ExpertHard1 markMultiple Choice
CPA · Question 10 · Area I: Individual Compliance and Planning
A taxpayer holds two assets: Asset A (Basis $10,000, FMV $100,000) and Asset B (Basis $100,000, FMV $80,000). The taxpayer is terminally ill and wants to minimize total tax liability for the family. The taxpayer's estate will not exceed the estate tax exemption. Which strategy is most tax-efficient regarding the transfer of these assets to heirs?
A taxpayer holds two assets: Asset A (Basis $10,000, FMV $100,000) and Asset B (Basis $100,000, FMV $80,000). The taxpayer is terminally ill and wants to minimize total tax liability for the family. The taxpayer's estate will not exceed the estate tax exemption. Which strategy is most tax-efficient regarding the transfer of these assets to heirs?
Answer options:
A.
Gift Asset A immediately; Sell Asset B immediately.
B.
Gift both Asset A and Asset B immediately.
C.
Retain Asset A until death; Sell Asset B immediately.
D.
Retain both assets until death.
How to approach this question
Apply the rules: Assets transferred at death get a basis step-up (or step-down) to FMV. Gifts carry over basis. Strategy: Keep appreciated assets for step-up. Sell loss assets to recognize loss.
Full Answer
C.Retain Asset A until death; Sell Asset B immediately.✓ Correct
C
IRC §1014. Asset A has a $90,000 built-in gain. If held until death, heirs get FMV basis ($100k), eliminating the tax on gain. Asset B has a $20,000 built-in loss. If held until death, basis steps down to $80k, and the loss is lost forever. Selling Asset B now captures the loss.
Common mistakes
Thinking all assets should be held until death; forgetting that basis can step down as well as up.
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