This year Evelyn created an irrevocable trust to provide for Ed, her 32-year-old nephew, and Ed's family. Evelyn transferred $150,000 to the trust and named a bank as the trustee. The trust was directed to pay income to Ed until he reaches age 35 (three years from now), and at that time the trust is to be terminated and the corpus is to be distributed to Ed's two children (or their estates). Determine the amount, if any, of the taxable gift. The relevant interest rate is 6 percent. (Round your intermediate calculation to three decimal places.)
What will be an ideal response?
$135,000.
The $150,000 transfer to the trust is a current gift but only the income interest qualifies for an annual exclusion. The remainder interest is valued as follows:
Remainder interest = $150,000/(1 + 0.06)3 = $150,000/(1.191) = $125,945.
The income interest is $150,000 ? $125,945 = $24,055. Hence, the taxable gift is the amount of the remainder, $125,945, and the income interest after the annual exclusion, $9,055 ($24,055 ? $15,000 in 2019).
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