ExpertHard1 markMultiple Choice
CPA · Question 18 · Area I: Individual Compliance and Planning
A donor transfers property into a revocable trust for the benefit of their child. The donor retains the right to change beneficiaries. In Year 1, the trust income of $5,000 is paid to the child. What are the gift tax implications for Year 1?
A donor transfers property into a revocable trust for the benefit of their child. The donor retains the right to change beneficiaries. In Year 1, the trust income of $5,000 is paid to the child. What are the gift tax implications for Year 1?
Answer options:
A.
The transfer of property to the trust is a completed gift.
B.
No gift occurs because the trust is revocable.
C.
The $5,000 income payment is a completed gift from the donor to the child.
D.
The income is taxable to the child but not a gift.
How to approach this question
Distinguish between the trust corpus (incomplete gift if revocable) and distributions (completed gift when paid).
Full Answer
C.The $5,000 income payment is a completed gift from the donor to the child.✓ Correct
Treas. Reg. §25.2511-2. The transfer to the revocable trust is not a completed gift because the donor retains dominion and control. However, when income is actually distributed to a beneficiary, the donor has parted with dominion over that money, making it a completed gift at that time.
Common mistakes
Assuming the initial transfer was the gift or that no gift ever occurs.
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