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Tax Implications on Estate and Trust Beneficiaries

In Bob's will, there is only one precise bequest that can be given. The last will and

testament of Bob stipulates that his sister, Julie Bushnell, is to receive the sum of $25,000.

The remaining assets of Bob's estate will be distributed to his children, Chase and Candace,

who Bob has named as the beneficiaries of these assets. He also leaves them any proceeds

from the life insurance policies and any policies that are receivable to his estate once all his

debts, costs, funeral expenses, and burial fees have been paid. The whole life insurance policy

will pay a total of $450,000 to the children as the beneficiary. In addition to that, the vacation

property, which is estimated to be worth $735,000, will be given to them. Additionally, the

residential home, which has a value of $1,250,000, will be given to them as a present. The

children will inherit not just the home, which has an estimated value of $75,000, but also his

automobile, which has a value of $75,000. In Bob's will, he has appointed his sister Julie to

the position of trustee. After Bob's passing, Julie will be responsible for settling any

outstanding obligations, paying for funeral expenses, and distributing any transfers or

inheritances. As soon as the children's capital gains are determined to be more than $13,150,

they will be liable to the 20% trust and estate tax on capital gains. Since each of them would

make more than $518,500 per year, they will additionally be subject to a trust and estate

income tax of 37%.

Marital/Property Transfers

Following Bob's passing, Betty ought to be granted access to his cash account so that

she can continue to receive income. Betty should apply for Social Security and surviving

spouse benefits from Bob's pension in order to increase the amount of money that she

receives. Betty's personal property, which is liquid, is an additional asset that, after Bob's

death, could assist her continue to bring in money even after he has passed away. Bob and
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Betty ought to think about establishing a spousal lifetime access trust, sometimes known as a

SLAT. This arrangement is a trust that cannot be revoked, with one spouse serving as the

beneficiary and the other providing the funds. The assets held in trust can be accessed by the

beneficiary's spouse at any time. The fact that the married pair can take advantage of a high

gift tax exemption is one of the advantages of this trust. This exemption can be utilized to

leave assets to the children, fulfilling Bob's wish that Chase, Candance, and even Katie be left

with something of significance. In the end, though, it would provide Betty with the essential

income while also providing revenue for the children. Bob would be able to transfer his

available exemption amount without incurring a gift tax if he established a spousal lifetime

access trust for his wife. However, Betty may still be required to pay taxes on any capital

gains she makes or interest she earns based on the income that Bob generated during his

lifetime. If Betty were to sell any of those assets, however, there would be income taxes due

on the transfer of those assets.

Lifetime Gifting/Property Transfers.

Bob's primary goal is to minimize his exposure to inheritance taxes. This can be

accomplished by doing the actions that have been proposed, including as establishing the

spouse lifetime access trust, making contributions to gits, and even making charity gifts,

which is also one of Bob's goals. If Bob is also concerned about finding a legal guardian for

Katie if something was to happen to him and Betty, then I can recommend Chase as an option

for him. It is important that the information that Katie receives a disclosed amount for

educational reasons be stated in the instructions for transfers. The method that minimizes the

amount of tax owed is the most advantageous way to transfer these assets. It is usually a good

idea to take advantage of the $15,000 annual gift tax deduction that is available. Another

fantastic strategy for reducing or eliminating your tax bill is to make direct payments, for

instance, to Katie's college expenditures.

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A tax-free distribution of Bob's wealth can be accomplished by transferring his

individual retirement account (IRA) to his children or to Betty.It is important to maintain tax

efficiency when contributing to educational costs such as tuition, books, and other fees;

nevertheless, purchases such as a new vehicle do not qualify. If you inherit an IRA account,

you may be eligible for an income-tax credit for the estate taxes that were paid on the

account; however, the income that is made from the account is not taxable until you take a

distribution from it. The federal estate tax does not apply to the spousal lifetime access trust

because it is exempt from that tax. As of the year 2021, there will be no requirement to pay

federal taxes on gifts so long as the total value does not go above $11.78 million.

Anything that is donated to Betty will not be subject to a gift tax because that is a gift

to the spouse. Additionally, anything equal to $15,000 for the year to each individual and

anything for the qualified educational items will not be subject to a gift tax. If Bob decides to

give one of his children his vehicle, which has a value of $75,000, the gift will be subject to a

tax rate of 26% (Silva, 2021). According to Silva, (2021), the tax rate applicable to Bob's

artwork, which has an appraised value of $300,000, is 34%. If the doner enjoys all immediate

rights to the use, possession, and enjoyment of the property or income from the property, then

the gift is regarded to be a present interest. A donation is regarded to be a future interest if the

recipient will not have any rights to the use, possession, or enjoyment of the property, or if

the recipient will not begin to receive revenue from the property until some point in the

future.

Instructions for Form 709, 2020 specify that "future interests include reversions,

remainders, and other similar interests or estates. Since there is no car loan linked with the

purchase, the automobile might be thought of as a present rather than a purchase. It is

anticipated that the residential home will be of interest in the future. Depending on how long
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after she will be attending college the monies that Katie will be using for her education can

potentially be deemed future interest.

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References

Internal Revenue Service. (2020, January 1). Instructions for Form 709 (2020). [Online

Resource] Retrieved from: https://www.irs.gov/instructions/i709\.

Langdon, M.A.D.T. P. (2020). Estate Planning. [Online Book] Retrieved from:

https://mbsdirect.vitalsource.com/#/books/9781946711342/.

MacGregor, R. (2020, November 24). "When to Take Advantage of a Spousal Lifetime

Access Trust (SLAT)." JD Supra. [Online Article] Retrieved from:

https://www.jdsupra.com/legalnews/when-to-take-advantage-of-a-spousal-50337/.

Silva, D. (2021, March 3). "All About Gift Tax in 2021." Policygenius. [Online Article]

Retrieved from: https://www.policygenius.com/taxes/guide-to-gift-tax/.