Tax 26
Family Planning
Solutions to Tax Research Problems
26-42 This trust may be considered a grantor trust under 677(b), which provides that "income of a trust shall not be considered taxable to the grantor merely because such income in the discretion of another person, the trustee, or the grantor acting as trustee or co-trustee, may be appointed or distributed for the support or maintenance of a beneficiary (other than the grantor's spouse) whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed." The income from the trust was, in fact, distributed to the beneficiary S and used by him to pay educational expenses. Therefore, the research question is whether educational expenses are regarded as support and maintenance that P is legally required to provide to his son S. The Internal Revenue Service has long made the argument that parents have a legally enforceable responsibility to pay the school and college bills of their children [see Morrill, Jr. v. U.S., 228 F . Supp 734 (D.Ct. Maine, 1964)]. However, Federal courts have consistently looked to the laws of the state in which the grantor is a resident to determine the status of educational costs as support and maintenance payments. In Braun, Jr., 48 TCM 210, T.C. Memo 1984 -285, the Tax Court had to consider whether residents of the state of New Jersey were legally obligated under state law to pay college tuition and room and board expenses of an unmarried child over the age of 18. The Court held that "the import to our facts is clearly that petitioners retained the obligation to provide their children with a college education. They were both willing and able to do so, a college education was imminently reasonable in the light of the background, values, and goals of the parents as well as the children, and petitioners have brought forward no facts or arguments which would militate against the recognition of this obligation on the part of these particular parents." The answer to the research question involving P and his son S will depend on the nature of the support obligation imposed on P under the laws of Missouri. If the law stipulates that a parent with P's financial and social status, and with P's expectations concerning the suitable education of his children, is required to provide that education, then 677(b) will control, and the $7,000 of trust income will be taxed to P rather than to S. If P is not required to provide a college education for S, the grantor trust rules are inapplicable and the income will be taxed to S under the rules of Subchapter J. It is well established that the refusal to accept an inheritance may constitute the transfer of a property interest subject to the Federal gift tax (see Rev. Rul. 76-156, 1976-1 C.B. 292). However, 2518 provides a statutory exception to this general rule. Per 2518(a), a person who makes a "qualified disclaimer" with respect to any interest in property shall be considered never to have owned the interest. Therefore, the shift of ownership of the interest upon such disclaimer is not regarded as a transfer subject to the Federal gift or estate tax.
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26-43
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Chapter 26
Family Tax Planning
5-
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Section 2518(b) defines a qualified disclaimer as an irrevocable and unqualified refusal by a person to accept an interest in property--but only if four conditions are satisfied. First, the disclaimer must be in writing. Second, the disclaimer must be received by the transferor of the interest or her or his legal representative not later than nine months after the day on which the attempted transfer of the interest occurred, or nine months after the person making the disclaimer reaches age 21, whichever date is later. Third, the person making the disclaimer must not have accepted the interest in the property or any of its benefits. Fourth, the interest in the property must pass to another party without any direction on the part of the person making the disclaimer. Turning to the facts in the research problem, S made a disclaimer of her interest in the $500,000 specific bequest from her deceased sister 17 months after the date of her sister's death. Assuming that S is over age 21 as of the date of death, her disclaimer is not "qualified" because she violated the timing requirement of 2518(b). As a result, S has made a $500,000 taxable gift to the grandchildren of D.
26
Family Tax Planning
Test Bank
True or False
1. Grandfather GF, a single taxpayer, has current year taxable income of $300,000. His granddaughter GD, also single, has current year taxable income of $210,000. An income shift of $15,000 from GF to GD during the current year would not result in any tax savings to the family. 2. In the current taxable year, married couple H and W give a completed gift of a $20,000 certificate-ofdeposit bearing simple interest to their 15-year-old child, C. The interest on the certificate paid to C during the current year totals $1,600. Under the assignment-of-income doctrine, the $1,600 must be included in the gross income of H and W. 3. Married taxpayers have the option of filing a joint income tax return or filing as two single taxpayers. 4. D, the seven-year-old daughter of Mr. and Mrs. M, is a very successful child model. Because Mr. and Mrs. M provide more than 50 percent of D's support and claim her as a dependent, D's earnings as a model must be reported on her parent's income tax return. 5. Individual S is the sole shareholder of Corporation S. The corporation employs S's college-aged granddaughter as secretary-treasurer for the summer, paying her $25,000 for three months work. If the Internal Revenue Service determines that the granddaughter is not a bona fide corporate employee and disallows the entire $25,000 salary deduction, the $25,000 payment could be reclassified as a dividend to the granddaughter. 6. A family member will be recognized as a legitimate partner if he or she owns a capital interest in a partnership in which capital is a material income-producing factor, even if the family member does not perform any services for or on behalf of the partnership. 7. The payment of dividends by a regular family corporation to shareholders who are low tax bracket family members is an economical and effective method for family income-shifting. 8. On the whole, a regular corporation provides more intra-family income-shifting advantages than an S corporation.
