How's this for a deal:
1. Mom puts income-producing property in a trust.
2. Mom has no right to income or principal from the trust.
3. Mom does retain the right to swap out property in the trust for other property of equal value. Other than this power, Mom has no control over the trust.
4. While Mom gets nothing from the trust, she has to pay the tax on any income the trust earns.
Mom gets to pay the tax, the kids get the money - that's the way life works, right? Lest you think Mom is a doormat, keep in mind: Mom is always more wily than she gets credit for.
A GIFT THAT'S NOT A GIFT
Mom did this on purpose to take advantage of an anomaly between the estate tax rules and the income tax rules. While the assets of the trust are no longer in her estate for death tax purposes, she is still their owner for income tax purposes.
Mom already fully funds the $11,000 annual exclusion gifts available for each of her kids. By paying the tax on what, economically, is her childrens' income, she can, in effect give them additional gifts - gifts that are not subject to gift taxes, because they are "her" taxes for income tax purposes.
DOES THIS WORK?
Practitioners have long believed this plan works, and have acted accordingly. There remained some uncertainty, though, as the IRS was ambiguous in its reaction to these trusts.
The uncertainty disappeared yesterday when the IRS issued Rev. Rul. 2004-64. The ruling holds that this plan works, as long as Mom has no right to be reimbursed by the trust for the taxes she pays on trust income. The ruling cautions that such a reimbursement right will cause the trust assets to be included in her taxable estate at death, for trusts created after October 3, 2004
(No link is yet available to the ruling text)
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to