Accredited Wealth Management Advisor Practice Exam

What is the primary purpose of a reverse gift?

1. To retain appreciation in the donor's taxable income

2. To gift an appreciated asset to a recipient who will inherit it

3. To structure a tax deduction for the donor

4. To avoid estate taxes in a will

The correct answer is: To gift an appreciated asset to a recipient who will inherit it

The primary purpose of a reverse gift is to gift an appreciated asset to a recipient who will inherit it. This type of strategy allows the donor to pass the asset along to someone else while also providing potential tax benefits related to the appreciation of that asset. By gifting an appreciated asset rather than having it pass through an estate, the donor can manage the future tax implications essentially by shifting the appreciation of that asset to the recipient, who takes on the asset's basis at the time of the gift. This can be beneficial because it may allow the recipient to inherit the asset without incurring capital gains taxes on the appreciation that occurred during the donor's ownership. In contrast, the other options wouldn't fully encapsulate the intent behind reverse gifts. For instance, retaining appreciation in the donor's taxable income doesn't align with the concept of a gift, which is typically aimed at transferring benefits to another party. Structuring a tax deduction for the donor is not the main focus of a reverse gift, as the emphasis is more on the transfer of wealth and potential tax strategies for the recipient. Avoiding estate taxes, while a common concern in estate planning, is not the defining function of a reverse gift as it specifically involves the gifting process while the donor is still alive, rather than