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Family Tax Planning
9. The gift of an income-producing asset, for purposes of shifting tax liability on the income to the donee, is never completed until the donor irrevocably transfers ownership to the donee. 10. Mr. and Mrs. B are equal shareholders in Beta Corporation, which is an S corporation. In order to shift corporate income to their children and still retain total control of the corporation, Mr. and Mrs. B may have Beta issue common, nonvoting stock to their children without terminating Beta's Subchapter S election. One advantage of a Crummey trust over a 2503(c) trust is that the distribution of trust corpus can be delayed beyond the date when the beneficiaries reach age 21. The purpose of a Crummey power in a trust is to prevent a beneficiary from gaining access to current additions to the trust. For tax purposes, trusts can be divided into two basic categories: grantor trusts and trusts recognized as separate taxable entities subject to the provisions of Subchapter J. Taxpayer T would like to "shift" some of his current year taxable income to an elderly aunt. T can accomplish this objective through the use of a $150,000 interest-free demand loan to his aunt. Taxpayer T transfers $1 million in assets to a revocable trust. Under the terms of the trust instrument, daughter D will be paid the income generated by the trust assets for her life, and charity C will receive the remainder interest upon D's death. The income of this trust will be taxed to T. If a transfer of assets into trust is complete for gift and estate tax purposes, the trust is always held to be a separate, taxable entity. The transferor will not be taxed on any income generated by these assets after transfer into trust. The tax attributable to a closely held business can be deferred but only if the business is at least 50 percent of the estate. An excellent source of funds with which to pay a sizeable Federal estate tax is insurance on the life of the potential decedent with the decedent's estate named as beneficiary. "Flower" bonds, which may be used to pay a Federal estate tax liability, typically will pay an interest rate higher than the market interest rate.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Multiple Choice
20.
Taxpayer M, a sole proprietor, hires her 15-year-old dependent daughter D as an employee of her business. During the year, M pays D a reasonable salary of $6,500 for the work D performs. D put the entire amount of her salary into a savings account for college. Which of the following statements is not accurate? a. b. c. d. M will claim a $6,500 ordinary business deduction on her current-year tax return. D will report $6,500 of ordinary income on her own current-year income tax return. D may not claim a personal exemption on her own current-year income tax return. M may not claim a dependency exemption for D on M's current tax return.
21.
Father employs Son as a carpenter in Father's construction business. Son only works June, July, and August, and uses his salary to pay his college tuition. Father may a. b. c. d. Deduct Son's wages to the extent the amount paid was reasonable payment for services rendered. Deduct Son's wages to the extent Father is liable for Son's tuition. Deduct Son's wages in proportion to the amount of ownership interest Son has in the business. Not deduct a family member's wages under any circumstances.
Test Bank
26-5
22.
Which of the following statements is true concerning the current income tax rate schedules for married couples and for single taxpayers? a. b. c. d. Because of the structure of the schedules, a single taxpayer may pay more tax on the same amount of taxable income reported by a married couple. Because of the structure of the schedules, a married couple may pay more tax on their combined incomes than if they had filed as two single taxpayers. Because of the structure of the schedules, a married couple may pay less tax on their combined incomes than if they had filed as two single taxpayers. Statements a., b. and c. are true.
23.
