Once you put anything into an irrevocable trust -you no longer have control over it, so in one sense, it is nonsensical to talk of disposal from an irrevocable trust , but I’ll let that pass
Look though at the question-its says-immediate objective.
So you have US 2 million worth of shares in two trusts, one revocable, the other irrevocable-from which do you sell now, at present, if you want to minimize taxes?
So how does death come into it?
The question concerns the taxes on the disposal.Asking for a “total tax” analysis will require an assessment of what the stock that is not sold may be worth when Becker dies.
But you cannot answer that part-there is no mention of what the shares may be worth when that happens.
So-we look at the sale of the US 1 million block now-and answer how to dispose of that at minimal tax.
Since we are talkign estate olanning here-who are the beneficiaries of the trust?What are the terms of this trust?
Then-who knows what is to be done with the stock once Becker is dead-do we know anything about his will? Or what he intends for those shares once he his dead?
Irrevocable Trust=No estate taxes
Revocable Trust=Market value ramp up=So no estate taxes
I can see that the calculations above account for cap gains-but we are not told anyhting about what these shares might be worth in the future-or if they will in fact be sold-put in another way-cannot the irrevocable trust simply assign the shares to the beneficiaries (whoever they may be).Or keep the shares inthe trust as capital and let the beneficiaries live of the dividends?
In short-you only have enough information to make an assessment of what the tax liability would be on something sold at the present time.
by selling in the revocable trust, the capital gains tax that is paid is removed from the estate for estate tax purposes. This is not true in the irrevocable trust as there is no estate tax on this account.
Another problem-so with a revocable trust Becker is assumed to have control because he can revoke it at any time.So what happens when he is dead? Who gets to revoke it?
Put in another way-does his estate,or executor -have control over the assets in a revocable trust once he is dead?
Just as with the irrevocable trust-is ot lost to the beneficiaries once he is dead?
Another problem-so with a revocable trust Becker is assumed to have control because he can revoke it at any time.So what happens when he is dead? Who gets to revoke it?
Put in another way-does his estate,or executor -have control over the assets in a revocable trust once he is dead?
Just as with the irrevocable trust-is ot lost to the beneficiaries once he is dead?
I went back over this one a few min ago, yah I totally botched this on the test. Very tricky question that looks deceptively easy, no way I will be able to answer these types of questions under pressure. I’ll give the CFA those points.
There are a number of problems with this question-first of all ,once something is put into an irrevocable trust the donor loses control over it-to say that Becker can direct sale of assets out of an irrevocable trust he has created is plain wrong-unless CFA is encouraging _ tax evasion _(thats the _ illegal _ variety of tax planning)
Second-the irrevocable trust is used to make a transfer to your beneficiaries while you are still alive, thus escaping estate taxes(so really, there was no need to say in the question that sales from the irrevocable trust are not subject to estate taxes)
Third-following from the above-the irrevocable trust is used in this way: transfer assets into a trust -appoint trustees -and name as beneficiaries those who you would like to see the assets go to. That is all-full stop!
Therefore-trying to sell the assets in an irrevocable trust in the present time is not only illegal-it defeats the purpose of setting up that trust in the first place
This question has been written by someone who has no real understanding of the concept of an trust-and clearly no experience whatsoever in tax planning.Trusts are a very complex area of law and even in the readings one can see that the authors dont really have a grasp of the concept.
The only answer possible is that one is indifferent between the two-but even then, you need to ignore that you are actually _ doing something illegal _ by ordering the sale of assets out of an irrevocable trust that you have created.
The biggest question is this: what happens to the cash when the stocks are sold? Does it stay in the trust or does he withdraw it for his own use? Thats the real key that the question does not address.
This is typical of a CFA test question that will trip you up the more you know.
First of all they’re talking about selling stock, not taking out the cash and spending it. Maybe he wants to diversify his portfolio. Have you ever sold stock in a brokerage account and not taking it out? I have.
They mention estate taxes in the answer, so they had to look at what happens when you die. If you sell from the revocable trust, you’re giving up $180,000 worth of step up in cost basis upon death. ASSUMING stock price does not change and the guy dies right the year after the transaction. Revocable: If you don’t sell the $1,000,000 in this trust Die: Pay $400,000 estate tax only on $2mil No capital gains if you now sell all the stock or you can keep it invested in same stock with no imbedded capital gains. Sell in the revocable: Pay $180,000 capital gains on $900k gain Die: pay $364,000 estate tax on $1,820,000 Pay total tax $544,000 And still have $180,000 capital gain imbedded in remaining stock! Gave up a $144,000 Benefit even after accounting for the lower estate taxes!!! How the heck is this the best account to sell it from??? Sell in irrevocable trust: Pay $180,000 capital gains on $900k gain Die: Nothing if they hold and don’t sell the other shares but it still has capital gains due upon selling of another $180,000 Don’t sell in irrevocable trust: Die: No estate tax but $360,000 of capital gains still in existing holdings. The step up in cost basis at death is worth more than the lower estate taxes from paying some of the capital gains now from the revocable trust account. And my the only one that is thinking like this??