Money Matters with removing gift tax from the taxable estate, saves over $1.6 million in tax. If the settlor dies within the trust term, the tax saving is lost, as the trust becomes subject to estate tax. But the tax cost in most cases is no higher than it would have been anyway. The only loss is the growth on the money that was used to pay the gift tax. While the trust continues, the income is of course taxable to the settlor.
But who pays the capital gains tax? The answer is somewhat unclear. Some commentators take the position that the trust should pay. If, however, it is eventually held that the settlor should pay it, this in fact helps the trust. To be sure, there is a risk that such payments might constitute a further taxable gift, but that should not be a deterrent. If this issue became significant, the trustees could avoid realizing capital gains, or (where
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possible under state law) have the crust pay the tax, thus avoiding a gift. It is important that under the particular state law involved the settlor's creditors have no right to reach the trust corpus. Otherwise, creating the trust would not constitute a complete gift until the end of the reserved income term, when the corpus would be subject to gift tax at its then value. For a mutual client of his and mine, David Oxman has devised a plan under which all income is distributed to the settlor until 1998, whereupon the mist splits into separate sprinkling trusts for the children and their descendants. (If the settlor dies before then, the trust goes into his estate.) The trust agreement further provides for a protector, who until 1998 can change the trust terms. This is to cope with generationskipping tax. As things stand now, the sprinkling trusts for the children are subject to the present generation-skipping tax, which, however, is unworkable and is likely to be changed. A trust created now may fall between the cracks: the repeal of the generationskipping trust may be retroactive, while the new law may only be prospective from the date of its creation. But it may be that to qualify for a "grandchild exclusion," property would have to pass to grandchildren outright, and if necessary the protector could arrange for that. The games made possible by anomalies in the IRS tables work both ways.
The games made possible by anomalies in Internal Revenue Service valuation tables can work both ways.
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Some years ago, for instance, the IRS tables assumed only a 6 percenc discount figure. So one could invest in municipals then yielding 10 percenc and give a remainder interest to one's children while reserving a 10 percent annuity for oneself. Under the then IRS table, the remainder subject to such a high annuity had little value, so the parent was able to enjoy the same income that he/she would have had anyway,