Dad gratuitously transfers 50 percent of the stock in a shipbuilding corporation valued at $10 million to Son. What are the tax consequences of this transfer to both Dad and Son? a. b. c. d. Dad is generally subject to gift tax on $5 million; Son has no income tax liability on receipt of the stock. Dad has no tax consequences, although his corporation gets a $5 million deduction; Son has taxable income of $5 million. Dad has income tax on the gain he recognizes as the difference between his basis for the 50 percent ownership interest given away and its FMV; Son has no tax consequences and receives a step-up basis to FMV for his 50 percent ownership interest. Dad has made a $5 million gift which is taxable under gift tax law; Son has income tax on the difference between Dad's basis for the 50 percent ownership interest given away and its FMV.
24.
Theta Partnership, a calendar year taxpayer, operates a business in which capital is a material incomeproducing factor. On January 1 of the current year, T, a 70 percent partner in Theta, sells half of his capital interest to his son S for its fair market value of $250,000. (This transfer gives S a 35 percent interest in partnership capital.) For the current year, Theta earns taxable income of $600,000. The maximum amount of this income that may be allocated to son S is a. b. c. d. Any amount as long as the allocation has substantial economic effect per 704(b) $0 $210,000 $420,000
25.
Taxpayer F owns and operates a cash basis bookkeeping service as a sole proprietor. Capital is not a material income-producing factor in the business. F would like to "shift" some of the income he earns in the business to his son, S, who is 25 years old. Which of the following techniques will accomplish F's goal? a. b. c. d. F hires S as an employee and pays him a reasonable salary for services actually performed. F gives S an ownership interest in the business in the form of a partnership interest. F gives S an ownership interest in the business in the form of a stock interest in an S corporation, and F draws no salary from the corporation. F makes a gift of the business accounts receivable to S.
26.
In the current year, sole proprietor Z (a single taxpayer) incorporates his business and becomes the sole shareholder in Z Corporation. The business has consistently generated $70,000 annual income to Z. Which of the following statements concerning the newly formed C corporation is not accurate? a. b. c. d. Z Corporation has a lower effective tax rate on the business income than did sole proprietor Z. Z Corporation may pay Z a reasonable salary for services rendered to the corporation and deduct the payment. Z Corporation may pay Z a competitive interest rate on funds lent by Z to the corporation and deduct the payments. Z corporation's net income is nontaxable when distributed to its shareholder as dividends.
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Family Tax Planning
27.
T incorporated his candy business as a C corporation. Several family members work for the corporation. Which technique will not avoid double taxation? a. b. c. d. The corporation employs family shareholders and pays them reasonable salaries. T loans the corporation money and receives fair market interest on the loan. The corporation pays dividends to family shareholders. T leases the land on which a new addition is being built to the corporation.
28.
Which of the following is not an advantage of the irrevocable trust form of ownership? a. b. c. d. A trust allows for the professional management of assets. A trust can provide economic benefits for numerous beneficiaries, even though a single trustee has legal title to the trust assets. A trust pays tax on current trust income at the fiduciary rate even if such income is distributed to beneficiaries in a higher individual income tax bracket. All of the above are advantages of the trust form.
29.
Dad gives his five-year-old child a certificate of deposit. The $2,000 in interest income received this year is taxed in which of the follow ways? a. b. c. d. $2,000 included in Dad's gross income $100 taxed at Dad's marginal rate and $950 taxed at 10% $1,050 taxed at 10% There is no tax on the income generated by a gift.
30.
During the 2011, taxpayer C (age 17 on the last day of the taxable year and a dependent on his widowed mother's tax return) receives $350 of interest on a savings account and $900 earned income from baby-sitting. Based on these facts, which one of the following statements is correct? a. b. c. d. C has taxable income of $50 which will be taxed at the rate applying to single taxpayers. C has no taxable income. The $350 of unearned income will be taxed on C's mother's return for the current year. C has no taxable income because his standard deduction is greater than $1,300. C has taxable income of $1,300 which will be taxed on C's return at the marginal rate that would apply on his mother's return.
31.
The advantages of a private trust include all of the following except a. b. c. d. Placing legal title in the hands of a single entity Providing for prudent management of trust assets Providing a form for giving property in sequence rather than concurrently Accumulating income during the years in which the trust's marginal rate is less than the income beneficiary's
32.
