Tax Planning

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Effectof an irrevocable trust on the gift tax and future estate taxes

Theirrevocable trustee is required by the law in the United States tocomplete and file Form 1041 to report the trust income for the trustearned above $600 in that particular year (David, 2015). Irrevocabletrusts are taxed in the same way as individuals. The trustee mustfile Schedule K-1 and submit copies of the form to each of thebeneficiaries. For the gift tax, the amount of gift transferred to anirrevocable trustee is taxable, and they accrue a tax liability. Witheffect from 2010, gift tax exclusion is $13,000 per year of incomeand for every beneficiary. This implies that any amount above $13,000is taxable at a rate of at least 35 percent (David, 2015). An estatetax is also imposed on the portion of the value of the estate of thedeceased taxpayer. The estate tax payable is exclusive of the gifttax applicable during the year of income of donor/deceased. Thetrustee and the donor are, therefore, treated differently, and theymust file tax separately. Whoever appropriate tax planning areavailable for minimizing the tax liability as well as maximizing thetax benefits.

Othersignificant alternatives of minimizing estate tax and maximizingpotential advantage of the payment of gift taxes on the transfer ofproperty

Taxplanning is an essential concept to all taxpayers. It refers to thevarious means that a taxpayers can use to legally minimize the taxpayable (Smith, 1982). Therefore, tax planning is generallyacceptable, unlike tax evasion. Individuals set up trusts as a taxplanning strategy that involve tax exempts from the inheritancetaxes. This is a better way of reducing the estate taxes andshielding income of the family. Unlike irrevocable trust, theirrevocable trust is treated as a separate entity that is independentfrom the grantor. As an informed accounting professional, I alsosecond the creation of the 20years irrevocable trust as it will helpin estate tax reduction and also in other tax mitigation strategies.Gift tax and estate tax provisions allow individuals in reducing thetax payable by the donor and hence, it is a good tax planning tool.It is also advisable to comply with the federal tax rules in order tominimize the tax liability that arises from the penalties imposed.

Taxresearch process

Thefacts- Thisis a case of a client who want to execute tax planning strategy byestablishing an irrevocable trust for his two grandchildren. Thechildren will earn the trust income for a period of 20 years afterthat the principle amount will be paid to the children.

Issues-Thereare numerous types of trust, and therefore, it is important to selectthe best trust that will help in minimizing the estate tax and alsomaximizing the tax benefits available to the taxpayer.

Applicableauthorities- Federaltax laws provide exemptions on the estate tax to the donor so as tominimize the tax burden.

Authorityevaluation- Individualare allowed to make significant gifts that are exempt from thefederal tax. By making irrevocable trusts, the donor is capable ofreducing their future estate tax.

Analyzingthe facts in terms of authority- Theestate tax payable is exclusive of the gift tax applicable during theyear of income of donor. This is therefore, the best way in taxplanning. The individuals can also make use of other tax incentivesin order minimize their tax liability

Conclusionand recommendations- Itis clear that the irrevocable trustee must file returns of all theincome arising from the trust separate from that of the donor.However, there are some of the strategies that I can advise my clientto utilize with an attempt to minimize the tax liability as well asmaximizing the tax benefits. These strategies are known as taxplanning, and they include all the means of maximizing the potentialadvantages of the payment of gift taxes on transfers of property.


David,C. (2015). Irrevocable Trust Income. Retrieved August 12, 2015,from

Smith,A. &amp Skinner, A. (1982). Thewealth of nations. Harmondsworth,Penguin Books

WilliamH. Hoffman, J. and James E. (2010). South-WesternFederal Taxation: Individual Income Taxes, 2016 EditionCENGAGE Learning ISBN: 9781305393301

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