Please write a letter to Mr. and Mrs. McGoyle proposing a plan wherein you will draft and they will execute a trust, for the benefit of their family. You should not actually draft the trust at this time. In the letter, you may discuss whatever issues you feel are relevant, but you should, at a minimum, discuss the following issues:
Mr & Mrs McGoyle,
Subject: Issues which are to be considered while drafting a Trust.
• Whether Trust should be revocable or irrevocable?
Under revocable trust the grantor has the right over property put into the trust and they can change the terms and conditions as when the need arises. As per, irrevocable trust the ownership of property transfers to the beneficiary of the trust. This can be used to protect assets from creditors and to avoid estate taxes.
But in this case revocable trust is advisable because Corey is the process of divorce and his wife can claim right over his property which he may gain as beneficiary in case of irrevocable trust.
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• What assets that should be placed in the Trust?
All assets can be transferred to the trust except 401(k) tax-deferred pension account (Duflo and Saez, 2000) owned by Argus, valued at $1,200,000 and 403(b) tax-deferred pension account owned by Randi, valued at $280,000 because this will amount to complete withdrawal of amount and will attract tax liabilities. One can avoid this by making trust as primary and contingent beneficiary because it will protect trust beneficiaries from probate and tax issues.
• What can be done to minimize the federal and state estate and gift tax liability?
As this the trust which will be established for the benefit of children and grandchildren, then in order to minimize federal and state estate tax (Surrey, Gutman and Kartiganer, 1984) and gift tax liability the couple should establish Dynasty trust in which the assets that are put into the trust are subject to federal estate and gift tax just once when the assets are transferred to trust by grantor. They will not be taxed again and multiple generations will benefit from them.
• What should be done of Bethany’s share as she unable to manage it on her own?
As Bethany suffers from severe psychological disabilities and she is unable to manage her personal finances in this case the couple is advised to open a Qualified Income Trust (QIT) which is a special legal arrangement for holding a person’s income. In this case a trustee is needed to manage monthly deposits and expenses and account for the funds in the trust.
• Who should look after trust assets and what title he or she should be given?
According to the information given Corey has major life problems so he cannot manage the trust properly as compared to Amy. She can be appointed as the trustee of the trust to manage the assets and affairs of the trust.
• What provisions should be established in the event of a predeceased child who leaves minor child?
In the event of a predeceased child who leaves a minor child, the child cannot inherit any property in his name until the child attains the age of eighteen years. However, in the event the person dies and leaves child as beneficiary then it will be the trustee’s responsibility to manage that child’s property as per agreement. Under Uniform Transfers To Minors Act, (Recommendation relating to Uniform Transfers to Minors Act, 1984) if a person dies and makes gift to a child then the child’s money will be transferred to custodial account for the child’s benefit to a certain age.
• What are the capital gain implications of transferring assets to the trust and what can be done about those implications?
As per New Jersey Income Tax Law if there are any capital gains or losses from the disposition of property owned by a Trust then it should be reported under other income category in Form NJ- 1041. The basis that can be used for calculating gain or loss is cost or adjusted basis determined by federal income tax purposes. All capital gain are taxed at their full amount unless there are losses under the same category of income in that year.
• Duflo, E. and Saez, E. (2000). Participation and investment decisions in a retirement plan. Cambridge, MA: National Bureau of Economic Research.
• Surrey, S., Gutman, H. and Kartiganer, J. (1984). Federal estate and gift tax project. Philadelphia, Pa.: American Law Institute.
• Recommendation relating to Uniform Transfers to Minors Act. (1984). Palo Alto, Calif. (4000 Middlefield Rd., Room D-2, Palo Alto, 94306): The Commission.