Question

Tax and Estate Planning

Richard and Monica estimated they would have adjusted gross income of $108,000 in the current year and would have exemptions of $7,900 and deductions of $25,000. Their average combined federal and state tax bracket was 33 percent.

Richard and Monica maintained their contrasting views when it came to estate planning. Even though their assets were well under the threshold for exposure to federal estate tax, he wanted to set up a bypass trust. Monica wanted the personal assets, now mostly in Richard’s name, placed in their joint names. She wanted their daughter, who might be divorced fairly soon, to receive the majority of their estate. Richard said that fact did not persuade him and that their son (who had an average career potential) should not be penalized due to their daughter’s situation. Somehow it did not surprise me that they didn’t have wills currently.

Case Application Questions:

1. Compute their projected taxes for the year.

2. Richard wanted to know if he should take a $10,000 tax deduction this year or wait until next year to do so. He was inclined to do so now even though his average tax bracket would likely be 28 percent next year. What do you think he should do?

3. Monica wanted to know if they should place their savings into a qualified pension or save it personally. She said that Richard often had modest losses, not gains, each year. What is your recommendation?

4. Monica asked what tax-planning strategies you would recommend for them. What will you suggest?

5. Do you believe they should establish bypass trusts?

6. What estate planning recommendations do you have?

7. Complete the tax planning and estate planning sections of the Comprehensive Financial Plan using your answers to the above questions.

Answer 1

1. PROJECTED TAX: Adjusted gross income - deductions-exemptions =taxable income * average tax rate

ADJUSTED GROSS INCOME = 108000

LESS: DEDUCTIONS= 25000

LESS: EXEMPTIONS = 7900

TAXABLE INCOME= 75100

AVERAGE TAX RATE= 33%

PROJECTED TAXES = $24783

2) RICHARD should use the tax deduction this year as it ll reduce its hight taxable income and will pay lesser taxes as next year the average tax is more in this year so he should use its tax deduction this year as it is as deductions can change and it can go in waste if the deduction is barred next year.

3)savings in qualified pension scheme have number of important advantages than saving personally ,once our income is over a certain level, the government takes taxes from earnings pension scheme helps in tax relief. so savings in pension schemes will help in tax relief and limp sum reciept of amount as savings.

4)some of the tax planning strategies are:

• invest in muncipal bonds to generate tax free income
• utilize strategies to reduce or avoid taxable income such as retirement plans
• maximize deductions in years when itemizing
• be mindful of irrevocable trusts and taxes  
• develop a strategy for low cost basis assets.

5)bypass trust is a irrevocable trust into which the settlor deposits asset and which is transferred to the settlors spouse after its death as tax free transfer,no federal tax shall be due on this use of bypass trust so its a benficial asset.but one the spouse dies the amount will be transferred to enyone the settlor has asked to be transferred and not the spouse.

6) when there are more than one children to whom the estate needs to be transferred then the trust should have the authority to divide into that parts equally,this structure protects the assets from claims of surviving spouse creditors and from any new spouse.the trust will pass to the benifit of the children.