor of Isabella's estate incurred administration expenses of $45,250 and paid $8,400 in funeral expenses. The
executor charged the estate for $32,200 in fees. What is the maximum amount Isabella's estate can deduct in computing
the adjusted gross estate?
 $45,250.
 $53,650.
 $77,450.
 $85,850.
Expenses incurred in administering the estate are also deductible, such as executor's fees, attorneys' fees. The executor
has the option of deducting administration expenses (but not funeral expenses) and casualty and theft losses on the
estate tax return or on the estate's income tax return. ($45,250 + $8,400 + $32,200)
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estate tax.
Christopher's residence was damaged by a storm during the administration of his estate. Christopher's executor paid
$120,000 to repair the residence after the storm. Which of the following is a true statement?
 A casualty loss of $120,000 can be deducted on Christopher's final individual income tax return.
 The casualty loss deduction is limited to the loss in excess of 10 percent of Christopher's AGI.
 Christopher's executor can deduct a loss of $120,000 on the estate tax return.
 No casualty loss deduction is available for calculating the estate tax.
Casualty and theft losses are deductible for calculating the estate tax without any floor limitation. These losses must be
incurred during the administration of the estate, otherwise any deduction belongs to the new owner of the property. Only
casualty losses on business property are allowed for income tax purposes starting in 2018 (unless the loss is in a
presidentially declared disaster area).
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estate tax.
Chloe's gross estate consists of the following property valued at the date of death:
Description Value
Real estate $ 5,500,000
Cash, stock, and bonds 6,700,000
Personal property 300,000
Chloe's real estate is encumbered by a mortgage of $450,000, and Chloe's executor paid her funeral costs of $6,000
and charged fees for $24,000. Which of the following is a true statement?
 Chloe's adjusted gross estate is at least $12,020,000.
 Chloe's taxable estate is at least $12,020,000.
 Chloe's taxable estate is $12,050,000.
 Chloe's estate will calculate the tentative estate tax on $12.5 million.
Chloe's gross estate ($12.5 million) is reduced by debts, funeral expenses, and executor's fees (if elected by the
executor). Hence the adjusted gross estate is $12,020,000 ($12.5 million less $480,000).
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estate tax.
Tracey is unmarried and owns $17 million in stock and bonds. What is the result if Tracey dies this year and leaves all of
her property to a qualified charity?
 Tracey's gross estate will be zero.
 Tracey's estate tax basis will be zero.
 Tracey's taxable estate will be zero.
 Tracey's estate will have a tentative estate tax of zero.
Tracey's gross estate ($17 million) is reduced by charitable contributions to zero.
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estate tax.
Madison was married at the time of her death and her gross estate consisted of $22 million in stock and bonds. Madison
left all of her property to her spouse. What is the result?
 Madison's taxable estate will be zero.
 Madison's surviving spouse will have an income tax basis in the inherited property of zero.
 Madison's adjusted gross estate will be zero.
 Madison's estate will have a tentative estate tax of zero.
To avoid taxing a married couple's estate twice, Congress provides a deduction for bequests to a surviving spouse. To
qualify for the marital deduction, the transferred property must be included in the estate of the deceased spouse, and
the surviving spouse must receive the property from the decedent and control its ultimate disposition.
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estate tax.
 A remainder interest held by the decedent at the time of death is not included in the decedent's gross estate.
 The value of a remainder interest depends in part on the Section 7520 interest rate at the time of death.
 The value of a remainder interest in a life estate is independent of the age of the life tenant.
 The value of a life estate does not depend upon the age of the life tenant.
At the end of a terminable interest, the property will pass to the person holding the remainder interest. Hence, the value
of the remainder depends upon the length of the terminable interest (life estate here) and the Section 7520 interest rate.
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estate tax.
Ethan owned a vacation home at the time of his death. Which of the following is a true statement if Ethan was married to
Emma and resided in a common-law state at the time of his death?
 Ethan can claim a marital deduction for the vacation home if he bequeaths it to Emma.
 Ethan cannot claim a marital deduction if he bequeaths a life estate in the vacation home to Emma.
 Ethan can claim a marital deduction for half the value of the vacation home if it was owned with Emma in joint
tenancy with the right of survivorship.
 Ethan can claim a charitable deduction if he bequeaths it to a qualified charity.
 All of the choices are true.
Property rights that are terminable do not generally qualify for the marital deduction.
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estate tax.
Adjusted taxable gifts are added to the taxable estate to accomplish which of the following objectives?
 Prevent double taxation of previously taxed gifts.
 Increase the marginal tax rate on previously taxed gifts.
 Increase the marginal tax rate on the taxable estate.
 Remove inter vivos transfers from cumulative taxable transfers.
The objective of adding previously taxed transfers to the taxable estate is to allow the estate tax base to reflect all
transfers, both inter vivos and testamentary. Under a progressive tax rate schedule, this adjustment is designed to
increase the marginal tax rate on the estate. Adjusted taxable gifts themselves, however, are not subject to tax in the
estate formula. To prevent double taxation of prior taxable gifts, we reduce the tentative estate tax by a credit for the
taxes that would have been payable on the adjusted taxable gifts under the current tax rate schedule. Thus, although
prior gifts have a direct effect on the magnitude of the estate tax, the estate tax is imposed only on the transfers
included in the taxable estate under the current rate schedule.
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estate tax.
An applicable credit is subtracted in calculating both the gift tax and the estate tax. Why doesn't this calculation have the
effect of increasing the total applicable credit amount?
 The tentative estate tax is reduced by only taxes payable on adjusted taxable gifts rather than gross gift taxes.
 The applicable credit only offsets the exemption equivalent.
 The applicable credit cannot be used to offset gift taxes on adjusted taxable gifts.
 The applicable credit varies in amount from year to year.
The tentative estate tax is reduced by only taxes payable on adjusted taxable gifts rather than gross gift taxes. If the
gross gift taxes were used as a credit against the estate tax, then the effect would be to increase the applicable credit by
the credit previously used in calculating the gift tax.
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estate tax.
The generation-skipping tax is designed to accomplish which of the following?
 Generate additional revenues to supplement the estate tax.
 Prevent the avoidance of transfer taxes (both estate and gift tax) through transfers that skip a generation of
recipients.
 Eliminate the possibility that the estate tax can be avoided by gifts in contemplation of death.
 Replace the gift tax on distributions from trusts.
The GST merely plugs a hole in the transfer tax system.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 25-04 Understand how

