Tax-Planning Client Letter on Irrevocable Trusts, Gift Tax, and Estate Essay

Tax-Planning Client Letter on Irrevocable Trusts, Gift Tax, and Estate Tax - Essay Example The first thing you need to know is that irrevocable trusts are treated as independent legal entities that own their assets. It is also important to know that in the course of establishing an irrevocable trust is likely involve unexpected tax consequences. Some of the tax consequences are likely to be unfavorable. Since you would like the income from the trust to be paid to your two grandchildren for 20 years, such payment would be accompanied by income tax. In this regard, you will need to complete Form 1041 and file it to report the trust income. This would be required if the trust earns over $600 in the course of tax year. Nevertheless, the income from the irrevocable trusts would be taxed in the same approach as individuals. You, as the trustee, will also be required to file and deliver copies of Schedule K-1 to each of the two grandchildren, who are the beneficiaries, in their first distribution during the tax year (Clausen, Givner, Kavagh, kaye, & Kinyan, 2014 ). There is also the issue of gift tax. In this regard, the transfer of your assets to the irrevocable trust is accompanied by gift tax liability. The only exclusion is a case of $13,000 per annum on each of the beneficiaries. If the gift exceeds $13,000, it is subjected a maximum tax rate of 35%. In such a case, you would be required to file the gift tax by filing Form 709.This would however be necessary if you owe the gift tax. It is important to note that your grandchildren, as the beneficiaries, will not be liable for the gift tax (Clausen, Givner, Kavagh, kaye, & Kinyan, 2014 ). Another case of possible tax liability is estate tax. Estate tax would be imposed after your death. This will be done on the portion of your estate that surpasses the gift tax exclusions in the same year of your death. Your executor after then would be required to file Form