Tax-Planning Client Letter on Irrevocable Trusts, Gift Tax, and Estate Tax - Essay Example

Tax-Planning Client Letter on Irrevocable Trusts, Gift Tax, and E Tax Affiliation Dear Client, RE: Advice Regarding Irrevocable trusts, Gift tax, and estate tax To create an irrevocable trust for your two grandchildren, you first need to locate a trust document, which contains all terms and conditions of this trust. You then need to identify a trustworthy trustee in this trust document. Since you already have the beneficiaries, indicate the personal details in the trust document. Transfer the specified properties to the trustee.

For real estate, the preparation of a quitclaim deed, from you to the trustee, is required. You then need to apply for the tax ID number, specifically, from the IRS. Nevertheless, the most critical issue is to know how best to minimize estate tax through all possible alternatives (Clausen, Givner, Kavagh, kaye, & Kinyan, 2014 ). The first thing you need to know is that irrevocable trusts are treated as independent legal entities that own their assets. It is also important to know that in the course of establishing an irrevocable trust is likely involve unexpected tax consequences.

Some of the tax consequences are likely to be unfavorable. Since you would like the income from the trust to be paid to your two grandchildren for 20 years, such payment would be accompanied by income tax. In this regard, you will need to complete Form 1041 and file it to report the trust income. This would be required if the trust earns over $600 in the course of tax year. Nevertheless, the income from the irrevocable trusts would be taxed in the same approach as individuals. You, as the trustee, will also be required to file and deliver copies of Schedule K-1 to each of the two grandchildren, who are the beneficiaries, in their first distribution during the tax year (Clausen, Givner, Kavagh, kaye, & Kinyan, 2014 ).

There is also the issue of gift tax. In this regard, the transfer of your assets to the irrevocable trust is accompanied by gift tax liability. The only exclusion is a case of $13,000 per annum on each of the beneficiaries. If the gift exceeds $13,000, it is subjected a maximum tax rate of 35%. In such a case, you would be required to file the gift tax by filing Form 709.This would however be necessary if you owe the gift tax. It is important to note that your grandchildren, as the beneficiaries, will not be liable for the gift tax (Clausen, Givner, Kavagh, kaye, & Kinyan, 2014 ).

Another case of possible tax liability is estate tax. Estate tax would be imposed after your death. This will be done on the portion of your estate that surpasses the gift tax exclusions in the same year of your death. Your executor after then would be required to file Form 1041. This would however be necessary if the estate would be owing estate taxes. In this regard, the assets of your irrevocable trusts would not be counted as part of the estate of grantor. Note that, the assets of irrevocable trusts are solely considered the assets of the trust, but estate tax can never be imposed since trusts do not perish (Clausen, Givner, Kavagh, kaye, & Kinyan, 2014 ).

Nevertheless, you can reduce the estate tax by initiating lifetime gifts to your grandchildren. In this regard, you can make annual gifts of less than $13,000 to each of your two grandchildren (Reuters, 2014). This will make you avoid the gift tax since on gifts above $13,000 is subjected to gift taxes. Alternatively, if this could be difficult depending on the amount of gift, you can engage your wife in the gifting process to give up to $24,000 collectively, per year, to each of the two grandchildren (Reuters, 2014).

The second alternative seems to be the best since a sufficient amount of gifts would have been transferred to your grandchildren within a few year. ReferencesClausen, m., Givner, B., Kavagh, B., kaye, O., & Kinyan, R. S. (2014 ). Drafting California Irrevocable Trusts. Oakland, California: CEB.Reuters, T. (2014). 10 Ways to Reduce Estate Taxes . Retrieved from estate.findlaw.com: http://estate.findlaw.com/planning-an-estate/10-ways-to-reduce-estate-taxes.html