Amy and Frank Got Married and They Have Approached You

question 6

Essay

Amy and Frank got married and they have approached you seeking your views about the gift tax and income tax consequences on the following facts.
As per the prenuptial agreement, Amy gave toFrank $100,000 of appreciated stock on the morning of their wedding. Amy's basis in the stock was $35,000. Under the terms of the agreement, Frank surrendered all other marital rights and claims toAmy's assets in exchange for these securities. Both Frank and Amy are residents of Arizona.
The file memoyou prepared contains the following legal conclusions, based on controlling authority:
• IRC Section 2501 imposes a tax on the transfer of property by gift, not when it is received by the donee, but upon the transfer. The donor is taxed, not the donee.
• The Supreme Court has held that prenuptial transfers in relinquishment of marital rights are not adequate and full consideration for the transfer of property. So, the transfer is treated as a gift.
• Since the prenuptial agreement is enforceable only after the marriage, the transfer has not taken place until after the marriage occurred. Thus, the transfer is eligible for the gift tax marital deduction.
• Although the transaction resulted in a gift, nogift tax is imposed due tothe application of the annual exclusion and the unlimited gift tax marital deduction.
• Neither party recognizes gross income upon release of the marital rights. Gross income does not include the value of property acquired by gift.
• The donee takes the donor's income tax basis in the transferred property.
Based on the information provided above, draft a client letter toan unsophisticated client explaining the gift tax consequences and the income tax consequences of the stock transfer.

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