Question
2. Claire establishes a trust for the benefit of her son, Ike, and funds the trust with $5 million of marketable securities. The trust calls
2. Claire establishes a trust for the benefit of her son, Ike, and funds the trust with $5 million of marketable securities. The trust calls for the net income of the trust to be distributed to Ike on an annual basis until he attains age 50, at which time the trust will be distributed to him outright. Should Ike die prior to attaining such age, the trust property will be paid into his probate estate. Local Trust Co. is designated to serve as trustee. However, Claire reserves for her lifetime the right to direct the trustee to withhold a given year's income and add it to principal. In addition, Claire can direct the trustee to make distributions of principal to Ike.
Claire dies while Ike is age 43. The trust property is valued at $8 million at the time; assume that the actuarial value of Ike's remaining income interest is $500,000.
a. Discuss the gift tax and estate tax consequences of the arrangement for Claire.
b. How would your answer to (a) change if, five years prior to her death, Claire relinquished the power to direct the trustee to withhold income payments?
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