Revocable and an Irrevocable Trust? The Difference

¶ … revocable and an irrevocable trust? The difference between a revocable and an irrevocable trust is very simple. A revocable trust is one that has been created and that can be revoked at a future time - generally for specific reasons (CompTax, n.d.). These kinds of trusts can also be changed, so if a person does not want to completely revoke the trust but wants to make adjustments, that is possible (CompTax, n.d.). Often these kinds of trusts are made when it comes to wills and estate planning, but they can also be used in order to focus on business transactions and the individuals who are allowed to initiate or complete those transactions. An irrevocable trust, as the name implies, is one that cannot be revoked. Once it has been created it is not able to be changed, which means that anyone who creates it must be very careful about doing so (CompTax, n.d.). Irrevocable trusts are not as common, because changes cannot be made to them at a later date. What is done with this type of trust, and that requires careful consideration for estate planning and in the business world, as well. While it is possible for a person to make an irrevocable trust without regrets, it is better to keep the trust revocable in case circumstances change in the future.

2) Write on what distinguishes the following cases from one another: Jiminez v. Lee, Unthank v. Sippstein, Clark v. Campbell, Hieble v. Hieble. There are several distinctions between the cases addressed here, all of which are designed to address and uphold trusts. In Jimenez v. Lee, the court ruled in favor of a daughter who claimed her father misused the funds in her trust. The ruling was made because there are very few words needed to actually create a trust, and the creation of such is more about intent, which was clearly demonstrated (CompTax, n.d.). Unthank v. Sippstein and Clark v. Campbell were both similar cases in that the court determined there was no trust. In the first case that was due to the lack of actual intent to create a trust, and in the second case that was due to the lack of clarity regarding to whom the property should be given (CompTax, n.d.). Hieble v. Hieble was unique in that there was no written agreement (CompTax, n.d.). The law generally says that all trusts must be in writing, but an exception was made in this particular case because of the clarity and the intent that took place between the adult children and the mother who wanted the property back (CompTax, n.d.). All of the cases dealt with trusts, but they were also different in the way they handled those trusts and how the trusts were seen to be created.

3) What are capital gains? Capital gains, in their simplest form, are properties that are held for the purpose of investment (CompTax, n.d.). This property is held by a taxpayer, and does not need to be connected to his or her business dealings to be considered for capital gain (CompTax, n.d.). The property can be personal in nature, such as a landlord who is renting something out, as opposed to being professional in nature, such as a business that is renting or leasing space or equipment (CompTax, n.d.). Some stocks, certain types of property, copyrights, and a few other items are not acceptable to be used for capital gains (CompTax, n.d.). In order for something to be acceptable for capital gains it must not be on the list of items that do not qualify, and it must also be actual capital. In other words, it must be something tangible that a person or business can use, and it must be able to be used in order to gain income. Sometimes people who are utilizing capital in this way end up losing money, but naturally that is not the intention. The desire is to see a monetary gain for the use of the capital.

4) What is the difference between long-term and short-term capital gains? Long-term capital gains are those that are intended to continue for some time, or that are not intended to see results right away (CompTax, n.d.). Both of these options can be considered long-term gains, but one is more desirable than the other. It is much better to start seeing gains immediately and keep seeing those gains for a very long time, as opposed to not seeing any gains immediately and begin required to wait a long time before the gains start to appear (CompTax, n.d.). That is true no matter how high the gains are or how long they will go on after they start to be realized. With short-term capital gains, the gain is often more immediate but does not last as long (CompTax, n.d.). The goal with these types of capital gains is to make some quick money and then move on to something else. If the person or business that is interested in capital gains has to have money right away but does not need a long-term solution to a financial problem, short-term capital gains can be a better choice. Of course, long-term capital gains can provide a higher degree of financial stability and security (CompTax, n.d.).

5) What types of property results in capital gains, i.e., what is a capital asset? Many different types of property can result in capital gains (CompTax, n.d.). Most often, this property is either equipment or buildings. When buildings or other immovable fixtures are capital assets, they are generally taxed in the country in which they are located, no matter where the actual companies have headquarters (CompTax, n.d.). Smaller assets that can be moved are generally taxed in the country where they are moved to if they are purchased by a company (CompTax, n.d.). There may be tax implications of the sale of those items, however, to the selling company in the country in which it is located (CompTax, n.d.). That is important to consider, because any sale or purchase of any type of property can have taxation and capital gains repercussions that should be addressed before the purchase is made (CompTax, n.d.). That avoids difficulty with taxing authorities at a later date, and also helps to ensure that both buyer and seller of the equipment are aware of what kinds of tax implications they are facing, so the transaction can be completed to everyone's satisfaction.

