What makes an irrevocable trust the perfect ‘gift wrap’?
Gifts! Now is the time to be making them, when values are depressed and all forms of taxes are expected to rise.Yet no one is telling you to do that. Accountants and other ﬁnancial advisors are preoccupied with damage control, lawyers are not proactive, and beneﬁciaries should be seen and not heard.
How do you make a gift when you want future appreciation to be available for a child’s use and you want it protected from creditors, including claims by the child’s spouse? Wrap it in an irrevocable trust. An irrevocable trust sounds ominous, but it is your best friend. Regardless of how a gift is structured, whether the child can beneﬁt from it immediately or only after the passage of time, the property should not pass into the beneﬁciary’s name. There should always be an irrevocable trust to shield it.
Gifts are precious. You have a lifetime federal gift tax exemption of only $1 million.* When you use any portion of that amount, you report the gift. Then, at your death, your federal estate tax exemption is reduced accordingly. Despite the confusion regarding where the federal estate tax exemption will end up—currently $3.5 million for 2009, unlimited in 2010 and returning to $1 million in 2011—the gift tax exemption is unwavering. It is not a big exemption when you consider your life expectancy, and unlike an inheritance, you are around to watch how it is used. So why not do all you can to make sure it will last with an irrevocable trust?
There are various sophisticated gifting strategies, such as grantor retained annuity trusts charitable lead trusts and qualiﬁed personal residence trusts that utilize irrevocable trusts to leverage the use of the $1 million lifetime exemption. These trusts delay the recipient’s use of the gift to achieve a tax beneﬁt, but if not thoughtfully drafted, property falls into the hands of the donee when these trusts terminate. Even simple gifts, such as putting children’s names on the deed to a vacation home, can benefit from an irrevocable trust because the trust allows for the ease of management and the ability to control the property’s destiny.
So, make that gift in an irrevocable trust. By putting a barrier around the property, the trustee controls the wealth; the nature of a gift is not dissipated; ownership and appreciation are traced; creditors are barred; and, in some instances, estate tax at the recipient’s death can be avoided. So my advice: You should never present a gift “unwrapped.”
*Incidentally, there are certain transfers that do not rise to the level of being considered a gift for tax purposes, and so are not reported. They include gifts between citizen spouses, annual exclusion gifts—currently $13,000 per recipient each year—and unlimited amounts for medical and tuition payments made directly to the service provider or institution. There are special tax rules for making these transfers into irrevocable trusts. IRS Circular 230 Disclosure: In accordance with U.S. Treasury Regulations, we inform you that any tax advice contained in this communication is not intended or written to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed under the Internal Revenue Code, nor can it be used in connection with promoting, marketing or recommending any transaction or tax-related matter.