wealth planning.
 A fiduciary entity is a legal entity that takes possession of property for the benefit of a person.
 An estate is a fiduciary entity that comes into existence upon a person's death to transfer the decedent's real
and personal property.
 A trust is also a fiduciary entity whose purpose is to hold and administer the corpus for other persons
(beneficiaries).
 An estate exists only temporarily, but a trust may have a prolonged or even indefinite existence.
 All of the choices are true.
These are all definitions of fiduciaries.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 25-04 Understand how

wealth planning.
 A serial gift strategy utilizes inter vivos gifts to multiple donees over multiple years to maximize the annual
exclusion.
 A serial gift strategy works well even if the gifts don't qualify as present interests.
 A bypass trust avoids all estate taxes on the estate of the first spouse to die.
 The income tax savings from holding appreciated property until death are always outweighed by the
additional estate tax imposed on the property.
This is the definition of a serial gift.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 25-04 Understand how

wealth planning.
 Leaving all property to the surviving spouse maximizes the marital deduction and therefore minimizes total
transfer taxes on the estates of both spouses.
 A bypass provision in the will of the deceased spouse is designed to use the applicable credit of the
deceased spouse by transferring property to beneficiaries other than the surviving spouse.
 Serial gifts are limited in scope because only $10,000 can be transferred each year tax-free to any specific
donee.
 Serial gifts can move significant amounts of wealth only if employed by multiple donors.
This is the definition of a bypass plan.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 25-04 Understand how

wealth planning.
Andrea transferred $500,000 of stock to a trust, with income to be paid to her niece for 20 years (value $125,000) and
the remainder to be paid to her nephew (value $375,000). Andrea named a bank as independent trustee but retained
the power to determine how much income, if any, will be paid in any particular year. What is the amount of the taxable
gift, if any? Explain your answer.
The taxable gift is $375,000.
Andrea has retained sufficient control that the transfer of the income interest to her niece is incomplete; the gift to the
nephew will be complete as income is actually distributed to him. However, the portion of the transfer representing the
remainder interest is a complete gift because Andrea can no longer control this portion of the property. Since it is a
future interest, this value will not qualify for an annual exclusion.
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Essay Difficulty: 3 Hard Learning Objective: 25-02 Calculate the federal

