2011 AM Q1 A) part i) Revocable vs. Irrevocable Trust


Can someone please weigh in on this I really thought irrevocable would be better as Estate taxes apply to the whole amount and as estate taxes are the same as realised capital gains taxes then revocable should be worse.


The objective is to minimize total taxes. The revocable trust is subject to estate taxes while the irrevocable is not. The general strategy is to minimize your estate tax exposure. If I sell in the irrevocable account I am forced to pay unnecessary estate taxes.

Sell in Revocable:

$1M Sale w/ cost basis of $0.1M results in a current tax liability of $0.9Mx(.2) = $180,000. Once death occurs the basis steps up to the market value of $1M which triggers a 20% sales tax on the remaining $1M, $200,000. The shares in the irrevocable trust are not subject to estate taxes.

Total taxes paid = $380,000

Sell in Irrevocable

$1M Sale w/ cost basis of $0.1M results in a current tax liability of $0.9Mx(.2) = $180,000. Here’s the trick, once Becker dies the entire market value of the revocable account is subject to estate taxes which is $2M x (0.2) = $400,000.

Total taxes paid = $580,000

@Chuckrox8, I think I wasn’t factoring in that there are 2 trusts at the beginning with 2 million in each of them.

So I see what you are saying now, quite easy, once clarified.

Really appreciate you providing a thorough explanation.