D's grandmother places $50,000 in a trust for D at her birth. The trustee may distribute income to D at his discretion. Which of the following is a true statement about the tax consequences of this arrangement? a. b. c. d. Any amounts accumulated by the trust are subject to the "kiddie tax." The distributed amounts will be subject to the "kiddie tax" as long as the child is less than 19 or a full-time student less than 24. D's parents must recognize all the trust income for income tax purposes until D reaches age 24. Income generated by a gift to a minor is nontaxable to the extent it is not distributed to the minor.
Test Bank
26-7
33.
A "gift-leaseback" generally occurs when the owner of a trade or business asset transfers the asset as a gift in trust for the benefit of the children (or other low-bracket family members) and then has the independent trustee lease back the asset to the business for fair rental value. The rent is deducted as a 162 business expense according to the terms of a written lease. IRS argues that this is not a business expense because a. b. c. d. A child could never own such a valuable asset. A legitimate business would purchase, rather than lease, the asset. The trust cannot engage in business transactions without breaching its fiduciary duty to prudently manage the trust corpus. There is no valid business purpose for it.
34.
Which of the following is not a characteristic of a 2503(c) trust? a. b. c. d. A transfer into a 2503(c) trust will be considered a gift of a current interest in the transferred property, eligible for the annual gift tax exclusion. Income from the trust may be expended for the benefit of any beneficiary under the age of 21. If an income beneficiary dies before reaching the age of 21, his or her share of trust assets reverts to the donor. Income accumulated in the trust for an income beneficiary under the age of 21 will be taxed at the beneficiary's rates.
35.
Which of the following is not a characteristic of a Crummey trust? a. b. c. d. A Crummey trust is a grantor trust, with the that result all trust income will be taxed to the grantor. A Crummey trust allows the grantor to delay distribution of trust assets beyond the 21st birthday of the trust beneficiary. Transfers into a Crummey trust are eligible for the annual gift tax exclusion because of the withdrawal right given to trust beneficiaries. Beneficiaries of a Crummey trust must be notified of their withdrawal right within a reasonable period prior to the lapse of the right.
36.
In the current year, donor D transfers $200,000 of income-producing assets into a trust. D's father, F, age 85, is given an income interest in the trust for the rest of his life. Upon F's death, the assets will revert to D. F's life expectancy is three years. In the current year, the trust has ordinary income of $18,000, which is distributed to F, and a capital gain allocable to corpus of $4,500. Based on these facts, a. b. c. d. All current-year income, both ordinary and capital gain, will be taxed to D. The current-year ordinary income will be taxed to F; the capital gain will be taxed to D. The current-year ordinary income will be taxed to F; the capital gain will be taxed to the trust. All current-year income, both ordinary and capital gain, will be taxed to the trust.
37.
In the current year, donor P establishes a trust for the benefit of his three minor children. Which of the following situations might cause the trust to be considered a grantor trust? a. b. c. d. e. The trust department of the First National Bank is named independent trustee and is given the right to "sprinkle" the annual trust income among the three children. The independent trustee may use trust income for the support and maintenance of the trust beneficiaries; however, no trust income is expended currently for such support. Mrs. P, the donor's wife, has the authority to revoke the trust so that the trust assets revert to P; however, P himself has no such authority. The trust will terminate in the year 2006, at which time the trust assets will revert to P. Both c and d.
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38.
D puts $100,000 into First Bank Trust to establish an irrevocable discretionary trust with his children as income beneficiaries; the principal goes to D's grandchildren at the death of the last surviving child. D divorces his children's mother and severs all ties with his family. The independent trustee distributes income only to pay for the support of the children. Which of the following is a true statement? a. b. c. d. The amount of income received by the children under age 19 is generally taxed to them at their father's marginal rate. The income is taxed to D. The distributed income is taxed at the trust's marginal rate. The custodial parent (the mother/ex-wife) is taxed on the income.
39.
U puts $50,000 in a trust to provide funds for his nephew's education. Any assets remaining in the trust when the nephew reaches 30 revert to U. The nephew is 28 and in medical school. The gift tax consequences are which of the following? a. b. c. d. The value of the income interest given to the nephew is a separate gift and subject to gift tax. This is a grantor trust, with all the income taxable to U; therefore, there are no gift tax consequences. All $50,000 is subject to gift tax in the year the trust was created. There is no gift tax because the income received by the nephew creates a moral obligation for his parent to repay; therefore, it is treated as a loan rather than a gift.
