Advanced Federal Taxation

Anonymous
timer Asked: Dec 2nd, 2015
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Question Description

One of the best tax planning mechanisms for estate tax planning is to control the amount of the gross estate.  Please discuss actions you would take to control the gross estate of a client.

Tutor Answer

kader001
School: Carnegie Mellon University

Thank you for the opportunity to help you with your question!

Individuals with large taxable estates often own assets that rapidly appreciate in value. To save estate taxes, these appreciating assets must be eliminated from the gross taxable estate. Often these assets offer benefits like the ability to live in your home or generate considerable income that the owner cannot or does not want to relinquish. Also, the gift tax consequences of simply giving these assets away may be prohibitive.

The solution to this problem is to convey such appreciating assets to an irrevocable trust that contains special instructions. Those instructions state that at your death the trust’s assets will belong to your designated beneficiaries; therefore the assets will not be a part of your taxable estate when you die. Just as important, the instructions also state that you reserve the right for a specified number of years to still use and benefit from the property transferred to the trust. An advanced estate plan that includes an irrevocable trust can empower you to personally benefit from your property while still removing it from your taxable estate. Additionally, the asset transferred to the trust might be entitled to a valuation discount.

The disadvantages of probating a will are many. The probate process is expensive, time consuming, and intrusive. Court costs, attorney fees, personal representative fees, bonds, and accounting fees all add up. The cost of probate is often between 3% and 8% of the gross value of an estate (up to eight thousand dollars for a hundred thousand dollar estate). If your estate is probated without a will, the costs of probate may be even greater. The probate process is a notoriously protracted legal procedure. Studies in one state reveal that the median time for settlement is thirteen months. If the probate proceedings are contested, the ensuing legal battle can take several years.

The estate is vulnerable to attack during probate proceedings from unhappy relatives and to suits from creditors who must receive certain legal notices. It is not unheard of for someone to file a claim in a probate proceeding simply as a way of forcing the estate to settle the claim in order to avoid an expensive legal fight.

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