1191 Burns Rd,
March 14, 2021
Dear Mr. Name,
Following the resourceful meeting we had at my office last week, I’d like to appreciate you first of all for trusting in my services as a certified public accountant. Secondly, it indeed is a great thing to treasure your grandchildren and become a role model to them at the same time. And lastly, based on our agreement, I am writing to put in writing issues we discussed on irrevocable trust, gift tax, and estate tax.
Your concern on irrevocable trust is important to address it considering its effects on future estate tax and gift tax. Trusts are a very flexible type and can be structured to satisfy your needs. The tax reform 1986 act significantly came with tax benefits, thus advantageous for estate planning (CTFA, 2019). There is annual gift tax exclusion for everyone. Still, it has to qualify by having a present interest like described in Section 2603 (c) of the Act, where the principal income and income have to be dispersed by the time the recipient attains 21 of age. If the recipient passes on before this age, the income and principal must be paid to either his estate or appointee. Secondly, section 2503 (b) of the Act, which applies to your case, allows for the income distribution annually. Thus it serves your will of giving the principal to the two grandchildren at the end of the 20 years, although it must comply with a $ 12000 a year to each of the children to qualify for the $ 1 million gift tax exemption granted to everyone. Since this type has both present and remainder interest, the annual distribution will qualify for the present interest tax exemption. In contrast, the remainder would apply by using a small portion of gift tax and unified estate planning (CTFA, 2019). The key is to not make any donations until the time limit for claiming the previous one expires.
One of the prudent ways to maximize this is by reducing the estate size and its associated tax. This reduction can be achieved by non-taxable gifts, which is a good strategy, especially for the seniors, although the resources must be sufficient. Using this strategy, you’ll give up to a maximum of $ 13000 without being subjected to gift tax (Nathanson, Craig, Geoghegan, Lee, Haber, Hieken, Stelljes, 2018). Another way to achieve estate size reduction is through making payments like medical and tuition expenses directly to the grandchildren’s service providers.
Alternatively, transferring the grandchildren’s assets is a prudent way to skip one generation, the immediate children, and this is what you intend to do. This tactic will prevent the assets from double taxation since normally; the assets are taxed once you transfer them to your children and again when they do the same to your grandchildren.
In summary, estate planning is a very significant undertaking to maintain and effectively transfer accumulated wealth throughout life. In most of that process, it should be finding the most tax-efficient ways to transfer the assets to the next generation. For your case, these ways can include transferring a maximum of $ 12000 per year to the children to save on the present interest, reducing the estate size through paying medical and tuition fees directly to the employer. Lastly, it is important to note that you have to ensure that the recipients do not invade the trust assets until final distribution.
CTFA, A. (2019). Estate planning strategies after tax reform. Journal of Financial Planning, 32(4), 20-22.
Nathanson, M. J., Craig, J. T., Geoghegan, J. A., Lee, N. G., Haber, M. A., Hieken, S. P., ... & Stelljes, S. R. (2018). Estate Planning and Why It’s Really So Important. In Personal Financial Planning for Executives and Entrepreneurs (pp. 115-133). Palgrave Macmillan, Cham.
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