Estate Finance Family Tax Plan Question

Assume for the purposes of this question that Mr. Brady is unmarried and that all the individuals named in the example are adults.

Mr. Brady engages you to prepare his 2019 gift tax returns. He tells you about the following transactions in 2019 that he thinks could be relevant to the preparation of his return. How much of Mr. Brady's lifetime gift tax exclusion has he used in 2019? Please address the gift tax consequences of each transfer. Consider the extent to which each transfer is a completed gift, the extent to which each transfer is a taxable gift (including whether and to what extent 2503(b) or 2503(e) applies), and how much gift tax exclusion is needed to cover each transfer.

List of transfers made by Mr. Brady in 2019

1. An initial gift of $20,000 to the Cindy Brady irrevocable trust (this is the first transfer made to the trust). The terms of the trust provide that after any transfer to the trust Cindy has the power to withdraw the lesser of (i) the value of the contribution, (ii) the annual exclusion amount described under 2503(b) and (iii) the greater of $5,000 or 5% of the trust. This power lapses at the end of each year the gift is made.

2. In 2016, Mr. Brady loaned Greg Brady $45,000 to start a business. The terms of the loan provided interest only for nine years at an annual rate of 4%, with a payment of the principal at the end of the term. In 2019, Greg forgave the entirety of the loan. The outstanding principal when the loan was forgiven was $45,000 and Greg had made all interest payments.

3. Greg asked Mr. Brady if he could buy his Rolls Royce. Mr. Brady asked his mechanic, Tom, how much he thought the Rolls Royce was worth and Tom said $20,000. Based on that information, Mr. Brady sold the Rolls Royce to Greg for $20,000. After receiving the car, Greg obtained a valuation for insurance purposes and found that the car is worth $40,000. Greg showed the valuation report to Mr. Brady, and Mr. Brady said "a deal is a deal, the car is yours." Assume for the purposes of this question that the valuation Greg obtained accurately states the fair market value of the car.

4. Mr. Brady sold 100 shares of Brady Inc. stock to Bobby Brady for $50,000. The average of the high and low price that 1 share of Brady Inc. stock was trading for on the NYSE on the date of the sale was $1,000.

5. Mr. Brady made direct payments of $20,000 over the course of 2019 to Bobby's landlord to pay for his rent.

6. Mr. Brady transferred $20,000 to Peter for Peter to use to pay for his first semester at Kogod Business School

7. Mr. Brady transferred $10,000 to an insurance company to cover the cost of Peter's health insurance.

8. Mr. Brady transferred $10,000 to Peter for him to pay for an appendectomy.

9. Mr. Brady transferred $100,000 to the Jan & Marcia Brady irrevocable trust. Mr. Brady appointed himself trustee (and remained trustee through 2019). Under the terms of the trust, the trustee has the power to distribute principal and income to Jan and Marcia to provide for their welfare. Upon Mr. Brady's death, the remainder is distributed to Jan and Marcia in equal shares.

10. Mr. Brady made several payments to Jan's psychologist over the course of 2019 totaling $20,000.

11. Mr. Brady paid American University Law School $20,000 for Jan's law school tuition.

12. Mr. Brady transferred $100,000 to the Brady Family Trust. Mr. Brady appointed himself trustee. The trustee has the power to distribute income and principal for the health, education, maintenance and support of Greg, Marcia, Peter, Jan, Bobby and Cindy. Upon Mr. Brady's death, the remainder is distributed in equal shares to Greg, Marcia, Peter, Jan, Bobby and Cindy.

13. Mr. Brady transferred $100,000 to the Greg & Peter Brady Trust with Tenleytown Trust Company as trustee. The trustee has the power to distribute income and principal for the health, education, maintenance and support of Greg and Peter. The trust terminates at Mr. Brady's death and the remainder is distributed to Greg and Peter equally. Mr. Brady can revoke the trust (and thereby revest the assets) at any time with the agreement of both Greg and Peter.

14. Mr. Brady transferred $25,000 to his housekeeper, Alice Nelson, to thank her for her 25 years as housekeeper for the Brady family.

15. BB, Inc., a closely held corporation owned solely by Mr. Brady, transferred $25,000 to Mr. Brady's brother-in-law, Jack, for Jack's birthday (Jack is not employed with, nor does he have any relationship with BB, Inc.)

16. In 2019, Mr. Brady became very interested in collecting art and bought a Picasso painting from his friend and fellow art collector, Dave, for $100,000. After receiving the painting, Mr. Brady obtained an appraisal for the painting and discovered that it is only worth $50,000. Mr. Brady called Dave to yell at him and asked Dave to pay fair market value for the painting. Dave said the sale is already complete and he won't pay Mr. Brady any more for the painting.