Brad, your 87 year old client, establishes “The Brad Irrevocable Trust” for the

Question

Brad, your 87 year old client, establishes “The Brad Irrevocable Trust” for the benefit of his children. The trust provides that, after Brad’s death, the trust assets will be divided amongst his “issue in equal shares, per stirpes.” Brad has three children: Henry, Isaac and Julia. The three children have a total of eight children of their own, and seventeen grandchildren. The trust provides that during brad’s lifetime, the trustee may distribute trust assets “to or for the benefit of Brad’s children, for their health, education, maintenance and support. In addition, the trust may “spend or apply trust assets for the benefit of any descendant of Brad whose parents are deceased and who requires such assistance to meet their day to day maintenance expenses.” Brad has a large estate that he’s trying to gift away and realizes that he may not have many years in which to do so. However, he only wants to gift as much money to the trust each year as would be covered by the gift tax annual exclusion. Brad asks you whether gifts to the trust would be eligible for the gift tax annual exclusion based on the number of children he has, the number of grandchildren he has, the number of great grandchildren he has or some combination thereof. Brad says that you may give anybody you like a temporary right of withdrawal. He does not care, so long as the basic terms of the trust, as stated above, do not change. Please write a letter to Brad (citing appropriate statutory and case law authority) explaining to him the level of annual exclusion that would be applicable to this trust, assuming it is drafted as is and assuming that Brad makes no other gifts to his descendants each year.

Explanation / Answer

I would mention the following points to Brad in the letter i will write to him, advising him over the fund transfers to the trust. Individuals form trusts to set aside assets for heirs/beneficiary or to manage money for them. When indiaviduals gift out of the trust, the trust is not subject to gift taxes, but as grantor, the individual needs to file a gift tax return with the IRS (Internal Revenue Service).

By the federal tax Law, gift tax law does not apply to trusts, it only applies to individuals. If one transfers money or assets to an individual in excess of $14,000 during a year, he/she may need to pay the gift tax. However, there is a lifetime exclusion limit of $5.49 million and any gift for an amount less than or eual to $14000 does not qualify to be deducted from the lifetime limit. The gift tax would be required to be paid only when the entire lifetime limit is exhausted for the individual. It is a generous limit and most individuals would not fall out of the maximum limit.

The IRS does not impose gift taxes on trusts. However, if an individual makes a gift (or a donation) to a trust for someone's immediate benefit, then the gift is subject to gift tax and the exclusion amount. The IRS does not consider "future interest" to be subject to gift tax.

It is important to remember that educational expenses paid on behalf of someone or medical costs covered by a gift are excluded from the perpective of gift tax. The money must be paid directly to the educational or medical organization that provided the benefit to the recipient. Also, the annual limit is the total of all the gifts towards an individual throughout the year.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.