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Non-Linear Thinking

Posted by David Gobeil on

Please read the Post about Linear Thinking first.

A non-linear thinker (NLT) would approach it differently. An NLT would glance at the root of the question to see what kind of information is included, but assume that it is all irrelevant until proven otherwise. There is a couple, someone’s nephews and some money.

Looking at the rest of the question, it is a combination question. The choices include all of the statements and none of the statements is included in all of the choices. All of the statements are in play.

An NLT would look at the statements and try to determine if any one of them is true or false. When doing so, the key is to determine the information required from the root of the question.

Statements 1 and 2 require some thought and probably judgement. Skip them.

Statement 3 looks easy. In the case of loans and gifts to a related minor, property income and losses are subject to attribution. Is Samuel a related minor? Look at the root. Samuel is 12 years of age. Samuel is one of Angela’s sister’s two children. Samuel is a related minor. Statement 3 is a consequence.

The root says, “What should Angela do and what would be the consequences?”

Our answer must be (A) 1 and 3, or (B) 2 and 3.

So, only statements 1 and 2 are still in play. Angela should transfer $250K to a trust for Samuel or Angela should gift $20K per year to Samuel.

The two statements are alternatives. What criteria would you use to decide whether to transfer funds to a trust or make an annual gift? The gift would come from some of Angela’s capital. How would the investment income be taxed? With the trust, any capital gains would not be attributed to Angela. With the annual payments, Angela would be taxed on any capital gains. First-generation property income would be taxed to Angela in any case. So, the trust could avoid income tax on any capital appreciation and any second-generation property income. The trust wins. The answer is (A).

The NLT never considered statement 4. The NLT never considered all of the issues. The fact that the children’s father was recently killed was irrelevant to the answer.

The NLT answered the question in about half the time. It did not matter whether the NLT knew the there is no attribution of capital gains or capital losses to the taxpayer if he loans or transfers capital property to a related minor. The NLT never looked at statement 4.

The same outcome results with basic questions where there is a single answer.

 

Consider that you are writing an examination where you may have neither the time nor the knowledge required to pass. How about a little non-linear thinking, which can reduce both the time and the knowledge required to pass?


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