REG – Gift Exclusion

  • Creator
    Topic
  • #188690
    needhelpnow
    Member

    During 2014, Blake transferred a corporate bond with a face amount and fair market value of $20,000 to a trust for the benefit of his 16-year-old child. Annual interest on this bond is $2,000, which is to be accumulated in the trust and distributed to the child on reaching the age of 21. The bond is then to be distributed to the donor or her successor-in-interest in liquidation of the trust. Present value of the total interest to be received by the child is $8,710. What is the amount of the gift that is excludable from taxable gifts?

    A. $20,000

    B. $10,000

    C. $8,710

    D. $0

    The correct answer is D.

    An “annual exclusion” of gifts made to any one person during a calendar year is excludable from taxable gifts. This amount is indexed for inflation and is $14,000 for 2014.

    However, the annual exclusion only applies to a “gift of a present interest.”A present interest gift is an unrestricted right to the immediate use, possession, or enjoyment of the property or of the related income.

    There is an exception to the present interest rule. A transfer for the benefit of a person who has not attained age 21 is considered a gift of a present interest if all of the following conditions are satisfied:

    Both the property and its income may be spent by or for the benefit of the minor before she or he reaches 21 years old.

    Any portion of the property or its income not expended for the minor before reaching 21 years of age must go to the minor at 21 years of age.

    If the minor dies before reaching 21 years of age, the property and its income must be payable to the minor’s estate or as the minor directs (under a “general power of appointment”). (IRC Section 2503(c))

    “Since this question states that only the interest income is to go to the minor (not the corporate bond itself), it does not qualify for the $14,000 annual exclusions. None of the gift ($8,170) is excludable from taxable gifts.”

    ~~~~

    My question is: why is it placing emphasis on the fact that since the question only states “interest income” goes to the minor, therefore it doesn’t qualify. Is it trying to point out that because the minor isn’t getting it right this second, there is no exclusion?

    OR

    Is it trying to point out that because it is “interest income”, there is a special rule for it. Thank you for your help.

Viewing 4 replies - 1 through 4 (of 4 total)
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  • #608122
    thechapman
    Member

    Would “interest income” fit the description of a future interest rather than a present interest? That's the only thing I can think of

    Passed - 2014

    #608123
    needhelpnow
    Member

    @thechapman, I was thinking along those lines. That is why the final statement in the answer section threw me off a bit

    #608124
    rzrbkfaith
    Member

    Becker had a similar question. Basically they said that you can't put money in a trust and say “you only get X dollars, then I get the money back.” A fixed amount of income is what they said precluded this from being a gift. It is not a present gift, nor is it complete (its revocable).

    AUD - 99
    BEC - 97
    REG - 91
    FAR - 1/8/16

    #608125
    Panda Love
    Member

    It is not considered a complete gift, therefore you can't account for it as gift and take the deduction.

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