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1. John creates a trust and expressly retains the right to revoke. Explain the income tax consequences under the following circumstances: a. John can only exercise the power to revoke with the consent
1. John creates a trust and expressly retains the right to revoke. Explain the income tax consequences under the following circumstances: a. John can only exercise the power to revoke with the consent of his spouse. b. John can only exercise the power to revoke with the consent of the remainder beneficiary of the trust. c. John can exercise the power to revoke, but the principal is distributed to someone other than John if the trust is revoked.
2. Jane creates a discretionary trust for the benefit of her children and grandchildren. Under the trust provisions, income can be paid to her two adult children in equal shares or accumulated at the discretion of the trustee. Upon the death of the survivor of her children, the trust is to be terminated and the proceeds distributed to her grandchildren then living in equal shares. Explain the tax consequences if: a. Jane is the trustee. b. Jane is not the trustee, but she holds the power to invade the trust principal to maintain the accustomed standard of living for her children. 12 TAX507 – Income Taxation of Estates and Trusts Course Syllabus c. Jane is the trustee, but all income that is accumulated is subject to the income beneficiaries’ general power of appointment.
3. Jim creates an irrevocable trust and funds it with income-producing property. Jim appoints ABC Bank and Trust Company as the sole trustee of the trust. Explain the tax consequences of the following terminology of the trust: a. The trustee is directed to use the income from the trust to pay the premiums on a survivorship life insurance policy covering the lives of Jim and his spouse. b. The trustee is given the discretionary power to apply the trust’s income for the support of Jim’s minor children. The trustee distributes $40,000 out of the trust’s $75,000 taxable income for this purpose.
4. Donna creates an irrevocable trust that has the primary purpose of holding a $500,000 life insurance policy on her life. The trustee, ABC Bank and Trust Company, holds no other principal. The trust is intended to avoid inclusion of the death benefit in her gross estate. She has three children as the primary beneficiaries and the trust will not terminate until the death of the survivor of her children. The trustee is given the power to distribute income for the primary beneficiaries at the trustee’s sole discretion. At the termination of the trust, the remaining principal is to be distributed to her grandchildren in equal shares, per stirpes. To qualify her gifts to the trust for the annual gift tax exclusion, the trust provides that each of her three children shall have the noncumulative right to withdraw his or her pro rata share of the annual gifts to the trust, however, if the withdrawal right is not exercised, it lapses in 30 day. Donna makes $15,000 gifts to the trust annually for the remainder of her lifetime to pay the premiums on the policy. The children never exercise any withdrawal rights. At her death, the $500,000 death benefit is invested by trustee in income-producing property. In the first year after her death, the trustee distributes all income to her children in equal shares. In the second year following her death, the trust has taxable income of $30,000, but only distributes $15,000 in equal shares to her children. What is the tax treatment of the trust and the beneficiaries during these tax years?