40.
Which of the following is not an advantage of inter vivos giving as compared with testamentary transfers? a. b. c. d. The transfer tax rates for inter vivos gifts are less than the tax rates on transfers at death. Any post-transfer appreciation in the value of inter vivos gifts will not be subject to tax when the donor dies. The annual exclusion can be used to make substantial amounts of tax-free gifts. The dollars used to pay a gift tax are not subject to transfer taxes; however, the dollars used to pay an estate tax are after-tax dollars.
41.
In 2011 H and W, who are in their 70's and have five children, could eliminate transfer tax on their $10.1 million net estate by a. b. c. d. Giving $100,000 as inter vivos gifts in increments subject to the annual gift tax exclusion and giving $10 million to one or more donees Creating a provision to leave the entire $10.1 million to the surviving spouse, which would enable a marital deduction of the entire $10.1 million Giving $100,000 as inter vivos gifts in increments subject to the annual gift tax exclusion and leaving the remaining $10,000,000 to the surviving spouse Both a. and c.
42.
Which of the following is a false statement concerning an asset "freeze" as part of an estate plan? a. b. c. d. An asset "freeze" is used to prevent or reduce future accumulations of wealth in an elderly taxpayer's estate. An asset "freeze" is usually psychologically easier for an elderly taxpayer than an estate plan based on substantial gifts of existing wealth to younger-generation family members. A sale to a younger-generation family member of an asset that is expected to appreciate significantly in value is an example of an asset "freeze." A revocable transfer to a trust of assets by an elderly taxpayer for the benefit of younger taxpayers is an example of an asset "freeze."
Test Bank
26-9
43.
G transferred appreciating real estate worth $3 million into a trust and retained an annuity equal to 10 percent of the value of the property on the date of the transfer. G will receive the annuity for 10 years after which the property will be distributed to R. Assume that the property is worth $8 million upon the termination of the trust. Which of the following statements is true? a. b. c. d. None of the property is included in G's gross estate if G lives more than 10 years after the transfer. None of the property will be included in G's gross estate as long as he dies within 10 years of the transfer. Both a. and b. are false. Both a. and b. are true.
44.
This year G transferred property to a trust. Under the terms of the trust, a qualified charity is to receive the income from the trust for 10 years at which time the property is returned to G. Which of the following statements is true? a. b. c. d. G will receive an income tax deduction for the value of the income interest in year one but in each year must report the actual income of the trust. G will receive an income tax deduction for the value of the remainder interest in year one but in each year must report the actual income of the trust. G will receive a deduction for the value of the income interest in year one and the trust will report the income it actually receives and distributes to the charity in subsequent years. None of the above are true.
45.
Which of the following is probably not an optimal source of liquidity for the payment of estate taxes? a. b. c. d. Life insurance A buy-sell agreement with a family business Real property assets of the estate Flower bonds
26
Family Tax Planning
Solutions to Test Bank
True or False
1. True. Both GF and GD are in a 33 percent marginal tax bracket (for 2011 the 33% bracket for single taxpayers extends from $174,400 to $379,150 of taxable income). The shift does not move income from a high tax bracket to a low tax bracket. [See p. 26-3 and 1(c).] 2. False. Because H and W made a completed gift of capital to C, C is the owner, and therefore the income from the capital (i.e., the interest) is taxed to C. Investment income must be taxed to the owner of the investment capital that generated the income. (See p. 26-4.) 3. False. Married taxpayers may file a joint return or they may choose to file separate returns using the married filing separately rate schedule. (See footnote 6, p. 26-4, and 6013.) 4. False. A child who earns income is a taxpayer in his or her own right, even if claimed as a dependent on another taxpayer's return. Children are taxpayers separate and distinct from their parents as recognized by 73, which states "amounts received in respect of the services of a child shall be included in his gross income and not in the gross income of the parent, even though such amounts are not received by the child." [See p. 26-5 and Reg. 1.73-1(a).] 5. False. The constructive dividend would be to grandfather S. The receipt of the funds by granddaughter would be considered a gift from S. [See p. 26-10 and Minnie E. Lasker, 11 TCM 50, Dec. 18,749(M).] 6. True. If the family partnership is one in which capital is a major income-producing factor, the mere ownership of a capital interest will entitle a family member to participate in partnership income. This is true even if the family member received his or her interest as a gift. [See Example 6, p. 26-8, and 704(e)(1).] 7. False. Dividends paid by a regular corporation to shareholders represent income subject to two rounds of income taxation and are usually considered prohibitively costly from a tax standpoint. [See p. 26-10 and 61(a)(7).] 8. False. The S form avoids double taxation on corporate income. The corporate income flows through directly to the shareholder. Thus, the S corporation is a very useful mechanism for intra-family incomeshifting since stock can be owned by the members of the family. [See p. 26-11 and 1366(a).]
