|| An irrevocable trust is an arrangement in which the grantor departs with
ownership and control of property usually during his lifetime. The transfer is sometimes
referred to as an inter vivos (Latin for during one's lifetime) or a "living"
trust. Usually this involves a gift of the property to the trust. The trust then
stands as a separate taxable entity and pays tax on its accumulated income. Irrevocable
trusts typically receive a deduction for income that is distributed on a current basis.
Because the grantor must permanently depart with the ownership and control of the property
being transferred to the trust, such a device has limited appeal to most taxpayers.
| Grantor Transfers
|| A grantor's use of irrevocable trusts to avoid taxation of income, and
to provide for accumulation of income to provide for beneficiaries at a later date, has
been limited under the current tax system. The Revenue Reconciliation Act (RRA) of 1993
has made these trusts subject to faster tax rate escalation than individual taxpayers. For
example, these trusts are taxed at 35 percent on taxable income in excess of $10,000
(check). For filers of joint returns, the 35% percent rate does not begin until taxable
income is $300,000 (check.
| Adverse Income Tax Consequences
|| Ironically, the impact of RRA changes will not severely impact
irrevocable trusts whose grantors or beneficiaries are already in the highest tax percent
bracket; they will affect the smaller estates of middle and upper-middle income taxpayers,
whose grantors and beneficiaries are in lower tax brackets. To avoid being taxed at the
higher rates, the trust income can be reduced by increasing distributions to
beneficiaries, reducing the amount of taxable income produced by trust assets, or having
the trust invest in assets that produce capital gain (maximum tax rate is only 28 percent)
rather than ordinary income.
| Family Planning Opportunities
|| Since an irrevocable trust is taxed as a separate entity on accumulated
income, it is sometimes desirable to create as many trusts as possible for purposes of
accumulating income at the lower tax brackets. However, two or more trusts will be treated
as one trust if they have substantially the same grantor and primary beneficiaries, and
federal tax avoidance is the principal purpose of the trusts. Code §643(f).
limited in recent years, income splitting among family members through family these trust
arrangements remains a valid way of reducing overall family income tax. Although an
assignment of income from one family member to another is not sufficient, an outright
transfer of income-producing property irrevocable trust can achieve income splitting. If
the family member to be benefited lacks the ability to manage the assets, you can use this
type of trust. If the beneficiary is a minor, you may consider the creation of a custodial
account under the applicable state's Gifts to Minors Act or the Uniform Transfers to
Minors Act instead of a one of these trust.
|| The use of irrevocable trusts in sophisticated tax planning involves a
multitude of complex tax rules. You should consult with a tax planning professional to
obtain the optimal tax results.
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contents copyright © 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved.
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and changes in the law, must be considered when applying U.S. tax law. You should always
consult with a competent tax professional licensed in your state with respect to your
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