Discussion Question Week 8 (Essay Sample)
Per the text and IRC, a gift occurs when the transfer of property is complete and the gift is valued at the date of the transfer. Imagine a scenario in which a client creates an irrevocable trust for his two (2) grandchildren to ensure college education expenses are paid. The trust agreement requires the distribution of the income from the trust directly to the college or university the grandchildren attend for tuition while they are in college and directly to the grandchildren until age twenty-five (25) after completing college. The income from the trust is distributed directly to the grandchildren until they reach age twenty-five (25), if they do not attend college. When the grandchildren celebrate their twenty-fifth (25th) birthday, the income stream distribution reverts to the client’s spouse, and the spouse receives the property upon the death of the client. Examine the gift tax consequences of the transaction based on the use of the irrevocable trust, as compared to direct payments to the grandchildren.
Per the text, gift tax-planning strategies can reduce tax for estate tax-planning purposes. Estate tax planning is very important for wealthy clients. Examine one (1) tax-planning strategy that a CPA could use for lifetime giving that would reduce overall estate and gift taxes for a client.
**These are two separate discussion questions**
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Discussion Questions
Response to Question 1
Irrevocable Trusts offer several tax advantages over direct gifting/gift payment, particularly with respect to capital gains taxes. If it is a grantor-type trust, each of the appreciated assets transferred into the trust, for instance real estate or a stock portfolio, could still obtain a step-up in basis after the grantor passes away. If these assets were directly gifted to the grandchildren, they would maintain similar basis as the donor had, and typically owe substantially more in capital gains taxes. Secondly, Irrevocable Trust also offers a tax advantage for the principal home of a grantor. The trust will retain the capital gains tax exclusion of the grantor under USC §121 that would be unavailable if the residence was gifted directly to the beneficiaries during the owner’s lifetime. Thirdly, settlers could even establish their trusts so that all of their trust proceeds is actually tax deferred until the trustee shares out the proceeds to the grandchildren. In essence, this could present some considerable tax advantages to the family of the grantor.
Response to Question 2
Gift and estate taxes could take a significant bite out of one’s estate. If a client has considerable assets, a Certified Public Accountant can help him/her reduce, or even get rid of, federal estate taxes. This will allow the client’s heirs to inherit the maximum amount of tax-free money. One tax-planning strategy that an accountant can utilize for lifetime giving which will lower overall gift and estate taxes f...
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