Tax Tips
Gifts to Trusts Must Be Handled With Care - April 2010
Richard Scrivanich - Partner
You can reduce your beneficiaries' exposure to future estate tax by giving away assets you don't need. Those assets and any future appreciation will be removed from your taxable estate. Giving money to your daughter Kristi can be a simple process. But what if Kristi is young and you feel she'll be tempted to spend that money unwisely? Or what if Kristi is married to someone you fear will gamble away your gifts? For any number of reasons, you might prefer to put money into an irrevocable trust for Kristi rather than make an outright gift to her.
Dealing with the gift tax
Unfortunately, transfers to an irrevocable trust may not qualify for the annual gift tax exclusion, which is $13,000 per recipient in 2010. To qualify, such gifts must offer a "present interest." That is, the recipient must be able to get his or her hands on the asset. However, often the reason for making gifts in trust is to keep the assets out of the trust beneficiary's easy reach.
If you give $13,000 to an irrevocable trust for your daughter, that transfer may trigger gift tax. You might have to file gift tax returns and, if you already have used up your $1 million gift tax exemption, you might have to pay gift tax at a rate of 45% of the amount transferred.
To make gifts in trust and avoid gift tax consequences, you can follow the "Crummey" procedure. This process is named after a precedent-setting court decision in which the taxpayer prevailed over the IRS. Here is how the Crummey procedure might work:
Example: Ben Richards creates an irrevocable trust and names his two children as trust beneficiaries. Ben names his sister Meg, a CPA, as the trustee. Ben transfers $26,000 into the trust. Meg sends notices to both trust beneficiaries that state they have 30 days to withdraw up to $13,000 apiece.
Therefore, both beneficiaries have the opportunity to access the assets transferred to the trust. This gives them a present interest in the transfer and qualifies the gifts for the annual exclusion. After 30 days, if no withdrawals have been made, the $26,000 can stay in the trust or be used by the trustee, with no gift tax consequences.
If Ben's wife Lara joins in the gift, the couple can move up to $52,000 worth of assets (twice $26,000) into the trust this year, tax free.
If you have any questions regarding the above discussed topic or any other tax matter, please feel free to give me a call at (562) 698-9891.
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