ExpertHard1 markMultiple Choice
CPA · Question 13 · Area I: Individual Compliance and Planning
A wealthy client holds two assets: Asset A (Basis $100k, FMV $1M, high appreciation potential) and Asset B (Basis $900k, FMV $1M, low appreciation potential). The client is elderly and in poor health. Which strategy minimizes total transfer taxes (gift and estate) and income taxes for the heirs?
A wealthy client holds two assets: Asset A (Basis $100k, FMV $1M, high appreciation potential) and Asset B (Basis $900k, FMV $1M, low appreciation potential). The client is elderly and in poor health. Which strategy minimizes total transfer taxes (gift and estate) and income taxes for the heirs?
Answer options:
A.
Gift Asset A now; hold Asset B until death.
B.
Gift Asset B now; hold Asset A until death.
C.
Sell Asset A now and gift the cash.
D.
Gift both assets now.
How to approach this question
Compare the benefit of the §1014 step-up in basis. Asset A has $900k of unrealized gain; Asset B has $100k. Holding A until death eliminates the tax on $900k. Gifting B removes future appreciation from the estate with minimal loss of step-up benefit.
Full Answer
B.Gift Asset B now; hold Asset A until death.✓ Correct
B
IRC §1014 provides a step-up in basis to FMV for assets transferred at death. Asset A has a huge built-in gain ($900k). If held until death, heirs get $1M basis, eliminating income tax on that gain. Asset B has little gain, so the step-up value is low. Gifting B removes it from the estate (and future appreciation) while the loss of step-up is negligible.
Common mistakes
Focusing only on removing value from the estate without considering the income tax savings of the basis step-up.
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