All the following statements concerning the income, estate, and gift tax consequ
ID: 2719656 • Letter: A
Question
All the following statements concerning the income, estate, and gift tax consequences of a net gift are correct EXCEPT:
A. The donor will have taxable income to the extent the donee’s payment of gift tax exceeds the donor’s adjusted basis in the gift property.
B. Because the donee pays the gift tax, the donor does not use up any of his or her unified credit.
C. Gift taxes paid by the donee will reduce the amount of the taxable gift.
D. The net amount of the gift is treated as an adjusted taxable gift in the calculation of the donor’s estate tax at the time of the donor’s death.
Can you provide a detailed explanation for your answer? Please only answer if you have a strong background in estate planning.
Explanation / Answer
A net gift qualifies for the annual exclusion for the donor of gift if the gifted property is a gift of present interest. Also, the donor will not have any obligation to prepay tax for the gift. This is because a net gift does not require the donee to disclaim the gift, and the gift taxes are due April 15th of the year after the gift.
For the purpose of estate tax computation only the net amount of gift will be considered as an adjustable taxable gift, but the donor will have a taxable income if the tax paid by donee on gift exceeds the cost basis of donor.
Thus, the correct answer is option A.