An individual wants to transfer his wealth to his kids. He has already formed a revocable and irrevocable trust for this purpose. In his country income, capital gains and estate assets (at death) are all taxed at a flat 20% rate. For revocable trust, the cost basis of investments increase to market value on the date of individual’s death and the assets are subject to estate taxes. For irrevocable trust, the cost basis of investments doesnt change but assets are not subject to estate taxes. His immediate objective as part of estate planning is to sell USD1.0mn of shares while minimizing total taxes.
Currently the two trusts each have $2.0mn of shares with a cost basis of $200k each.
Which trust should he opt for?
I was thinking that the individual should chose irrevocable trust as it is not subject to estate taxes. However, the answer is revocable trust. The answer key gives a long winded explanation which i dont understand. Please help me understand why would he chose revocable trust?
Keep this is in mind. Under revocable trust, I can call back my assets from the trust and regain full control over the assets and do whatever I want. That’s why its revocable.
Under irrevocable, I give up complete control of my assets and now all the control will be with the trust who’ll distribute my assets to my kids. I can’t do anything I want here as I have surrendered control of my assets.
His current objective is to sell his shares which is achievable only through irrevocable trusts. Questions asking based on his immediate objective what he needs to do.
The revocable trust is the answer because of the step up in basis, it becomes tax free at death. Only the estate tax is at play. This is like how United States is taxed too
which is projected to be higher? Estate tax from the rev trust or the income tax in the irrevocable?
