Real estate worth $700,000 was transferred to his surviving spouse, Delilah. Samson had promised to give stock worth $24,000 to his nephew, but he never did. Solution:$1,000,000 - $16,000 fee - $15,000 funeral expenses -$110,000 charitable contribution - $700,000 marital deduction = $159,000 taxable estate. A promise to pay without a valid contract is not an enforceable debt. 32. Basis of transferred Property Jessica owns investment land currently worth $500,000. She paid $80,000 for the land 10 years ago. She expects that the land will probably increase in value to at least $800,000 before she dies. She has not previously given any taxable gifts. a. If Jessica gives the land to her son now, what basis will he use for determining gain when he sells the land? b. If Jessica dies in 2011 and bequeaths the land to her son, what basis will he use for determining gain when he sells the land? c. If Jessica's son plans to keep the land instead of selling it, should she give it to him now or bequeath it to him? Explain the reason for your choice. Solution:a. $80,000; Jessica’s basis.b. Date of death value of $800,000. c. If the son plans to keep the land, then the basis will not be very important to him, so Jessica should consider giving the land to him now as the gift tax exemption equivalent in 2011 and 2012 is $5,000,000. If the son eventually decides to sell the land, the appreciation may be taxed to him at the capital gains rate (currently 15 percent for 2011 and 2012, but unlikely to remain at this rate beyond 2012). There may be no estate tax due, however, if Jessica dies prior to 2013 as the estate tax exemption equivalent is also $5,000,000. If the pre-2001 estate provisions are reinstated in 2013 and she has other valuable assets that will increase the value of her estate beyond the tax offset by the unified credit at that time, she would be subject to an estate tax. This problem highlights the uncertainty of family tax planning when there is no certainty regarding what the tax laws will be in even the near future. 33. Grantor Trust George transfers investment securities worth $200,000 with a tax basis of $130,000 to a trust, naming himself as trustee. The terms of the trust agreement require the trustee to pay all dividends and interest to George’s brother, Mark. George has the right to revoke the trust at any time and take back title to the securities. During the trust’s first year, George, as trustee, distributes $20,000 in dividends and $10,000 interest from the securities to Mark. None of the income was tax-exempt. a. How much gross income does Mark recognize from the payments? b. How much gross income does George recognize from the above? Solution: a. Zero. Mark has no income from these transfers; they are income to George because this is a grantor trust. The distribution is a gift to Mark.
Chapter 12: Wealth Transfer Taxes 9b. George has $30,000 of income because this is a grantor trust. 34. Trust IncomeGlen transferred corporate stock worth $300,000 with a tax basis of $160,000 to an irrevocable trust. No gift taxes are paid. The terms of the trust require the independent trustee to distribute the trust income annually to Glen’s sister, Barbara. Any capital gain or loss is
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