Question

Gina, age 79, recently had a stroke. Afraid that she may not live long enough to see her family enjoy her beach house, she would like to transfer it to her daughter, Taylor. Gina does not want to pay any gift tax or utilize any of her lifetime credit amount. Which of the following techniques, if used by Gina to transfer the beach house to Taylor, will not result in a taxable gift? Explain.

GRUT

GRAT(test answer)

SCIN

QPRT

Answer 1

Solution:-

Gina, age 79, recently had a stroke. Afraid that she may not live long enough to see her family enjoy her beach house, she would like to transfer it to her daughter, Taylor. Gina does not want to pay any gift tax or utilize any of her lifetime credit amount. Which of the following techniques, if used by Gina to transfer the beach house to Taylor, will not result in a taxable gift:-

SCIN

Explanation:-

To use a SCIN in estate planning, you sell your business or other assets to your children or other family members (or to a trust for their benefit) in exchange for an interest-bearing installment note. As long as the purchase price and interest rate are reasonable, there’s no taxable gift involved. So you can take advantage of a SCIN without having to use up any of your annual gift tax exclusions or lifetime gift tax exemption.

Generally, you can avoid gift taxes on an installment sale by pricing the assets at fair market value and charging interest at the applicable federal rate. As discussed below, however, a SCIN must include a premium.

The “self-canceling” feature means that if you die during the note’s term — which must be no longer than your actuarial life expectancy at the time of the transaction — the buyer (that is, your children or other family members) is relieved of any future payment obligations.

A SCIN offers a variety of valuable tax benefits. For example, if you die before the note matures, the outstanding principal is excluded from your estate. This allows you to transfer a significant amount of wealth to your children or other family members tax-free. And any appreciation in the assets’ value after the sale is also excluded from your estate.

You also can defer capital gains on the sale by spreading the gain over the note term. If you die before the note matures, however, the remaining capital gain will be taxed to your estate even though no more payments will be received. Finally, your children or other family members can also benefit because they may be able to deduct the interest they pay on the note.