gift tax.
Andrea transferred $602,500 of stock to a trust, with income to be paid to her niece for 20 years (value $177,000) and
the remainder to be paid to her nephew (value $425,500). Andrea named a bank as independent trustee but retained
the power to determine how much income, if any, will be paid in any particular year. What is the amount of the taxable
gift, if any? Explain your answer.
The taxable gift is $425,500.
Andrea has retained sufficient control that the transfer of the income interest to her niece is incomplete; the gift to the
nephew will be complete as income is actually distributed to him. However, the portion of the transfer representing the
remainder interest is a complete gift because Andrea can no longer control this portion of the property. Since it is a
future interest, this value will not qualify for an annual exclusion.
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gift tax.
This year Alex's friend Kimberly was disabled. Alex paid $30,000 to Kimberly's doctor for medical expenses. In addition,
Alex also paid $25,000 to Kimberly directly so that her son could afford tuition at State University this year. Has Alex
made taxable gifts, and if so, in what amounts?
The payment to Kimberly was a taxable gift of $10,000.
Both payments were complete gifts, but payments for medical expenses and education are exempt from the gift tax as
long as the payments were made directly to the college or doctor. The gift to Kimberly is taxable because the amount of
$25,000 exceeds the 2020 annual exclusion of $15,000 by $10,000 and the gift was not made directly to the college.
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gift tax.
This year Carlos and Hailey purchased realty for $480,000 and took title as equal tenants in common. However, Hailey
was able to provide only $200,000 of the purchase price and Carlos paid the remaining $280,000. Has Carlos made a
taxable gift to Hailey, and if so, in what amount?
$25,000.
Carlos has made a complete gift to Hailey of $40,000 ($240,000 − $200,000) and the gift is eligible for an annual
exclusion of $15,000 (2020).
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gift tax.
This year Carlos and Hailey purchased realty for $470,000 and took title as equal tenants in common. However, Hailey
was able to provide only $190,000 of the purchase price and Carlos paid the remaining $280,000. Has Carlos made a
taxable gift to Hailey, and if so, in what amount?
$30,000.
Carlos has made a complete gift to Hailey of $45,000 ($235,000 − $190,000) and the gift is eligible for an annual
exclusion of $15,000 (2020).
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gift tax.
Last year Brandon opened a savings account with a deposit of $45,000. The account was in the name of Brandon and
Melanie, who have joint tenancy with the right of survivorship. Melanie did not contribute to the account, but this year
she withdrew $18,000. Has Brandon made a taxable gift to Melanie, and if so, in what amount?
$3,000.
No gift was made at the time of the deposit, but a complete gift of $18,000 was made once Melanie made the
withdrawal. This gift qualifies for the annual exclusion ($18,000 − $15,000 = $3,000 in 2020).
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gift tax.
Aiden transferred $2 million to an irrevocable trust with income to Valeria for her life and the remainder to Jocelyn (or
her estate). Calculate the value of the remainder and the life estate if Valeria's age and the prevailing interest rate result
in a Table S discount factor for the remainder of 0.47.
The remainder value is $940,000 and the life estate value is $1,060,000.
The remainder is valued at $940,000 ($2 million × 0.47). Accordingly, the value of the life estate is $1,060,000
($2,000,000 less $940,000).
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gift tax.
This year Evelyn created an irrevocable trust to provide for Ed, her 32-year-old nephew, and Ed's family. Evelyn
transferred $150,000 to the trust and named a bank as the trustee. The trust was directed to pay income to Ed until he
reaches age 35 (three years from now), and at that time the trust is to be terminated and the corpus is to be distributed
to Ed's two children (or their estates). Determine the amount, if any, of the taxable gift. The relevant interest rate is 6
percent. (Round your intermediate calculation to three decimal places.)
$135,000.
The $150,000 transfer to the trust is a current gift but only the income interest qualifies for an annual exclusion. The
remainder interest is valued as follows:
Remainder interest = $150,000/(1 + 0.06)3 = $150,000/(1.191) = $125,945.
The income interest is $150,000 − $125,945 = $24,055. Hence, the taxable gift is the amount of the remainder,
$125,945, and the income interest after the annual exclusion, $9,055 ($24,055 − $15,000 in 2020).
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gift tax.
This year Evelyn created an irrevocable trust to provide for Ed, her 32-year-old nephew, and Ed's family. Evelyn
