Accredited Wealth Management Advisor Practice Exam

What distinguishes a net gift from a reverse gift?

1. The gift tax of a net gift is paid by the donor

2. A net gift is used when the donor has already fully utilized their exclusion amount

3. The goal of a net gift is to remove appreciation from taxable income

4. The purpose of a net gift is to take advantage of the gift tax payable credit

The correct answer is: A net gift is used when the donor has already fully utilized their exclusion amount

A net gift refers to a situation where the donor is making a gift but arrangements are made so that the recipient pays the applicable gift or estate taxes. This typically occurs when the donor has already utilized their gift exclusion amount, meaning they cannot deduct that amount from future gifts without incurring tax liabilities. Thus, the recipient effectively receives the gift minus the tax obligations. This context is critical in understanding why the choice about the net gift relating to the donor's exclusion amount is accurate. When a donor has fully utilized their exclusion amount, they cannot make additional tax-free gifts, which leads them to either pay taxes on future gifts or structure the gift arrangement to transfer tax obligations to the recipient. The other choices do not correctly reflect the nature and implications of net gifts. The distinction around who pays the tax belongs to the mechanics of the gift, not the fundamental definition of what constitutes a net gift versus a reverse gift. Similarly, the goal or purpose of a net gift centers around taxation strategies rather than merely removing appreciation from taxable income or taking advantage of gift tax credits, which may pertain to other gifting situations but not to net gifts specifically.