Question

1.Last year Robert transferred a life insurance policy worth $42,750 to an irrevocable trust with directions to distribute the corpus of the trust to his grandson, Danny, upon his graduation from college, or to Danny’s estate upon his death. Robert paid $14,250 of gift tax on the transfer of the policy. Early this year, Robert died and the insurance company paid $380,000 to the trust. What amount, if any, is included in Robert’s gross estate?

2.

Angelina gave a parcel of realty to Julie valued at $197,500 (Angelina purchased the property five years ago for $83,000).

Required:

1. Compute the amount of the taxable gift on the transfer, if any.
2. Suppose several years later Julie sold the property for $204,800. What is the amount of her gain or loss, if any, on the sale?

Answer 1

Answer:

1. Robert died within three years of the date of gifting the life insurance, so the face value of the policy ($ 380,000) and the gift tax ($ 14,250) is included in his Gross Estate.

2.

Computation of Amount of Taxable Gift on Transfer:

For 2018, the annual exclusion which applies to each instance of gift is $ 15,000.

The Taxable Gift is = $ 197,500 - $ 15,000 = $ 182,500

However, the liability of gift tax woould depend on whether Angelina has balance in unified credit left.

Unless Angelina has used her entire unified credit, there would not be any gift tax.

Computation of Amount of Gain or Loss on the sale:

Donors Adjusted Basis = $ 83,000

Fair Market Value at the time of gift = $ 197,500

The Fair Market Value at the time of gift is higher than adjusted basis of donor and the sale value is higher than the fair Market value.

Julie's basis on the gift would be donor's adjusted basis plus part of the gift tax paid,if any, on it that is due to the net increase in value of the gift.

If no gift tax is paid,

Her gain = $ 204,800 - $ 83,000 = $ 121,800.