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9. True. The donee, or recipient of a gift, must have complete "dominion and control" over the asset. (See p. 26-11.) 10. 11. 12. True. A difference in voting rights does not create a second class of stock that would terminate a valid Subchapter S election. [See p. 26-12 and 1361(c)(4).] True. The corpus of a 2503(c) trust must be distributed to the beneficiary no later than age 21. There is no such requirement for a Crummey trust. [See p. 26-15 and 2503(c).] False. The opposite is true. The Crummey power gives the beneficiary the right to withdraw current additions to the trust. This right in the beneficiary creates a current gift to the beneficiary, regardless of whether she or he exercises the right. (See p. 26-15.) True. These two categories are created by the language of 671. The basic operative rule is contained in 671. (See p. 26-16.) False. Under 7872(a), the amount of "foregone" interest on a demand loan will be considered as constructive interest income received by the creditor and paid by the debtor. Such interest is then considered a transfer back to the debtor as a gift from the creditor. Therefore, no income "shift" from creditor to debtor occurs. (See Example 16 and p. 26-16.) True. Revocable trusts are grantor trusts and therefore all of the income is taxed to T. (See p. 26-18 and 676.) False. A transfer may be a completed gift but still create a grantor trust. (See Example 24 and p. 26-19.) False. The estate tax attributable to a decedent's interest in a closely held business may be deferred but the value of the business must exceed 35 percent of the gross estate minus certain deductions. (See p. 26-32.) False. It is absolutely vital that the insured individual does not possess any incidents of ownership in the policies and that his or her estate is not the beneficiary of the policies. If the decedent "owns" the policy or the insurance proceeds are payable to the estate at death, the proceeds are included in the gross estate. [See pp. 26-32 and 2042(1).] False. Flower bonds typically pay a very low interest rate, resulting in a FMV well below their par value. (See p. 26-32.)
13. 14.
15. 16. 17. 18.
19.
Multiple Choice
20. 21. 22.
d. As long as M continues to provide over 50 percent of the support of D, D may be claimed as a dependent on M's return. [See Example 1, p. 26-3, and 151(e)(1) and 152(a).] a. Wage expense is deductible as a business expense. (See Example 3 and p. 26-6.) d. Whether or not the tax liability of a married couple is more or less than their combined liabilities as single taxpayers depends on the relative amounts of taxable income earned by each. (See Example 2 and pp. 26-4 and 26-5.) a. A gift is excludable from the donee's gross income. (See Example 5 and p. 26-7.) c. Because S is T's son, the family partnership rules of 704(e) apply, even though the son purchased his capital interest from his father. [See 704(e)(3).] Therefore, the maximum partnership income allocable to S is 35% of $600,000 $210,000. (See Example 6 and p. 26-8.) a. The assignment-of-income doctrine and 704(e) prevent a family member from becoming a partner in a service partnership unless the family member is capable of performing services. Similarly, Reg. 1.1375-3 prevents a shareholder in an S corporation from forgoing a reasonable salary for services performed in order to shift earned income to other shareholders. The assignment-of-income doctrine precludes the gifting of zero-basis accounts receivable as an income shift. (See pp. 26-4 through 26-5 and 26-6 through 26-10.)
23. 24.
25.
