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Charleston Estate Planning & Asset Protection Blog

Monday, April 8, 2019

Consider a Gift Trust to Save in Taxes and Provide for Your Loved Ones

What are the benefits of a gift trust as opposed to traditional gifting?

You work hard to provide for your family and likely will pay a hefty amount in taxes over your lifetime. To allow families to provide for their loved ones without the tax penalty, the Internal Revenue Code offers a gift tax exclusion. Per the exclusion, each person is permitted to give an unlimited number of people $15,000 per year, or $30,000 for a married couple, without paying taxes. While gifting annually is a wonderful part of many estate plans, a less utilized option involves creating a gift trust. A gift trust comes with the same tax savings but has the added bonus of offering asset protection and freedom from probate.  

“Crummey Trusts”

In the landmark case of Crummey v. Commissioner, the U.S. Ninth Circuit Court of Appeals determined that taxpayers can use their annual gift tax exclusion instead of transferring funds into a trust fund, which will not become a part of their taxable estate.  Certain guidelines must be followed for the gift trust to be upheld. First, unlike most trusts that will not give the beneficiary access to the funds until the death of the trust creator, a gift trust must allow for immediate access.  The trust beneficiary must be able to make withdrawals within a certain number of days following the gift made to the trust.

Further, to be valid, the beneficiary must have a present interest in the gift trust and the money placed within the trust cannot be part of the taxpayer’s estate.  Upon depositing the money within the trust, the trustee must give the beneficiary a written notice of his or her right to withdraw the funds. Your estate planning lawyer will assist you in crafting your estate plan so that it complies with the law and adequately protects the funds from the estate and gift taxation.

Advantages of a Gift Trust 

There are several advantages to placing your gift funds within a trust, as opposed to simply gifting the funds to the individual recipient. For starters, a gift trust provides for a certain level of asset protection. Funds that are gifted to an individual can be seized by the beneficiary’s creditors. A gift trust, in contrast, will protect the assets within it from creditors. Assets within the trust may further be protected from divorce. Additionally, should the beneficiary pass away, the funds within the trust will not need to go through probate and can instead be transferred directly to the successor beneficiary.

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