|
Irrevocable Trusts - Making Gifts To Your Trust Without Having To Pay Gift Tax |
 |
 |
Is there a way for you to establish a trust for the benefit of your children (or grandchildren) which will allow you to maintain control over the use of the money and without gift tax? Yes – if this type of irrevocable trust is drafted correctly, you can accomplish these goals. While Uniform Gifts to Minors Act Accounts appear to be simple and convenient, they suffer from a major draw back – your child or grandchild will get control of the money when he or she attains age 18. An irrevocable trust of the type described in this article allows you to provide for your children and grandchildren on your terms, not theirs.
Generally speaking, the federal gift tax system imposes a tax on your gifts to individuals or trusts. However, everyone is entitled to make annual exclusion gifts of up to $13,000 as of 2010 (to any individual, and those gifts may be doubled if your spouse joins with you). The irrevocable trust for family members takes advantage of the annual exclusion gift opportunities. In order to accomplish that, however, you must give notice to each beneficiary of the trust for whom you intend to claim an annual exclusion gift and you must tell that beneficiary that he or she has a right to withdraw the gift which is exercisable for at least some period of time. Your trustee, upon receipt of your gift to your trust must give the written notice to the beneficiaries of their withdrawal rights. You cannot enter into an agreement with the beneficiaries that they shall not exercise their withdrawal rights. Fortunately, a well draft gifting trust includes a provision which permits you to exclude one or more of the beneficiaries from receiving withdrawal rights during any given year or indefinitely. This adds flexibility, particularly if you are concerned that a child or grandchild may defeat your gifting purpose by withdrawing the gift prematurely.
Irrevocable gifting trusts must navigate several tax systems and therefore require careful planning and drafting. While you have the opportunity to avoid the reach of the federal and state estate and gift tax systems, the earnings of the trust are subject to annual income tax. Your trust may hold life insurance policies which do not generate income taxes and which may therefore be attractive investments for an irrevocable gifting trust. See Life Insurance Trust-Life Insurance Benefits Free of Income Tax for some special requirements for trusts which hold life insurance policies.
While you may choose to create a single trust for the benefit of a child or grandchild, you (and your spouse may join you) may choose to create a family trust which will benefit your children and grandchildren as a group. Your trust might terminate upon the occurrence of some event, possibly the expiration of a term of years, your death, or the death of your spouse. At that point, the trust fund may be distributed to your beneficiaries or, alternatively, divided into separate trusts for each child or grandchild. There are many choices and options but careful planning and drafting is essential.
This article is intended to acquaint the reader with some general principles which govern probate and is not intended to convey legal advice with respect to the reader’s specific circumstances. Probate legal services require detailed legal analysis and services based upon the specific circumstances of the family and the reader is therefore encouraged to call one of the following attorneys who practice in the Trusts and Estates group at Quinlivan & Hughes, P.A. 320-251-1414.
Kevin A. Spellacy
John H. Wenker
Robert P. Cunningham
W. Benjamin Winger
Bradley W. Hanson
|