transferred $227,000 to the trust and named a bank as the trustee. The trust was directed to pay income to Ed until he
reaches age 35 (three years from now), and at that time the trust is to be terminated and the corpus is to be distributed
to Ed's two children (or their estates). Determine the amount, if any, of the taxable gift. The relevant interest rate is 6
percent. (Round your intermediate calculation to three decimal places.)
$212,000.
The $227,000 transfer to the trust is a current gift but only the income interest qualifies for an annual exclusion. The
remainder interest is valued as follows:
Remainder interest = $227,000/(1 + 0.06)3 = $227,000/(1.191) = $190,596.
The income interest is $227,000 − $190,596 = $36,404. Hence, the taxable gift is the amount of the remainder,
$190,596, and the income interest after the annual exclusion, $21,404 ($36,404 − $15,000 in 2020).
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gift tax.
This year Maria transferred $600,000 to an irrevocable trust that pays equal shares of income annually to four cousins
(or their estates) for the next eight years. At that time, the trust is terminated and the corpus of the trust reverts to Maria.
Determine the amount, if any, of the current gifts and the taxable gifts if the relevant interest rate is 6 percent and Maria
is married and elects to gift-split with her spouse?
$51,771 for Maria and $51,771 for Maria's spouse.
The $600,000 transfer to the trust is a current gift only to the extent of the income interest (the corpus returns to Maria).
Hence, reversion interest is valued as follows:
Reversion interest = $600,000/(1 + 0.06)8 = $600,000/(1.5938) = $376,459 (rounded).
The income interest equals the total transfer less the value of the revision, or $600,000 − $376,459 = $223,541. Since
Maria elects to split the gift with her spouse, she and her spouse will be treated as gifting a total of $111,771. Because the
income interest is paid currently to four donees, the gift will qualify for four annual exclusions. Hence, Maria has made
four gifts of $27,943 each (a total of $111,771) and the annual exclusions will reduce each gift to $12,943. In total, Maria
has made total taxable gifts of $51,771 ($111,771 − $60,000). Maria's spouse will report identical gifts.
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gift tax.
James and Jasmine live in a community-property state. This year they transferred $800,000 of property to an
irrevocable trust that provides their son, Aaron, a life estate and their daughter, Lauren, the remainder. At the time of the
gift, the Table S value for Aaron was .18031. What is the amount, if any, of the taxable gifts?
James and Jasmine each made taxable gifts of $72,124 and $312,876.
Lauren's remainder is worth $144,248 ($800,000 × 0.18031) so the value of Aaron's life estate is $655,752 ($800,000 −
$144,248). Since the gift is from community property, half of the gift was made by each spouse. In other words, James
and Jasmine each made a gift of $72,124 to Lauren and $327,876 to Aaron. After applying the 2020 annual exclusion to
the life estate (the remainder is a future interest and does not qualify for an annual exclusion), James and Jasmine each
made taxable gifts of $72,124 and $312,876 ($327,876 − $15,000).
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gift tax.
Ryan placed $280,000 in trust with income to Stephen for his life and the remainder to Kayla (or her estate). At the time
of the gift, given the prevailing interest rate, Stephen's life estate was valued at $165,000 and the remainder at $115,000.
What is the amount, if any, of Ryan's taxable gifts?
$150,000 and $115,000.
The life estate is a present interest but Kayla's remainder is a future interest. Hence, only the value of Stephen's life
estate can be reduced by the annual exclusion. Hence, Ryan has made two taxable gifts: a taxable gift of $150,000 to
Stephen ($165,000 less the 2020 annual exclusion of $15,000) and a taxable gift of $115,000 to Kayla (no annual
exclusion is available).
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gift tax.
Ryan placed $405,000 in trust with income to Stephen for his life and the remainder to Kayla (or her estate). At the time
of the gift, given the prevailing interest rate, Stephen's life estate was valued at $246,000 and the remainder at
$159,000. What is the amount, if any, of Ryan's taxable gifts?
$231,000 and $159,000.
The life estate is a present interest but Kayla's remainder is a future interest. Hence, only the value of Stephen's life
estate can be reduced by the annual exclusion. Hence, Ryan has made two taxable gifts: a taxable gift of $231,000 to
Stephen ($246,000 less the 2020 annual exclusion of $15,000) and a taxable gift of $159,000 to Kayla (no annual
exclusion is available).
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gift tax.
Caleb transferred $115,000 to an irrevocable trust for Avery. The trustee has the discretion to distribute income or corpus
for Avery's benefit but is required to distribute all assets to Avery (or his estate) not later than Avery's 21st birthday. What
