Problem $20-30($LO$.4)$

Woody wants to transfer some of the income from his investment portfolio to his daughter Wendy, age $12.$ Woody wants the trust to be able to accumulate income on Wendy's behalf and to meet any excessive expenses associated with her chronic medical conditions. Furthermore, Woody wants the trust to protect Wendy against his own premature death without increasing his Federal gross estate. Thus, Woody provides the trustee with the powers to purchase insurance on his life and to meet any medical expenses that Wendy incurs.

The trust is created in $2019.$ A whole life insurance policy with five annual premium payments is purchased during that year. The trustee spends $$30,000$ for Wendy's medical expenses in $2022($but in no other year$).$ Woody dies in $2023.$

Complete the following paragraph regarding whether the trust has been tax$-$effective.

Assuming that Woody appoints an independent trustee the trust is tax$-$effective to a limited extent. Generally, since Wendy is subject to a marginal income tax rate than is Woody, the family's Federal income tax liability is with respect to all of the investment and capital gain income generated by that portion of his investment portfolio that he transfers to the trust. However, due to his daughter's current age, Woody needs to be concerned about the potential impact of the tax, which would require Wendy to pay income tax on her earned income using special rules. A plan where the trustee would invest in growth assets $,,$ rather than plans.

$,$ would help ensure the effectiveness of Woody's income$-$shifting marginal income tax rates of the trust or the daughter. This preferable to transferring assets to her after paying his own Federal income tax thereon. Moreover, the entity avoid grantor trust status, even though the trustee is empowered to purchase insurance on Woody's life or to satisfy some of his legal obligations.

To the extent that the trust uses its income to purchase or to meet his legal obligations such income is taxed to him. The entire trust does not become subject to the grantor trust rules when this occurs.

Thus, Woody taxable on the amount of the entity's income that is used in $2016$ through $2021$ to pay the five premiums on the life insurance policy. Under state law, Woody must provide health care for his dependent children, so his legal obligations are met by the trust in $2021($or any other year$),$ and Woody receives $!$ the trust's $2023$ gross income. therefrom. The life insurance proceeds included in