Paul Fukem
2 posts
Re: Topic 6 DQ 1
Question Phil and Marcy have been married for a number of years. Marcy is very wealthy, but Phil is not. In fact, Phil, who has only $200,000 of property, is very ill, and his doctor believes that he probably will die within the next few months. Make one tax planning suggestion for the couple. Assume the year is 2019 and that Phil may die in 2019. Participate in follow-up by assuming Phil and Marcy have two children and provide a tax planning suggestion that would complement the tax planning suggestion made by classmates when Phil and Marcy did not have children.
Answer
The main objective of Phil and Marcy will be to minimize gift tax as possible. Spouse are allowed to move property between themselves. It will depend on the state of residence of Marcy and Phil. If they are residence of a community property state, each spouse equally owns all the properties acquired after marriage. In this case, Marcy already own half of the $200,000 property.
If their state of residence is a noncommunity property state, Phil should give all of $200,000 property to Marcy. This transaction is qualified for marital deduction. Meaning, Phil can transfer his property as a gift to Marcy tax free. The $15,000 annual deduction applies to this transaction by the donor (Phil). He can claim the remaining $185,000 through marital deduction. This makes the transfer 100% tax free.
Another option will be for Phil to create a trust with Marcy receiving the income from the profits while he is still alive, and everything transferred to Marcy as a gift upon his death. This will still qualify for annual deduction and marital deduction.
If we consider the fact that they have two children and wants them to inherit Phil’s property, I will advise them to complete the gift giving process while Phil is still alive. This will enable to elect the gift splitting election. Phil can gift the $200,000 to their two children equally and choosing the gift-splitting election, the transaction will be treated as coming from both Phil and Marcy. This will enable to apply the $15000 annual deduction separately per child: reducing the amount liable to gift taxes by $30,000 each.
Another option for Phil will be to render a direct tuition payment and medical bill for his children if applicable. These types of gift transactions are exempt from gift tax without consideration to who is the donee is.
Reference.
- Anderson, K. E, Hulse, D. S., & Rupert, T. J. (Eds.). (2020). Pearson's federal taxation 2020: Corporations, partnerships, estates and trusts (33rd ed.). Pearson.
Response
1 posts
Re: Topic 6 DQ 2
Question
Amelia, a widow, is in the top marginal income tax bracket and has considerably more income than she can spend. She is considering creating a trust for the benefit of her adult son Jason but is reluctant to make it irrevocable, at least presently. If she funds a revocable trust that must distribute all of its income to Jason, will Jason be taxed on the income? How may this trust help reduce the size of Amelia's gross estate? Participate in follow-up discussion by commenting on your classmates' posts and suggest an alternative method for Amelia to reduce her taxable estate.
Answer
After reading Chapter 14 on income Taxation of Trusts and Estates, Amelia, who is a widow with significant income, has some decisions to make about a trust for her son Jason to be irrevocable or a revocable trust. First, all the income will be taxed to the grantor, Amelia. This trust will have the effect of reducing the size of Amelia's gross estate. Income will be diverted to Jason, so there will be a smaller buildup of unspent income in Amelia's gross estate. Amelia's gross estate will be depleted further because of income taxes she will pay on the trust income.Secondly, a revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time. An irrevocable trust describes a trust that cannot be modified after it is created without the consent of the beneficiaries. The main reasons for setting up an irrevocable trust are for estate and tax considerations. The benefit of this type of trust for estate assets is that it removes all incidents of ownership, effectively removing the trust's assets from the grantor's taxable estate. The main downside to an irrevocable trust is simple: It's not revocable or changeable. You no longer own the assets you've placed into the trust. In other words, if you place a million dollars in an irrevocable trust for your child and want to change your mind a few years later, Amelia would be out of luck.
When it comes to the tax portion of the trust Jason would not be tax on the income. But revocable trusts aren't without their drawbacks, most notably being that there are no tax benefits or creditor protection. The law requires the grantor to "give up" the right to modify a trust to take advantage of most federal and state income tax benefits, including exemptions. Since the grantor of a revocable trust retains this right to modify the trust agreement, the law does not allow the grantor to hop in and out of a trust to reduce taxes or protect assets (Hicks, 2020).
Anderson, K. E, Hulse, D. S., & Rupert, T. J. (Eds.). (2020). Pearson's federal taxation 2020: Corporations, partnerships, estates and trusts (33rd ed.). Pearson.
Hicks, Coryanne, 2020, Choosing Between a Revocable and Irrevocable Trust for Your Client, Retrieved August 15,
2021, https://money.usnews.com/financial-advisors/articles/choosing-between-a-revocable-and-irrevocable-trust-for-your-client