is the amount, if any, of the taxable gift?
$100,000.
Caleb will be entitled to an annual exclusion for the transfer because the trust fits the description of a trust for the benefit
of a minor. Hence, the taxable gift will be $100,000 ($115,000 − $15,000 annual exclusion in 2020).
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gift tax.
For the holidays, Samuel gave a necklace worth $35,000 to Jennifer and jewelry worth $44,000 to Savannah. Samuel is
married to Wendy and they live in a community-property state. Has Samuel made any taxable gifts and, if so, in what
amounts?
$2,500 and $7,000.
Since the gifts are from community property, then both Samuel and his spouse made a gift of $17,500 to Jennifer and
$22,000 to Savannah. After applying the 2020 annual exclusion, both Samuel and his spouse have made taxable gifts of
$2,500 ($17,500 − $15,000) to Jennifer and $7,000 ($22,000 − $15,000) to Savannah.
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gift tax.
For the holidays, Samuel gave a necklace worth $46,500 to Jennifer and jewelry worth $49,750 to Savannah. Samuel is
married to Wendy and they live in a community-property state. Has Samuel made any taxable gifts and, if so, in what
amounts?
$8,250 and $9,875.
Since the gifts are from community property, then both Samuel and his spouse made a gift of $23,250 to Jennifer and
$24,875 to Savannah. After applying the 2020 annual exclusion, both Samuel and his spouse have made taxable gifts of
$8,250 ($23,250 − $15,000) to Jennifer and $9,875 ($24,875 − $15,000) to Savannah.
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gift tax.
This year Nicholas earned $500,000 and used it to purchase land in joint tenancy with a right of survivorship with
Nevaeh. Has Nicholas made a taxable gift to Nevaeh and, if so, in what amount?
$235,000.
In a common-law state, Nicholas has made a taxable gift to Nevaeh of $235,000 ($250,000 − $15,000 annual exclusion
in 2020). If Nicholas is married to Nevaeh, the entire transfer will be offset by an annual exclusion and a marital
deduction, so there is no taxable gift.
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gift tax.
This year Nicholas earned $684,000 and used it to purchase land in joint tenancy with a right of survivorship with
Nevaeh. Has Nicholas made a taxable gift to Nevaeh and, if so, in what amount?
$327,000.
In a common-law state, Nicholas has made a taxable gift to Nevaeh of $327,000 ($342,000 − $15,000 annual exclusion
in 2020). If Nicholas is married to Nevaeh, the entire transfer will be offset by an annual exclusion and a marital
deduction, so there is no taxable gift.
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gift tax.
Grace transferred $800,000 into trust with the income to be paid annually to her spouse, Isaiah, for life and the
remainder to Taylor. Calculate the amount of the taxable gifts from the transfers.
$785,000.
The life estate is not eligible for the marital deduction because this interest will terminate upon a future event (Isaiah's
death) and then pass to another person (Taylor). Hence, the entire amount of the gift, less the 2020 annual exclusion for
Isaiah's life estate, will be a taxable gift ($800,000 − $15,000 = $785,000).
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gift tax.
Ricardo transferred $1,000,000 of cash to State University for a new sports complex. Calculate the amount of the taxable
gift.
Zero.
The gift qualifies for an annual exclusion ($15,000 in 2020) and a $985,000 charitable gift tax deduction. Hence, there is
no taxable gift. If Ricardo makes no other gifts this year, he need not even file a gift tax return. Ricardo can also claim an
income tax deduction for the transfer.
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gift tax.
Ricardo transferred $1,180,000 of cash to State University for a new sports complex. Calculate the amount of the taxable
gift.
Zero.
The gift qualifies for an annual exclusion ($15,000 in 2020) and a $1,165,000 charitable gift tax deduction. Hence, there is
no taxable gift. If Ricardo makes no other gifts this year, he need not even file a gift tax return. Ricardo can also claim an
income tax deduction for the transfer.
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gift tax.
Angel and Abigail are married and live in a common-law state. Angel and Abigail own a parcel of realty as joint tenants
with the right of survivorship. In addition, Abigail owns another parcel of realty in her name alone. If Abigail should die
when the jointly owned realty is worth $1 million and her own parcel of realty is worth $1.5 million, what is the total value
of realty that would be included in Abigail's gross estate?
$2 million.
Abigail's gross estate would include the value of the property subject to probate ($1.5 million) and half the value of the
property held by spouses in joint tenancy with the right of survivorship ($500,000).
References
Essay Difficulty: 3 Hard Learning Objective: 25-03 Compute the federal

