Financial Planning - Assignment Example

Question Homer Simpson gives Bart Simpson a gift of 14,000 shares of Fox Broadcasting Company that Homer had purchased for a dollar a share ten years ago that are now worth two dollars per share now. (a) Must Homer pay a gift tax on the gift of the stock to Bart? Explain your answer in detail. Homer does not need to pay gift tax on the stocks to be transferred to Bart because the base amount of stocks which is $14,000 is exempt. Any sum paid by Homer to his family members as much as $14,000 per year per person is not subject to gift tax. It is assumed that Bart is child of Homer and thus Homer is not entitled to pay any gift tax on the basis amount of stocks i.e. the price on which Homer purchased that stock i.e. $1. b) What is Barts income tax basis on the stock given to him? Explain your answer in detail. Bart’s income tax basis for such transfer of stocks is the price at which Homer had bought the shares. The major reason behind such basis is that the fair market value of the stocks is greater than the original purchase price. On the contrary, had the fair market value been less than the original purchase price, then, there would be different rules for such income tax basis. Under the existing scenario, the income tax basis for Bart is $1 i.e. the price at which Homer had bought the stocks. c) Is any or all of gift to Bart subject to income tax to Bart when he receives the gift? Explain your answer in detail. Any amount received by Bart especially at the time of receiving the gift, is not subject to income tax because it is not the income of Bart. These are merely the transfer of assets. Not only this, Bart is not entitled to pay any gift tax on receiving such gifts because it is the liability of the gift donor i.e. Homer. However, Homer is not entitled to pay gift tax on such amount because the amount was included in annual gift tax exclusion. Bart would be entitled to pay income tax when he would be disposing of those stocks provided he earns some capital gain on those stocks. For that matter, the income tax basis for him would be the purchase price of Homer i.e. $1. Question 2 A month after making the gift to Bart, Homer causes an automobile accident due to his negligent operation of his car causing injury to Krusty the Clown. Krusty sues Homer and wins a substantial court judgment. Can Krusty effectively seek to obtain partial satisfaction of his judgment by reaching the stock given to Bart? Explain your answer in detail. Would your answer be different if Homer made the gift to Bart the day after the automobile accident? Explain your answer in detail. Since the amount of gift has already been paid by Homer to Bart, therefore, Homer has lost control and ownership of that gift. In such case, if Krusty wants to acquire partial satisfaction by reaching the stocks gifted to Bart, he may not get any success because those stocks are now owned by Bart, and not Homer. In this way, the claim of Krusty on those stocks would be rejected. On the contrary, if it is assumed that the automobile accident had occurred prior to transfer of gift by Homer to Bart and next day Homer gifts those stocks to Bart, then Krusty would have the permission to reach on those stocks. The major reason behind his this right is Homer might want to show that he does not possess any sufficient funds to be paid to Krusty on account of the partial satisfaction due to court judgment. Because of this, Homer wants to save this money by transferring the stocks to his child Bart, in order to present himself as defaulter. Under such circumstance, the court may not consider his act as honest and faithful and would likely allow Krusty to acquire those shares from Bart. Question 3 Homer and his wife Marge want to pay for Lisas college tuition which is $42,000 this year. Can they do this without it being considered a gift subject to gift tax? Explain your answer in detail. The amount of tuition fee for Lisa i.e. $42,000 to be paid by Homer and his wife Marge are not subject to gift tax. Internal Revenue Code (IRC) has provided two types of exemptions under which the amount of transfer payments have no limit in order to be included in gift tax criteria. The exemptions are in respect of tuition fee and medical expenses. However, Homer and his wife, Marge, should note that the tuition fee exemption is subject to two conditions. Firstly, the amount of transfer payment should solely represent the amount of tuition fee only. The amount paid for books, educational expenses etc. do not qualify for such exemptions. Secondly, the educational institute should be a qualified educational organization as mentioned in the law. It is important to note that any amount reimbursed by the Homer and his wife to prior or current tuition fee is not subject to gift tax exemption. They should deposit the tuition fee directly to the qualified educational organization if they want to claim such gift tax exemption. Question 4 Homers father wishes to make a cash gift of $14,000 to each of his grandchildren. Will these gifts be subject to the generational skipping tax? Explain your answer in detail. The amount of cash gift of $14,000 to be paid to the grandchildren of Homer’s father is exempt from estate tax. The major reason behind such exemption is that the applicable tax laws allow the individuals to pass on the assets to his/her descendants in a specified way. An individual is allowed to make gifts much as 14,000 in 2013 per year per person which is increased by $1,000 as compared to year 2012 in which the exempt amount was $13,000. In the given scenario, if Homer’s father has 5 grandchildren, then total exempt amount relating to annual gift saving would be $70,000 (5 x $14,000). This $70,000 would be reduced from the total assets of Homer’s father which are subject to tax. Other benefit would be that the assets would still remain within the family. In this way, Homer’s father can obtain a significant tax saving by utilizing the annual gift tax exclusion and in fact this amount will be subject to generational skipping tax. Question 5 Would an Intentionally Defective Trust be a type of trust that would be appropriate for Homers extremely wealthy boss Charles Montgomery Burns to utilize to make gifts to his grandchildren? Explain your answer in detail including the considerations Mr. Burns should make in determining whether or not to use this type of trust. Intentionally Defective Trust is created by those people who wish to avoid substantial estate tax in the especially in the event of their death. Under this existing scenario, Homer’s boss, Mr. Burns is indifferent whether to create in Intentionally Defective Trust or not. It is important to note that by creating such a trust, Mr. Burns can effectively freeze certain assets which are subject to estate taxes. However, the income generated from those assets, is still subject to income tax. If Mr. Burns, for instance, transfers his property to their grandchildren, then this transfer property would reduce his estate amount which is subject to tax. However, the income to be generated from this property (trust created by Mr. Burns) would not be income tax exempt such that Mr. Burns would be liable to pay income tax from the incomes associated with the property. In this way, Mr. Burns can save his estate tax by creating the trust e.g. property which is locked for his grandchildren which leads to his beneficiaries in obtaining extra wealth from Mr. Burns. Read More