CHAPTER 16—FAMILY TAX PLANNING Key
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-of-deposit
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.
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.
11. 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.
12. The purpose of a Crummey power in a trust is to prevent a beneficiary from gaining access to current
additions to the trust.
13. 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.
14. 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.
15. 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.
16. 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.
17. The tax attributable to a closely held business can be deferred but only if the business is at least 50 percent
of the estate.
18. 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.
19. “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.
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?
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
22. Which of the following statements is true concerning the current income tax rate schedules for married
couples and for single taxpayers?
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?
24. Theta Partnership, a calendar year taxpayer, operates a business in which capital is a material income–
producing 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
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?
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?
27. T incorporated his candy business as a C corporation. Several family members work for the corporation.
Which technique will not avoid double taxation?
28. Which of the following is not an advantage of the irrevocable trust form of ownership?
29. Dad gives his five-year-old child a certificate of deposit. The $2,000 in interest income received this year is
30. During the 2012, 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?
31. The advantages of a private trust include all of the following except
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?
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
34. Which of the following is not a characteristic of a § 2503(c) trust?
35. Which of the following is not a characteristic of a Crummey trust?
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,
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?
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?
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?
40. Which of the following is not an advantage of inter vivos giving as compared with testamentary transfers?
41. In 2012 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
42. Which of the following is a. false statement concerning an asset “freeze” as part of an estate plan?
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?
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?
45. Which of the following is probably not an optimal source of liquidity for the payment of estate taxes?