Impact of Irrevocable Trusts on Gift Tax and Estate Tax

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Based on your request to establish an irrevocable trust for your two grandchildren, the determination of the impact of such a trust on gift tax and estate tax is important. An irrevocable trust is one with specified terms that cannot be changed even by the grantor once the agreement has been signed (Garber, 2017). In your case, there is no restriction on the transfer of assets or amounts to the irrevocable trust. Additionally, once the transfer has been carried out assets are no longer incorporated in the estate of the individual providing it to the trust. While $14,000 can be transferred to the irrevocable trust annually tax-free without having to pay any gift tax, $5 million can be transferred to this trust once a lifetime, tax-free (U.S. Tax Center, n.d.).

The major issue in your situation is how to reduce future estate taxes for your grandchildren. Secondly, you also need to determine how to maximize the potential benefits of the payment of gift taxes on transfers of property. The determination of these issues will help in effective decision making on the best alternative or course of action for minimizing future estate taxes on the irrevocable trust and maximizing the potential advantages of gift tax payments on transfers of property.

One of the applicable authorities in your case is the Internal Revenue Service (IRS), which is the federal body that handles all issues relating to taxation. This organization is mandated with the task or responsibility of administration of income tax for individuals and business entities. The other applicable authority in your situation is the U.S. Congress since it's the federal agency that is responsible for creating and establishing policies and regulations that govern the administration of income tax.

However, the most effective authority is the Internal Revenue Service (IRS) because of its direct involvement in administration of income tax for individuals and businesses. The administration responsibility of IRS makes it the most effective authority in your case because it handles gift taxes and estate taxes among other taxation issues. IRS is responsible for imposing any gift taxes and/or estate taxes in the irrevocable trust based on relevant regulations.

Based on relevant laws, IRS enforces income taxes on irrevocable trusts on nearly all its earnings and at the highest rate of taxation. Nonetheless, investment earnings generated from a well-structured irrevocable trust are excluded from estate taxes, but are subject to income taxes. On the other hand, the U.S. Congress has established regulations through which you can give a maximum of $14,000 annually to your grandchildren without being subjected to gift tax (U.S. Tax Center, n.d.).

In conclusion, the establishment of an irrevocable trust for the grandchildren is suitable to avoid double taxation through generation skipping. To help reduce estate tax in this trust, you should ensure that the amount does not exceed $14,000 annually. Some alternatives to help reduce these taxes and maximize the potential benefits of payment on gift taxes on property transfers is obtaining valuation discounts or charitable estate planning.

Yours truly,

References

Garber, J. (2017, February 4). Revocable vs. Irrevocable Trusts. Retrieved June 11, 2017, from https://www.thebalance.com/revocable-vs.-irrevocable-trusts-3505386

U.S. Tax Center. (n.d.). 7 Things You Should Know About Gift Tax: Which Gifts Are Taxable and What Can Be Excluded. Retrieved June 11, 2017, from https://www.irs.com/articles/7-things-you-should-know-about-gift-tax