Question

Estate Finance Family Tax Plan Question (there is no relationship between the person. You just read the question and answer it)

In the scenario presented for the assignment, assume Mr. Brady provides you with the following additional information:

In 2009, Peter Brady was struggling with cocaine addiction. On February 1, 2009, Mr. Brady and Peter entered into a written agreement where Mr. Brady agreed to pay Peter $100,000 on February 1, 2019 if Peter is able to pass a drug test every month for ten years. On February 1, 2019, Peter passes his final drug test (he had passed all of his other drug tests too) and Mr. Brady transfers $100,000 to him. Assume for the purposes of this question that the agreement between Peter and Mr. Brady is legally binding (there are many reasons why it might not be legally binding, but just assume that it is).

Based on the information above, please answer the following questions:

• What are the gift tax implications of this transfer?
• Has Mr. Brady made a gift? Why or why not?
• What code sections or regulations might be applicable here?

Answer 1

1. The person who makes the gift(Mr. Brady) files the gift tax return, if necessary, and pays any tax. If someone gives you more than the annual gift tax exclusion amount ($15,000 in 2019), the giver must file a gift tax return.

2. The Internal Revenue Service considers a gift to be virtually any transfer of cash or property in which the donor doesn't receive something of equal value in return. If you give someone cash with the understanding that he does not have to pay you back, that's a gift. Hence Mr. brady has made a gift to Peter.

3. 26 U.S. Code § 2503.Taxable gifts are applicable here.