Question

1.         True or False. When a parent makes a loan to a child and does not charge interest, there is no income or gift tax consequence if the child pays back the principal.

2.         True or False. Assets held in a decedent’s revocable trust will receive a step-up in basis at the decedent’s death.

3.         True or False. When an installment sale is based on the full FMV of the property transferred, the seller has not made a gift to the buyer of the property.

4.         True or False. Lyle established a revocable trust six years ago and named the trust the beneficiary of his life insurance policy. Lyle’s wife and child are the beneficiaries of the trust. The proceeds paid to the trust at Lyle’s death will not be included in his gross estate.

5.         True or False. A surviving spouse that is the beneficiary of his/her spouse’s IRA may elect to treat the IRA as an inherited IRA or a spousal rollover IRA.

Answer 1

1) False

if you loan a significant amount of money to your kids – say, enough to buy a house – it’s important to charge interest.

If you don’t, the IRS can say the interest you should have charged was a gift . In that case, the interest money goes toward your annual gift giving limit of $14,000 per individual. If you give more than $14,000 to one individual, you are required to file a gift tax form.

The rate of interest on the loan must be at least as high as the minimum interest rates set by the IRS.

2) True

Title to property can affect a step up in basis. In Illinois, married couples can hold real estate and/or stocks as joint tenants with rights of survivorship. 26 USC §1014 provides that a surviving spouse will only receive a stepped up basis on half the value of the property when the other spouse passes away

3) True

4) False

5) True

You can treat the IRA as your own by naming yourself as the account owner or by rolling the inherited IRA into your own IRA account. This can often be your best choice if you're over age 59½ or your spouse was older than you. If you plan to roll the account, be sure to let the processor of the inherited account know the exact name of the account you are sending the money to. If you touch the check, even if just to deposit it, you may face tax penalties