High School

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On May 1, Ted transfers $500,000 to a revocable trust with First National Bank as trustee. The trustee must pay out all the income to Ed during Ed's lifetime and, at Ed's death, distribute the property to Ed, Jr. Ted amends the trust instrument on July 7 of the next year to make the trust irrevocable. By this date, the trust property has appreciated to $612,000.

How much gift should be reported in this situation?

Answer :

Ted should report a gift of $612,000, as this is the value of the trust property when it became irrevocable. Initially, the transfer was not considered a complete gift since the trust was revocable. Making the trust irrevocable completes the gift based on the appreciated value.

Let's break this down step-by-step:

  1. Initial Transfer: On May 1, Ted transferred $500,000 to a revocable trust. Since the trust is revocable, this transfer is not considered a complete gift for tax purposes because Ted still has control over the trust and can modify or revoke it at any time.

  2. Amendment to Irrevocable: On July 7 of the next year, Ted amended the trust to make it irrevocable. At this point, the trust property had appreciated to $612,000. Making the trust irrevocable means Ted no longer has control over the trust, and it cannot be altered or revoked. Therefore, this act completes the gift.

  3. Value of the Gift: Since the trust property had appreciated by the time Ted made it irrevocable, the value of the gift is the fair market value of the trust property on that date, which is $612,000.

In summary, Ted should report a gift of $612,000 when the trust became irrevocable on July 7 of the following year.

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