CFA III Morning Sample Q1 A-1 Taxes completed, ask, his, either, estate

ishfaque

I know it might be too late to ask now, but I just completed this mock.
For Q1-A, with regards to where Becker should sell 1mm from his Buildco.
Isn’t this kind of ambiougus? He will get taxed at 20% for cap gains in either trust, so he will be left with 800k (assmuing $0 cost basis for simplying).
So if he is left with 800k in revocable, his heir will get 20% less due to estate tax, but the cost basis will be stepped up to the basis on the date of death.
For the irrevocable trust, there are no estate taxes, but the basis is not stepped up.
Doesn’t this depend on what happens to the 800k left from the sale?
If the 800k is left in cash, he will still have 800k at death. In the revocable, it will be taxed at 20%, left heir for 640k.
For the irrevocable, the heir will actually have all 800k because no estate tax.
If 800k is invested and grow to 5mm. In revocable, 20% or 1mm will come off, leaving 4mm. Since cost basis is stepped up, there are no other taxes.
For the irrevocable, the 4.2mm gain is taxed. The tax is 4.2mm*20%=840k. So heir is left with 4.16mm.
Either way, it looks like the irrevocable is better, but the guideline answer is to sell in the revocable???

hw0799

^Thanks for the reply, good luck tomorrow!
I just looked at this again, unless I am reading the question or the vignette wrong, the choice should be irrevocable.
Basically, you get a 20% slap for revocable for the ENTIRE amount of the portfolio.
In the irrevocable, you only get 20% deducted from the CAP GAINS. Assuming the 800k basis, you are better off in the irrevocable because the basis is not taxed at 20% unlike the revocable (estate taxes applies).

strikethree

Maybe:
Assets in the revocable trust are subject to estate taxes and capital gains taxes.
Assets in the irrevocable are subject to capital gains taxes only.
It is most optimal, to avoid paying capital gains taxes “exactly on at Becker’s death” from the revocable trust. Meaning, we should get rid of these 1mln stocks when we can.
Knowing that we can get rid of the 1mln from the irrevocable any time afterwards (no changing conditions.. capital gains tax always apply..).