6) Stock and dividends are treated differently for tax purposes. Which one is treated as a capital gain when sold and which one is treated as an ordinary gain when sold? Stock cannot be used as a capital gain, so it is treated as a regular gain (CompTax, n.d.). Dividends, on the other hand, can be treated as a capital gain (CompTax, n.d.). It is very important that anyone who has stock sales or dividends consult his or her tax adviser, in order to be sure that the information gained is correct and that the items are taxed appropriately. Because there are so many tax rules and regulations, there are many ways to make mistakes without meaning to cause any kind of problem for the company or person who has to pay the tax bill (CompTax, n.d.). In other words, people often do not realize that certain types of gains have to be taxed differently when they are acquired and when they are sold. Those who are not aware of this issue will end up with tax problems in the future, which is naturally something they would want to avoid.

7) How are capital gains different from ordinary gains? Capital gains are different because they are gains on the sale or rent of specific capital (tangible items) as opposed to ordinary gains that are seen (such as income from work performed) (CompTax, n.d.). When people work and they bring in income, they do have a gain. There is value in what they get from the work they do. However, this does not mean that they cannot acquire gains in other ways - such as from the capital they rent or sell (CompTax, n.d.). It is not always easy to distinguish gains properly, especially since not every country has the same kinds of rules for taxation. Despite this, a good tax professional can provide plenty of insight and information to anyone who needs to move forward with selling or renting capital in order to make some extra money. Whether a person is seeking long-term or short-term capital gains, there are options for that person to use. It is very important to know how things are taxed first, though, to avoid penalties and problems in the future.

8) How are capital losses treated and how do they differ from capital gains? Capital gains are gains that are seen when a person or business is holding something for investment (CompTax, n.d.). Capital losses are losses that occur when the investment property fails to make money. Each person or business that is renting or selling the capital is doing so in order to see financial gain (CompTax, n.d.). Otherwise, there would be little to no point in selling or renting out the building, equipment, or other types of goods. With that in mind, capital gains are taxed at a specific rate based on what is required by the country in which the tax has to be paid. As for capital losses, these are also taxed - but often at a different rate when compared to capital gains (CompTax, n.d.). It is not possible to give specifics, because each and every country has different rules and rates when it comes to taxes on capital gains and the level of loss that can be taken on capital losses. A financial advisor is always the best choice for handling capital gains and losses, no matter the country in which the person or business is located.

9) What is a dividend? A dividend is a payment that is made to shareholders (CompTax, n.d.). Dividends are typically paid out by corporations (CompTax, n.d.). The payouts are generally made in cash, but in some cases they are made with stock. In doing that, additional stock is given to the shareholder in lieu of any actual money (CompTax, n.d.). These are called stock splits or stock dividends, and are generally not as popular as cash dividends (CompTax, n.d.). However, some shareholders do see the value in simply having more stock in the company, as that allows the shareholders to grow their investment with that particular company and what it has to offer to them in the future. If the company does well the stock will be worth more. In that case, the more stock the shareholder has the more value he or she will see when the determination is made to sell that stock (CompTax, n.d.). There are other considerations, of course, like the way dividends (cash) are taxed and whether that is more valuable to the shareholder than receiving more stock. Either way, dividend payments can be nice sums that are offered to those who have invested in a company by purchasing its stock.

10) Give an example of what types of investments result in dividends. Many different types of investments result in dividends. The most common, however, is simply buying stock in a company (CompTax, n.d.). That stock is purchased by individuals and other companies in order to invest in a specific company or business, and in return for that purchase the company or individual expects to receive dividends (CompTax, n.d.). Generally, dividends are paid out four times per year, but that can change depending on the company. It is also possible for companies to stop paying dividends at any time, so what seemed like a good investment originally may be found to be a poor investment because it no longer provides the dividends that it provided in the beginning (CompTax, n.d.). That can be frustrating for people who are trying to invest in companies and get dividends coming in that add up to significant income, but it is also difficult to do anything about the possibility that the company will no longer pay dividends. Examining that company's track record will be beneficial, however, in order to determine whether investing in that company would be likely to continue to pay out dividends well in to the future (CompTax, n.d.).

11) How is a dividend taxed? Dividends, like other income, are subject to tax (CompTax, n.d.). Unlike capital gains, dividends are generally taxed as regular income (CompTax, n.d.). That is important to understand, because tax rates are very different from one country to another. When determining how a dividend is taxed one has to know two things: what country the dividend is taxed in, and what the rates for taxation are in that country (CompTax, n.d.). Determining where the dividend is to be taxed is the most important issue, because of the difference in taxation rates. Those who live in one country and receive dividends from investments in another country obviously do not want to be double taxed or taxed at an incorrect rate because of the difference in location (CompTax, n.d.). That is something that has to be considered, and many people consult a tax advisor so they are able to get the dividends they need and deserve, pay a fair tax rate on them, and ensure that they are not paying more than they should based on their location and the location of the company where the dividend was issued (CompTax, n.d.). Having a tax professional handle this issue is not required, but many individuals and companies find it to be the safety way to handle things and the most financially sound way to address any concerns.