Client as settlor just entered into a trust agreement with bank as trustee, fund

Question

Client as settlor just entered into a trust agreement with bank as trustee, funding trust with $120,000.00 in cash. Trust provides for all income to be paid out at least annually to client’s 18- year-old son, who is just starting a four-year college program, for his education and living expenses away at school. Trustee may use principal if income is insufficient for the college expenses. After son graduates from college, income is to continue to be paid to son at least annually, but trustee is without authority on its own to thereafter distribute any principal until son reaches 25 years of age. At that time, trustee is directed to distribute to son one-third of principal that is then in trust on son’s 25th birthday, one-half of the then principal to son on son’s 30th birthday, and all the then remaining principal to son on son’s 35th birthday. At all times son is to continue to receive all income of trust at least annually. Client has power to accelerate distributions of principal to son during client’s lifetime.

What are the income, gift and estate tax consequences of the trust arrangement during the lifetime of the client and upon the client’s death, which occurs on the son’s 30th birthday. Explain your answer.

Explanation / Answer

INCOME, GIFT AND ESTATE TAX CONSEQUENCES OF THE TRUST ARRANGEMENT

Income from the Trust shall be included in the income of the or settler of trust over the period of his life and after his death, the owner of Trust (Internal Revenue Code, § 671).

For the purpose of Estate Tax, the Gross Estate of the decedent consists of an accounting of everything his own or have certain interests in at the date of death; it includes the interest in Trusts.

Transfer of assets to a Trust is not subject to Gift Tax.

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