Question

(17.1) Discuss the gift tax consequences of the following transfers: a. Grantor establishes an irrevocable trust with income to Grantor for 10 years, and a remainder to Grantor’s Child. b. Same as “a.” except that the remainder interest in the trust is given 2/3 to Grantor’s Child and 1/3 to Grantor’s Niece. c. Same as “a.” except that Grantor’s Spouse is the income beneficiary of the trust for Spouse’s life, with a remainder to their Child.

Answer 1

Irrevocable Trusts.

The trustee of an irrevocable trust must complete and file Form 1041 to report trust income, as long as the trust earned more than $600 during the tax year. Irrevocable trusts are taxed on income in much the same way as individuals.

The transfer of assets to an irrevocable trust, or to the beneficiary of a revocable trust, is a taxable event resulting in gift tax liability. As of 2012, the gift tax exclusion is $13,000 per year per beneficiary, except that gifts to your spouse are never subject to gift tax.

The amount of any gift that exceeds $14,000 is taxable at a maximum rate of 35 percent. You must file the gift tax return, Form 709, only if you actually owe gift tax. The recipient of a gift is never liable for gift tax.

Distributions to beneficiaries of an irrevocable trust, however, are taxable to beneficiaries at ordinary income tax rates.

a trustee who is also a beneficiary will not be treated as making a taxable gift if he makes a distribution to another beneficiary pursuant to an “ascertainable standard.” By implication, if the distribution is not made pursuant to an ascertainable standard, it is a gift.

So what is an ascertainable standard? It is a “clearly measurable standard under which the holder of a power is legally accountable.”

ANS.

A) here beneficiery are trustee and his child and distribution is not made pursuant to an ascertainable standard hence it is a gift.

B) here beneficiery are trustee and his son and niece and distribution is not made pursuant to an ascertainable standard hence it is a gift.

c) Grantor’s Spouse is the income beneficiary of the trust for Spouse’s life, with a remainder to their Child this transaction will not attract the gift tax.