You’ve worked hard your entire life and you’re hoping to pass the fruits of your labor onto your children or grandchildren and not the Internal Revenue Service. If that’s the case, you may be interested in a gift in trust, which is a legal and fiduciary vehicle that makes it easier to transfer wealth to the next generation without being subject to federal estate taxes. It’s important to understand how it works and why you may want to set one up. You can also work with a financial advisor to help you improve your overall estate plan and make sure you’re set up to pass your wealth to the next generation.
While you can give generously to beneficiaries without the IRS necessarily taking a cut of that money, the gift giver needs to consider the gift tax exclusion amount. If you give an amount that is less than the gift tax exclusion amount, you won’t have to pay taxes. (For 2022, the annual gift tax exemption is $16,000; for 2023 it’s $17,000.) If you give a beneficiary more than the annual gift tax exemption, you may have to pay a gift tax, which is why some people create a gift in trust, to avoid taking a hit on their taxes.
Still, the IRS’s rules on gifts and taxes can be a labyrinth of legal loopholes and there is a good chance you won’t have to pay a gift tax or need to set up a gift in trust. For instance, if you are married, two spouses are allowed to “split” a gift to a single beneficiary. So in 2022, you could give a child a gift worth up to two annual exclusions, essentially doubling your annual exclusion. In other words, any gift valued at $32,000 or under. In other to be eligible for the gift splitting, both partners will need to file federal gift tax returns, signed by each spouse.
Before making any hasty decisions, you’ll want to discuss all of this with a financial advisor or an estate attorney. While a gift in trust, incidentally, may sound like something you give to descendants after you pass on, you can give a family a gift in trust and still be very much alive.
Saving in taxes is not the primary reason that you may want to consider opening a gift in trust. Instead, there are two other important reasons to give members of your family a gift in trust in lieu of giving money directly:
While you’re probably envisioning a gift in trust being something for only the wealthy and involving a lot of money, the trust doesn’t have any money in it. It’s a vehicle that is accessible to the middle class, and while it could include money, it might consist of a lot of heirlooms that you want to stay in the family, like a wedding gown that has been passed down for generations. The trust might also contain property.
For instance, you might want to leave your child your home and setting it up in a trust would be a way to ensure that your child will definitely get it. After all, if the property is simply transferred to a family member who then finds himself sued by creditors or involved in a messy divorce, the child could lose the home.
A helpful way to think of a gift in trust is to think of it not really as a gift. It’s a gift, but in a sense, it is the trustee managing the trust who owns it. (The trustee can be you.) The trustee will have been instructed, however, to make the beneficiary used to the trust.
Not every family needs to create a gift in trust, even if they have a lot of wealth. But if you’re worried about your wealth being set upon by the IRS or toxic and greedy family members or you are concerned about bad monetary judgment by the beneficiary, you can give your wealth freely in the form of a gift in trust. You can also make sure the gift in trust comes with instructions on how your assets should be managed. A gift in trust, in other words, may give you peace of mind in knowing that the future looks a little more orderly. In that sense, a gift in trust is a gift for you, too.
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