Question

Hank is a single individual who possesses a life insurance policy worth $205.000 that will pay his two children a total of $515.000 upon his death. This year Hank transferred the policy and all incidents of ownership to an irrevocable trust that pays income annually to his two children for 15 years and then distributes the corpus to the children in equal shares. Assume that Hank has made only one prior taxable gift of $5 million in 2011. (Refer to Exhibit 25-1 and Exhibit 25-2.) Required: a. Calculate the amount of gift tax due (if any) on the gift. b. Calculate the amount of cumulative taxable transfers for estate tax purposes if Hank dies this year but after the date of the gift. At the time of his death, Hank's probate estate is $10 million divided in equal shares between his two children. (For all requirements, enter your answers in dollars and not in millions of dollars.) a. Amount of gift tax b. Amount of cumulative taxable transfers for estate tax purposes

Answer 1

A:-

Gift of life insurance policy	$205,000
Annual exclusions (two children)	&(28000)
Current taxable gift	$177,000
Prior taxable gifts	+ $5,000,000
Cumulative gifts	$5,177,000
Tax on cumulative taxable transfer	$2055800
Less : current taxable on prior taxable gifts ($5 million)	$(1945800)
Tax on current taxable gifts		$110,000
Unified credit ($5.25 million)	$2,045,800
Less: used unified credit ($5 million)	$(1,945,800)
Unused unified credit		(100,000)
Gift tax due		$10,000

B:- Because Hank made the transfer of the life insurance within 3 year of his death.his estate will include the life insurance proceeds ($515000) as well as the gift taxes paid on that transfer.

Probate estate(a)	$10,000,000
Life insurance proceeds (b)	$515,000
Gift taxes on transfer within 3 year of death(c)	$10,000
Gross estate (a+b+c)	$10,525,000
Prior taxable transfer	$ 5,177,000
Cumulative taxable transfer	$ 15,702,000

Note that Hank's estate will be allowed a credit for the transfer tax on the $205,000 value of the insurance policy. To do otherwise, would subject the transfer of the insurance policy to double tax - once under the gift tax and again under the estate tax.