This year Jim created an irrevocable trust to provide for Ted, his 32-year-old n

Question

This year Jim created an irrevocable trust to provide for Ted, his 32-year-old nephew, and Ted’s family. Jim transferred $74,000 to the trust and named a bank as the trustee. The trust was directed to pay income to Ted until he reaches age 35, and at that time the trust is to be terminated and the corpus is to be distributed to Ted’s two children (or their estates).

Determine the amount, if any, of the current gift and the taxable gift. If necessary, you may assume the relevant interest rate is 5 percent and Jim is unmarried. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

Amount of current gift _____________

Amount of taxable gift ______________

Explanation / Answer

The amount transferred to the trust which is $74,000 is nothing but the amount of current gift. Now for an annual exclusion, only the income interest qualifies.

The remainder interest is valued as follows

Remainder interest = $74,000 / (1 + .05)^3= $ 63,924

So the interest income is = 74000 - 63924 = $ 10,076

Now here because the annual exclusion exceeds the income interest, the income interest of $ 10,076 gets offset.and the toal amount of taxable gift becomes : amount of remainder interest = $ 63,924

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