Solutions to Test Bank
26-13
26. 27. 28. 29.
d. Any dividends paid must be included in its shareholder's gross income and taxed at the individual level. Dividends are not deductible. (See p. 26-9.) c. Dividends are not deductible by the corporation and are taxable to the shareholder. (See pp. 26-9 and 26-10.) c. To the extent that trust income is distributed (or required to be distributed) to beneficiaries, it is taxed to the beneficiaries. (See p. 26-15 and 652 and 662.) b. Net unearned income to child The standard deduction for 2011 Taxable income Taxed at child's rate (10%) Taxable unearned income (at parent's marginal rate). $2,000 ( ,950) $1,050 ( ,950) $ ,100
(See Example 10 and p. 26-12.) 30. a. Because C's unearned income of $350 is less than $1,900 in 2011 (the kiddie tax base of $950 plus a $950 standard deduction), it is not subject to the ``kiddie'' tax. Therefore, the taxable income of $50 ($1,300 gross income $1,250 ($950 $300) standard deduction) is taxed at C's applicable rate as a single taxpayer. (See Example 10 and pp. 26-12.) d. The opportunities for tax savings by accumulating income are limited because of the compressed tax rates for the trust. (See p. 26-14 and 665 through 668.) b. [See p. 26-14 and 1(I) for application of the kiddie tax, causing the unearned income distributed from a trust to a beneficiary under age 19 or who is a full-time student less than 24 to be taxed at his or her parents' rates.] d. The IRS has refused to recognize the validity of gift-leaseback arrangements and has consistently disallowed the rent deduction to the transferor of the business assets under the theory that the entire transaction has no business purpose. However, the deductibility of rent paid under gift-leasebacks where the rent is reasonable, the lease is written, and the trustee is independent, has been allowed in Tax Court and some appellate courts. (See p. 26-14.)
31. 32.
33.
34.
c. In a 2503(c) trust, upon the death of a beneficiary under the age of 21, the trust assets must be payable to the estate of the beneficiary or be subject to the beneficiary's testamentary general power of appointment. [See p. 26-15 and 2503(c)(2)(B).] a. In a Crummey trust the income is generally taxed to the beneficiary since he or she has a general power of appointment over the trust property. [See 678 and pp. 26-15 and 26-19.] a. This is clearly a reversionary trust under 673 and the grantor is treated as owner for income tax purposes. (See Examples 14 and 15 and p. 26-16.) e. In c, Mrs. P is a nonadverse party (she has no interest in the trust). Thus, this is a grantor trust. In d, donor P is owner of the trust if the revisionary interest is valued today at more than 5 percent of the assets subject to reversion. [See pp. 26-17, 26-18 and 26-19, and 673 and 676(a).] b. Section 677(b) states that the fact that trust income may be distributed for the support of a beneficiary does not automatically create a grantor trust. However, any income actually distributed for support or maintenance of a beneficiary (other than the grantor's spouse) whom the grantor is legally obligated to support is taxable to the grantor and not to the beneficiary. (See p. 26-19.) a. Since this is a grantor trust (reversionary interest retained by the grantor), any amounts transferred to the nephew are gifts and subject to gift tax. (See Example 24 and p. 26-20.) a. Both the gift and the estate tax are computed by using the same rate schedule. [See pp. 26-20 and 26-21 and 2502(a)(1).]
35. 36. 37.
38.
39. 40.
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Family Tax Planning
41.
d. Both a. and c. eliminate any transfer tax liability although c is probably a more popular way to do it since the assets remain under the control of H and W while they are living. The surviving spouse would be able to use the unused unified credit of the first-spouse-to-die. Item b is incorrect since the surviving spouse would pay an estate tax when he or she dies. (See pp. 26-21 through 26-22.) d. A revocable transfer will be brought back into the decedent's estate. The first three are accurate statements. (See pp. 26-20 through 26-22.) a. This is a grantor retained annuity trust (i.e., a GRAT). If the grantor survives the term, nothing is pulled back into the grantor's estate under 2036 since the grantor did not retain an interest until death. However, if he dies within the term, the value of the property is included in his estate. (See Examples 36 and 37 and p. 29.) (See Example 40 and pp. 26-33 and 26-34.) a. In a charitable lead trust, the grantor receives an income tax deduction for the actuarial value of the income interest in the year of the transfer but must include in his gross income the income actually received annually. (See Example 39 and p. 26-31.) c. Using real property to raise cash for the payment of estate taxes could force the estate to sell the property at distress sale prices. (See pp. 26-36 and 26-37.)
42. 43.
44.
45.