estate tax.
Angel and Abigail are married and live in a common-law state. Angel and Abigail own a parcel of realty as joint tenants
with the right of survivorship. In addition, Abigail owns another parcel of realty in her name alone. If Abigail should die
when the jointly owned realty is worth $2.3 million and her own parcel of realty is worth $3.65 million, what is the total
value of realty that would be included in Abigail's gross estate?
$4.8 million.
Abigail's gross estate would include the value of the property subject to probate ($3.65 million) and half the value of the
property held by spouses in joint tenancy with the right of survivorship ($1,150,000).
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estate tax.
Ashley owns a whole-life insurance policy worth $25,000 that directs the insurance company to pay the beneficiary
$500,000 on her death. Ashley pays the annual policy premiums and has the power to designate the beneficiary of the
policy. What value of the policy, if any, would be included in Ashley's estate upon her death?
$500,000.
Because Ashley owned the policy, the face value of an insurance policy is included in the gross estate despite the fact
that the proceeds will be paid directly to the beneficiary.
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estate tax.
Ashley owns a whole-life insurance policy worth $30,000 that directs the insurance company to pay the beneficiary
$600,000 on her death. Ashley pays the annual policy premiums and has the power to designate the beneficiary of the
policy. What value of the policy, if any, would be included in Ashley's estate upon her death?
$600,000.
Because Ashley owned the policy, the face value of an insurance policy is included in the gross estate despite the fact
that the proceeds will be paid directly to the beneficiary.
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estate tax.
Joshua and David purchased real property for $500,000 as equal tenants in common. Although they are listed as equal
co-owners, Joshua was only able to provide $200,000 of the purchase price. David treated the additional $100,000 of
his contribution to the purchase price as a gift to Joshua. If the property is worth $2.5 million at Joshua's death, what
amount would be included in Joshua's estate?
$1.25 million.
If the title to property is held by tenants in common, half the value of the property ($1.25 million) is included in Joshua's
estate.
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estate tax.
Sophia is single and owns the following property:
Description Value
Real estate property $ 4,500,000
Sophia owns the real property in joint tenancy with Daniel. They purchased the property several years ago for $1 million.
Sophia was only able to provide $200,000 of the purchase price. If Sophia dies, what is the amount of her gross estate?
$4 million.
Sophia's estate includes the value of property owned outright ($3.1 million) and the proportion of real property
represented by the value as the amount of the purchase price she initially provided. Sophia provided 20 percent
($200,000 of $1 million) of the total cost, so her estate would include $900,000 of the real property. Thus, Sophia's gross
estate would be $4 million ($3.1 million plus $900,000).
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estate tax.
Sophia is single and owns the following property:
Description Value
Real estate property $ 13,950,000
Sophia owns the real property in joint tenancy with Daniel. They purchased the property several years ago for $3.1
million. Sophia was only able to provide $620,000 of the purchase price. If Sophia dies, what is the amount of her gross
estate?
$6.31 million.
Sophia's estate includes the value of property owned outright ($3.52 million) and the proportion of real property
represented by the value as the amount of the purchase price she initially provided. Sophia provided 20 percent
($620,000 of $3.1 million) of the total cost, so her estate would include $2,790,000 of the real property. Thus, Sophia's
gross estate would be $6.31 million ($3.52 million plus $2,790,000).
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estate tax.
At his death in 2020, Nathan owned the following property:
Description Value
The real estate is subject to a $1,700,000 mortgage and Nathan made taxable gifts in 2009 totaling $2 million, at which
time he offset the gift tax with an applicable credit (exemption equivalent of $2 million). Nathan has never been married.
What is the amount of his estate tax due? (Use Exhibit 25-1.)
$1.768 million in 2020.
Nathan has a taxable estate of $14 million ($15.7 million less debt of $1.7 million). The tax is calculated as follows:
Adjusted taxable gifts $ 2,000,000

