Cassidy Cryogenic creates an irrevocable trust funding it with assets worth $500

Question

Cassidy Cryogenic creates an irrevocable trust funding it with assets worth $500,000. According to the terms of the trust, Cassidy is to receive all of the income from the trust during her life with a remainder to her daughter Marissa. At the time of the creation of the trust, Cassidy is 53 years old and 120 percent of the AFR is 8 percent, thus the single life remainder factor is .19151. What are the transfer tax consequences of this transaction to Cassidy? How does your answer change if Marissa is her niece?

Explanation / Answer

Funding for Irrevocable trust = $ 500000

Income received from trust = (500000*120%)-500000

= 600000-500000

= $100000 (Annual)

Applicable federal Rate = 8%

Net Income after Tax = 100000-8%

= $ 92000

Cassady is 53 years old and remaining life is .19151

That means cassady's remaining life is = 53/(1-.19151)*.19151

= 13 years approx

So, receipt for Cassady = 92000*13 = $ 1196000

After Cassady, the same income is diverted to marissa by virtue of law.

2) If Marisa is her niece, then cassady has to declare her as nominee for trust. Only after that the benefits will be diverted to Marissa.

Remarks : Answer is as per Indian laws (assumed to be applicable globally).

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