Suppose you are a CPA, and your client has requested advice regarding establishing an irrevocable trust for his two grandchildren

Advice regarding establishing an irrevocable trust

Memorandum to the file

From: Certified Public Accountant

Re: Advice regarding establishing an irrevocable trust

 An irrevocable trust is a type of trust where its terms cannot be amended without the access of the grantor's named beneficiaries.

Effects of an irrevocable trust on the gift tax and future estate taxes

 The main disadvantage of an irrevocable trust is that it’s not revocable thus you no longer earn the assets you’ve placed into the trust. The advantage of an irrevocable trust on the gift tax is that if you make a gift of an asset to a beneficiary during life, the asset is not included in your taxable estate at your death. An irrevocable trust provides an alternative to simply giving an asset to a beneficiary to reduce your taxable estate its disadvantage on gift tax is that irrevocable trusts are separate tax entitles, transferring assets to this type of trust may also come with an obligation to file a gift tax return with the owner’s state. The effects of an irrevocable grant on future estate taxes are that you may lose control over it immediately an asset is an irrevocable trust, creditor protection, and tax advantages.

Alternatives used to reduce estate tax and minimize potential advantages of the payment of gifts taxes on the transfer of property

The alternatives used to reduce estate tax include 1. Transferring small amounts of the estate to an irrevocable life insurance trust. 2.family limited partnership which provides a valuable estate planning tool to assist families in transferring ownership to the next generation. Last but not least, marital transfer and lastly, lifetime gifts to children and grandchildren which reduces the size of the taxable estate.

The Six Steps tax research process

Determine the facts

An irrevocable grant has beneficiaries who are entitled to the rights of the trust, in this particular case the beneficiaries being two grandchildren. Often there are misconceptions that no distribution of any form can be made from an irrevocable trust which is not true. It is acceptable and legal to create an irrevocable trust for the benefit of the two children. It is also important to note that some circumstances can allow you to amend the irrevocable trust, example is a situation where the beneficiary has disabilities, provisions allow the trustee to make amendments with changes in the law. 

 Identify the issues (questions)

The issues in an irrevocable trust often include whether the trustee is allowed to amend the irrevocable grant. Issues may also arise when the beneficiary is still young and has not developed proper judgment as far as issues to deal with money is concerned. Another issue that might also arise is how the grant can be protected from the creditors of the beneficiary.

 Locate the applicable authorities            

In this particular stage, the IRC and other primary authorities ought to be consulted.

Evaluate the authorities and choose those to follow where the authorities conflict

Analyze the facts in terms of the applicable authorities.

Communicate conclusions and recommendation to the client

It is important to note that there will be a total loss of control over properties once they are transferred to the irrevocable trust, therefore thoughtful deliberation is important before transferring ownership. Having an irrevocable trust does not also guarantee to enjoy complete benefits of an irrevocable trust.