Taxable estate + 14,000,000
Cumulative taxable transfers $ 16,000,000
Tax on cumulative transfers $ 6,345,800

Applicable credit ($11.58 million exemption equivalent in 2020) − 4,577,800
Estimated estate tax due $ 1,768,000
References

estate tax.
At his death in 2020, Nathan owned the following property:
Description Value
Personal property 1,000,000
The real estate is subject to a $1,775,000 mortgage and Nathan made taxable gifts in 2009 totaling $2.8 million, at which
time he offset the gift tax with an applicable credit (exemption equivalent of $2.8 million). Nathan has never been
married. What is the amount of his estate tax due? (Use Exhibit 25-1.)
$3.02 million in 2020.
Nathan has a taxable estate of $16.32 million ($18.10 million less debt of $1.77 million). The tax is calculated as follows:


Applicable credit ($11.58 million exemption equivalent in 2020) − 4,577,800
References

estate tax.
Ava transferred $1.5 million of real estate into an irrevocable trust for her son, Luis. The trustee was directed to retain
income until Luis' 21st birthday and then pay him the corpus of the trust. Ava retained the power to require the trustee to
pay income to Luis at any time, and retained the right to the assets if Luis predeceased her. What amount of the trust, if
any, will be included in Ava's estate if she died shortly after making the transfer?
$1.5 million.
The value of the trust assets would be included in Ava's estate because she retains control over the income (the ability
to force the trustee to distribute income) and has a contingent right of reversion.
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estate tax.
Ava transferred $2.10 million of real estate into an irrevocable trust for her son, Luis. The trustee was directed to retain
income until Luis' 21st birthday and then pay him the corpus of the trust. Ava retained the power to require the trustee to
pay income to Luis at any time, and retained the right to the assets if Luis predeceased her. What amount of the trust, if
any, will be included in Ava's estate if she died shortly after making the transfer?
$2.10 million.
The value of the trust assets would be included in Ava's estate because she retains control over the income (the ability
to force the trustee to distribute income) and has a contingent right of reversion.
References

estate tax.
Last year Diego transferred a life insurance policy worth $75,000 to an irrevocable trust with directions to distribute the
corpus of the trust to his grandson, Juan, upon his graduation from college, or to Juan's estate upon his death. Diego
paid $5,000 of gift tax on the transfer of the policy. Early this year, Diego died and the insurance company paid
$600,000 to the trust. What amount, if any, is included in Diego's gross estate?
$605,000.
Diego died within three years of the date of gifting the life insurance, so the face value of the policy ($600,000) and the
gift tax ($5,000) is included in his gross estate.
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estate tax.
Adrian owns two parcels of real estate. Parcel #1 is worth $400,000 and Parcel #2 is worth $660,000. Adrian plans to
bequeath Parcel #1 directly to his spouse, Sofia, and leave her a life estate in Parcel #2. What amounts will be included in
Adrian's taxable estate for these two parcels?
$660,000.
Both parcels will be included in Adrian's gross estate, but his executor will be able to claim a marital deduction for the
value of Parcel #1, $400,000. However, Adrian will leave Sofia a terminable interest in Parcel #2 and this will not qualify
for the marital deduction. Hence, Adrian's taxable estate will include the value of Parcel #2, $660,000.
References

estate tax.
Gabriel had a taxable estate of $16 million when he died in 2020. Calculate the amount of estate tax due (if any) if
Gabriel made prior taxable gifts in 2005 totaling $1 million, at which time he claimed an applicable credit of $1 million and
paid no tax. Gabriel was unmarried at his death. (Use Exhibit 25-1.)
$2,168,000 in 2020.


Applicable credit (2020) − 4,577,800
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estate tax.
Gabriel had a taxable estate of $17.3 million when he died in 2020. Calculate the amount of estate tax due (if any) if
Gabriel made prior taxable gifts in 2005 totaling $1 million, at which time he claimed an applicable credit of $1 million and
paid no tax. Gabriel was unmarried at his death. (Use Exhibit 25-1.)
$2,688,000 in 2020.


Applicable credit (2020) − 4,577,800
References

estate tax.
Isaac is married and Isaac and his spouse agree that they want to transfer the maximum amount of cash to each of their
four children and six grandchildren. How much cash in total can Isaac and his spouse transfer to his children and
grandchildren each year without creating any taxable gifts?
$300,000.
Isaac and his spouse can gift a total of $300,000 to their children and grandchildren (4 + 6 = 10 donees, multiplied by
$15,000 2020 annual exclusion for each donee, multiplied by 2 for gift-splitting).
References
Essay Difficulty: 3 Hard Learning Objective: 25-04 Understand how

