Irrevocable Trust Case Brief

Client is a married couple in their late thirties with two young children in 2005. They are planning to have another child in 2006. Client owns a Los Angeles business which they expect to grow at a rate of 10% per year. They would like to transfer a portion of the ownership of the businesses to their children now, while the value is relatively low, to leverage the reduction in the size of their taxable estate. If possible, they would like to make the gift to the class composed of their children (including the planned child).

Establish an irrevocable trust. Use the maximum statutory gift tax exclusion of $11,000 per donor per recipient per year to transfer trust assets to the children. The portion of the assets transferred, and any appreciation of those assets, will be excluded from estate tax.

The business is currently worth $2,500,000 and is expected to be worth about $5,000,000 in 2011. Each year the two existing children are gifted a combined total of $44,000. If the third child is born in 2006 and is gifted $22,000 annually, the total value of the children’s portion of the trust with 10% appreciation is about $646,000 in 2011. If both parents were to pass away at that time, the $646,000 would be excluded from estate tax at a rate of 49%. The resulting savings is $316,000.