Why is the revocable trust more appropriate for objective i)?
I had to go over this what felt like 100 times before realizing that I was just confusing the characteristics of the two and just circled the wrong one. So you wanna sell $1M of stock now from one of these accounts, with a cost basis of $100k (safe to assume since each account has $2M of stock and a $200k cost basis). Here’s the breakdown…note we assume for simplicity sake that the stock doesn’t move from current levels, but it wouldn’t matter if it did, same idea applies:
if you sell from the revocable-will pay taxes now on the 900k gain of 20%=180k. Then, at death, the 1M left in the revocable will be estate taxed at 20% of value = 180k. It’s actually irrelevant that the cost basis changes. The 2M in the irrevocable account will not be taxed (no estate tax and not selling so no cap gains tax). Total taxes paid are 180k+180k=360k
if you sell from the irrevocable trust initial tax liability on the sale is the same at 180k. Now, at death the amount in the full $2M in the revocable account will get the estate tax of 20% = 400k. The remaining 1M in the irrevocable trust is then not taxed. So, total taxes paid in this case are 180k + 400k = 580k
Less total taxes paid if sale is from revocable. This one drove me a little nuts…hope this helps
I would just add - def watch out for questions like this…there’s no accompanying formula we learned that applies, but it’s just arithmetic and being able to kinda “logic” your way thru to the answer. They can be tricky and don’t wanna lose points on these. Could be a fair amount of points for grabs like this on sat. Key is to be sharp and focused on test day