wealth planning.
Isaac is married and Isaac and his spouse agree that they want to transfer the maximum amount of cash to each of their
four children and six grandchildren. How much cash in total can Isaac and his spouse transfer to his children and
grandchildren each year without creating any taxable gifts?
$300,000.
Isaac and his spouse can gift a total of $300,000 to their children and grandchildren (4 + 6 = 10 donees, multiplied by
$15,000 2020 annual exclusion for each donee, multiplied by 2 for gift-splitting).
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wealth planning.
Eric has $5 million 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). Eric has made many prior taxable gifts, and additional
taxable transfers will be subject to the highest transfer tax rate. Determine how much estate tax Eric will save if he gifts
the property now and survives at least three years, during which time the property appreciates to $5.5 million. Ignore the
time value of money in your calculation. (Use Exhibit 25-1.)
$1,014,440.
The top transfer tax rate is 40 percent, and so a gift this year would result in total taxable gifts of $4,940,000 ($5 million
less 4 annual exclusions of $15,000 each), resulting in a gift tax of $1,976,000. In contrast, if Eric dies in three years his
estate would pay estate tax on the value at the date of death, resulting in an estate tax of $2,200,000 ($5,500,000 ×
40%). Also, if Eric gifts the property now and survives at least three years, then the gift tax on the current gift will not be
included in his estate, saving an additional $790,400 ($1,976,000 × 40%). Eric would lose the time value of the gift tax
because a transfer by will would postpone the tax three years. Ignoring the time value of money, the total tax savings of
making the gift now would be ($2,200,000 − $1,976,000) + $790,400 = $1,014,400.
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wealth planning.
Eric has $4.6 million 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). Eric has made many prior taxable gifts, and additional
taxable transfers will be subject to the highest transfer tax rate. Determine how much estate tax Eric will save if he gifts
the property now and survives at least three years, during which time the property appreciates to $5.06 million. Ignore
the time value of money in your calculation. (Use Exhibit 25-1.)
$934,400.
The top transfer tax rate is 40 percent, and so a gift this year would result in total taxable gifts of $4,540,000 ($4.6
million less 4 annual exclusions of $15,000 each), resulting in a gift tax of $1,816,000. In contrast, if Eric dies in three
years his estate would pay estate tax on the value at the date of death, resulting in an estate tax of $2,024,000
($5,060,000 × 40%). Also, if Eric gifts the property now and survives at least three years, then the gift tax on the current
gift will not be included in his estate, saving an additional $726,400 ($1,816,000 × 40%). Eric would lose the time value of
the gift tax because a transfer by will would postpone the tax three years. Ignoring the time value of money, the total tax
savings of making the gift now would be ($2,024,000 − $1,816,000) + $726,400 = $934,400.
References

wealth planning.

Chapter 25 Test Bank

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1. Award: 1.

2. Award: 1.00 point

4. Award: 1.00 point

The exemption equivalent was repealed in 2010.

5. Award: 1.00 point

7. Award: 1.00 point

8. Award: 1.00 point

The estate tax is imposed on testamentary transfers.

The gift tax is imposed on inter vivos (lifetime) transfers.

10. Award: 1.00 point

11. Award: 1.00 point

Only complete gifts are subject to the federal gift tax.

13. Award: 1.00 point

14. Award: 1.00 point

A future interest is a right to receive income or property in the future.

16. Award: 1.00 point

17. Award: 1.00 point

19. Award: 1.00 point

20. Award: 1.00 point

Both spouses must consent to any gift-splitting election.

22. Award: 1.00 point

23. Award: 1.00 point

25. Award: 1.00 point

27. Award: 1.00 point

28. Award: 1.00 point

No deductions are allowed when calculating the taxable estate.

30. Award: 1.00 point

31. Award: 1.00 point

Property passing by operation of law is not included in the probate estate.

33. Award: 1.00 point

34. Award: 1.00 point

36. Award: 1.00 point

37. Award: 1.00 point

39. Award: 1.00 point

40. Award: 1.00 point

42. Award: 1.00 point

43. Award: 1.00 point

True / False Diﬃculty: 1 Easy Learning Objective: 25-04 Understand how

A trust is a legal entity that can only exist for a year.

The life of a trust is not necessarily limited to a speciﬁc period.

True / False Diﬃculty: 1 Easy Learning Objective: 25-04 Understand how

45. Award: 1.00 point

A serial gift strategy maximizes the value of the annual exclusion.

True / False Diﬃculty: 2 Medium Learning Objective: 25-04 Understand how

46. Award: 1.00 point

True / False Diﬃculty: 1 Easy Learning Objective: 25-04 Understand how

True / False Diﬃculty: 3 Hard Learning Objective: 25-04 Understand how

48. Award: 1.00 point

True / False Diﬃculty: 2 Medium Learning Objective: 25-04 Understand how

49. Award: 1.00 point

True / False Diﬃculty: 2 Medium Learning Objective: 25-04 Understand how

True / False Diﬃculty: 3 Hard Learning Objective: 25-04 Understand how

51. Award: 1.00 point

 an inter vivos transfer.

 All of the choices are correct.

The applicable credit is designed to:

 apply only to taxable transfers included in the gross estate.

 apply to amounts not already eliminated by the exemption equivalent.

 exclude up to $15,000 per individual per year on any individual transfer.