Essay on Tax Planning Letter

Published: 2021/11/22
Number of words: 658


A trust refers to a fiduciary relationship, which grants a third party (a trustee) a mandate of holding assets on behalf of beneficiaries. There are numerous ways in which trusts can be arranged specifying when and how should the assets pass onto the beneficiaries. There are two main types of trust: revocable and irrevocable trusts. The former refers to trusts created by individuals that can be altered, revoked or amended. The latter, on the other hand, refers to trusts created by an individual that cannot be altered, revoked nor amended.


In this case, the client desires to establish an irrevocable trust for his grandchildren. In particular, he wants the income from the tax to be paid to the grandchildren for twenty years. He also wants the income from the trust to be paid to the grandchildren after the twenty years.

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The main issue, in this case, pertains to the effects of an irrevocable trust on future estate taxes and gift taxes. There is also the issue of maximizing the potential advantages of the payment of gift taxes on the transfer of property. There is also the issue of the alternatives that the client can use to reduce estate tax.

Applicable Authority

The applicable authorities to the client’s situation are the Tax Payers’ Relief Act of 2012 and the case law of Crummey vs. Commissioner (from which the technique of Crummey powers is derived).

Evaluation of Authority

The Taxpayer’s relief act of 2012 allows individuals in the USA to transfer their assets as substantial gifts that are exempted from the federal transfer of assets taxes. The taxpayer’s relief act of 2012 states that individuals will be exempted from tax if they transfer their property in the form of gifts. However, the worth of the property transferred as gifts should not exceed $5.25 million. Otherwise, the federal transfer of property taxes will apply. Besides, if an asset is transferred to another party as a gift, its appreciation value is exempt from tax. Notably, the acts allow each trust beneficiary to receive an annual income of up to $14,000 that is exempt from tax. However, an annual income of over $14, 000 is taxable. The Taxpayer’s relief act of 2012 also offers an exemption on real estate of up to $5.25 million.

Although transfers to irrevocable trusts are generally not subject to estate tax, they are subject to the gift tax. However, beneficiaries can qualify for the yearly gift tax exclusion provided they have full control over the gifts. However, this is not the case in the client’s situation. In Crummey vs. Commissioner, the court held that the annual gift tax exclusion would apply in instances where the beneficiaries to the trust have a right to withdraw gift to a trust. The annual gift tax exclusion applies even in cases where the beneficiary does not exercise his/her right to withdraw the gift from a trust.

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Conclusions and Recommendations

Based on the findings from the preceding section, the client can establish an irrevocable trust for his two grandchildren. However, he should ensure the value of the assets he transfers to the trust does not exceed $5.25 million lest taxes apply. Through this, each of the grandchildren can receive an annual income of up to $14,000 that is tax-free. Besides, the appreciation value of the trust would not be taxed.

The client can also activate the annual gift exclusion by granting the beneficiaries the right to withdraw to trust. The client can send a letter to the grandchildren, informing them that they have a right to withdraw to the trust. This will qualify them for the annual gift tax exclusion. Overall, the transfer of property through irrevocable trusts assists one in minimizing the estate taxes.


Crummey v. CIR, 397 F.2d 82 (9th Cir. 1968).

The Taxpayer’s Relief Act 2012

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