IRS Ruling Puts Certainty Back Into Estate Tax Planning

by Mike Godfrey, Tax-News.com, Washington

09 July 2004

A new Internal Revenue Service ruling this week could have the effect of increasing the popularity of a tax planning method used to mitigate the effects of estate tax, it has emerged.

The IRS ruling relates to the use of a trust known as an ‘intentionally defective irrevocable trust’ and specialists in the tax planning industry consider the decision will eliminate much of the uncertainty that has surrounded this tax strategy.

Estate tax planning in the United States is still big business even though the White House has succeeded in pushing through cuts in the levy and increases in the exemption threshold for every year through 2009.

In 2010, the tax will be completely eliminated - albeit temporarily – with the tax set to kick in once again in 2011.

Nevertheless, thanks to the recent IRS ruling on IDITs, tax practitioners believe wealthy individuals will find it much easier to transfer property out of their estate in order to benefit their heirs.

While the trust’s income is included on an individual’s personal income tax return, its assets aren’t included in their taxable estate.

This means that the taxpayer will "effectively wind up paying the kids' income tax on the trust income" whilst not having to worry that this constitutes a taxable gift, one legal expert told the Wall Street Journal.

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