Annual vs Lifetime

Lesson

This lesson discussed the differences between annual and lifetime wealth transfer strategies, their tax implications, and how they can be used to meet clients' financial goals.

Practice Question #1

Which of the following is NOT subject to gift tax?

A) A gift of $20,000 to a child

B) A gift of $25,000 to a friend

C) A gift of $50,000 to a spouse

D) A gift of $30,000 to a grandchild

Select an option above to see an explanation here.

A) A gift of $20,000 to a child exceeds the annual exclusion and is subject to gift tax. B) A gift of $25,000 to a friend exceeds the annual exclusion and is subject to gift tax. C) Gifts between spouses are generally not subject to gift tax. D) A gift of $30,000 to a grandchild exceeds the annual exclusion and is subject to gift tax.

Terms

Annual exclusion:: The amount that can be gifted tax-free each year to an individual without counting towards the lifetime gift tax exemption.
Lifetime exemption:: The total amount that can be gifted tax-free over a person's lifetime beyond the annual exclusion.

Practice Question #2

What is the primary difference between a revocable trust and an irrevocable trust?

A) The assets in a revocable trust are subject to estate tax, while those in an irrevocable trust are not.

B) A revocable trust can be changed or terminated by the grantor, while an irrevocable trust cannot.

C) An irrevocable trust provides income to the grantor, while a revocable trust does not.

D) A revocable trust is subject to generation-skipping transfer tax, while an irrevocable trust is not.

Select an option above to see an explanation here.

A) Both revocable and irrevocable trusts can be structured to minimize estate tax liability. B) The grantor can change or terminate a revocable trust, while an irrevocable trust cannot. C) Both revocable and irrevocable trusts can be structured to provide income to the grantor. D) Both revocable and irrevocable trusts can be subject to generation-skipping transfer tax, depending on the beneficiaries.

Do Not Confuse With

Unified credit:: A tax credit that can be applied to both gift and estate taxes, reducing the overall tax liability.

Practice Question #3

Which of the following strategies can be used to minimize gift and estate tax liability?

A) Making annual exclusion gifts

B) Establishing a grantor retained annuity trust (GRAT)

C) Utilizing the unified credit

D) All of the above

Select an option above to see an explanation here.

A) Making annual exclusion gifts allows individuals to transfer assets tax-free up to the annual exclusion amount. B) Establishing a GRAT allows the grantor to receive an annuity while transferring the remaining assets to beneficiaries tax-free. C) Utilizing the unified credit can reduce the overall gift and estate tax liability. D) All of the strategies listed can be used to minimize gift and estate tax liability.

Historical Example

In the early 2000s, a wealthy individual transferred a significant portion of their wealth to their children and grandchildren. They utilized a combination of annual exclusion gifts and a GRAT to minimize their gift and estate tax liability.