Problem $30-30($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 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 $2022.$ 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 $2025($but in no other year$).$ Woody dies in $2026.$

Fill in the blank in context with the paragraph below:

Assuming that Woody appoints

an independent trustee, the trust is tax$-$effective to a limited extent. Generally, since Wendy is subject to a lower marginal income tax rate than is Woody, the family's Federal income tax liability is reduced

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 kiddie

tax. The Kiddie Tax applies to a child if: the child is under age $19$ at year end or is a full$-$time student age $19$ to $23$; the child's unearned

income exceeds $$\_\_\_\_\_\_\_\_$; and the child does not file a joint return. For a child age $18,$ or age $19$ to $23$ and a full$-$time student, the Kiddie Tax rules apply only if the child's earned income does not exceed one$-$half of the child's support $[1($g$)(2)].$ A plan where the trustee would invest in growth assets, rather than

growth income$-$producing assets, would help ensure the effectiveness of Woody's income$-$shifting plans.