Tax Law Research Paper

Pages: 4 (1453 words)  ·  Bibliography Sources: 4  ·  File: .docx  ·  Level: Master's  ·  Topic: Economics

Tax Law

In order to avoid having one's estate subject to the death tax, many people choose to establish trusts, and then transfer their assets to those trusts in order to avoid having the contents of the trusts included in their gross estate. This is a legal and effective way of removing the tax burden from a significant portion of a person's assets. However, there are four laws that help outline and govern the ability to transfer assets to a trust and exempt them from taxation. Those laws are: 26 U.S.C.S. § 2035, 26 U.S.C.S. § 2036, 26 U.S.C.S. § 2037, and 26 U.S.C.S. § 2038. Taken together, these four laws provide a clear blueprint for those who wish to use trusts as a means of avoiding the inheritance tax liability.

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U.S.C.S. § 2035 governs which property is included in a decedents gross estate. Basically, it states that any transfers of interest in property, which would have been included in the gross estate under 26 U.S.C.S. § 2036-2038 and 2042, and which were made within three years of the decedent's death will be included in the gross estate. Life insurance policies do not count as gifts under this section unless the decedent would have been required to file gift tax returns on those policies. Furthermore, distributions from trusts owned by decedents will be treated as direct transfers by the decedents. What this section basically seeks to avoid is the gift in anticipation of death as a means of avoiding taxes. The real-life implications of the section is that people who intend to use trusts as a means of avoiding inheritance taxes need to do so well before anticipated death. Therefore, if the client is extremely elderly, experiencing any significant health issues, or for any other reason has a life expectancy of less than three years, the trust may not be the appropriate estate option.

Research Paper on Tax Law in Order to Assignment

While 26 U.S.C.S. § 2035 examines transfers made in the three years prior to death, 26 U.S.C.S. § 2036 specifically examines property that a decedent has transferred via a trust. It provides that the value of the gross estate includes property that has been transferred by trust, if the decedent retained the possession or enjoyment of the property, the right to income from the property, or the right to designate who would receive the property or income. In other words, simply labeling property as a trust, but continuing to treat it as personal property is insufficient to shelter property from inheritance taxes. This prevents people from establishing trusts only for personal benefit; it can also provide limitations on the amount of assets that can be placed into a trust. The client needs to be informed that the trust should not include assets that the client intends to use during the client's lifetime. Doing so places the entire body of the trust at risk for estate taxes. Therefore, the trust should be held separate and distinct from the assets that the client anticipates using during his or her lifetime. The income from the trust should also not go to the benefit of the client. Moreover, if there are going to be dispensations from the trust during the client's lifetime, a third-party, independent trustee needs to be in charge of making decisions about those dispensations. Alternatively, the trust could be established to make regular dispensations that do not involve any trustee making a judgment or otherwise exercising control over the money.

26 U.S.C.S. § 2037 governs transfers that take effect at death. It provides that the value of the gross estate will include trust property if the possession or enjoyment of the trust property can only be obtained by surviving the decedent and the decedent has obtained a reversionary interest in the property that is greater than 5% of the value of the property. A reversionary interest means that the property can come back to the decedent or remains under the control of the decedent. Trusts where the income goes to the decedent are not considered reversionary interests. This prohibits people from using living trusts as a way to avoid tax liability. However, if the trust is established in a way that beneficiaries could have used trust assets during the lifetime of the decedent, through the exercise of a general power of appointment that was exercisable (but not necessarily exercised) in the period immediately… [END OF PREVIEW] . . . READ MORE

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Tax Law.  (2014, January 31).  Retrieved September 26, 2020, from https://www.essaytown.com/subjects/paper/tax-law-order/5077717

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"Tax Law."  Essaytown.com.  January 31, 2014.  Accessed September 26, 2020.
https://www.essaytown.com/subjects/paper/tax-law-order/5077717.