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Different Types of Gifting and Trusts and How They Work In Estate Planning

Tax Forms and calculatorA large share of your wealth could eventually be lost to taxes unless you plan carefully. Well planned lifetime gifts to family, friends, and charitable organizations can help reduce your family’s overall income tax burden and save on estate taxes.

Gifting refers to property, money, or assets that you transfer to another person while receiving nothing or less than fair market value in return. These gifts may be subject to gift tax if you have exceeded the annual or lifetime gift exemption.

Key things to know about gifting

  • In 2016 you can gift $14,000 per individual, annually, tax free.
  • Spouses can gift $28,000 per individual annually, tax free.
  • No gift tax return filing is required when the gift is $14,000 or less for a single person, and $28,000 or less for a couple.
  • No gift tax has to be paid until your lifetime total taxable gifts exceed the applicable exemption amount.
  • Gifts to a spouse or a charity are typically not taxable.
  • Spreading gifts throughout your lifetime is a great strategy to help reduce estate taxes.
  • Gifting up to $14,000 per recipient per year and making direct payments to medical and educational providers on behalf of loved ones are also good options for minimizing taxes.
  • Any exemption you use for gifting will reduce the amount you can use for the estate tax.

How the gift tax works:
If your gift exceeds $14,000 to any person during the course of the year, it must be reported on IRS Form 709. Spouses splitting gifts totaling $28,000 must always file Form 709, even when no taxable gift is incurred.

How can you structure your gifting program?

Outright Gifts

This is often the method that donors choose when they want to minimize costs associated with making such gifts. Outright gifting is the simplest and often quickest way of doing so, as it generally does not require creating structures in advance of the transaction.

Although it has its benefits, outright gifting may not be appropriate if you need to place limitations on the use or timing of the gift. If you have minor children, you may want to ensure that you have some continued control over the gift. Otherwise, if you make an outright gift, you surrender any investment control over the funds, unless the recipient designates you to continue investing such gift on their behalf. Outright gifts also may not be protected from the claims of the beneficiary’s creditors, including a divorcing spouse.

If your primary concerns include continued control over the assets and protection from creditors, outright gifting may not be the most appropriate structure for your personal gifting program.

Charitable Gifts

This is the simplest form of charitable gifting and typically not subject to estate taxes. This kind of gift can be made during life or at death in a will or trust, and can be cash or other assets. This method makes the most sense if you are interested in making moderate gifts in a simple manner. If you have specific charitable goals, outright gifts can be made with restrictions or guidelines as to how the gift is to be used.

If you want to make a gift to a select charity but desire to preserve income, you can consider a Charitable Gift Annuity. A Charitable Gift Annuity is a contract between a donor and a charity. The donor makes a gift to the charity in exchange for an income stream for the donor’s life. At the time of the gift, the donor receives an income tax deduction. Upon the donor’s death, the charity keeps whatever is remaining of the gift.

If you want to make an even more substantial charitable gift, you can consider setting up a Charitable Trust. The most common type of charitable trust is a Charitable Remainder Trust (CRT). CRTs are either Charitable Remainder Annuity trusts (CRATS) or Charitable Remainder Unitrusts (CRUTS). In a CRT you would establish a trust that provides that a percentage of the trust assets are paid to you for the remainder of your life. Upon your death, the remaining assets in the trust pass to charity. You benefit by retaining income from the assets during your lifetime, while also contributing substantially to the charity. The CRAT provides a fixed amount of income to the income beneficiary each year. The CRUT provides that a fixed percentage of the annual value of the trust property be paid to the income beneficiary each year.

Another type of charitable trust is a Charitable Lead Trust. A CLT is essentially the reverse of a CRT. In a CLT you establish a trust that provides for annual payments of income to a charity for a term of years or for your lifetime. At the end of the term or at your death, the remaining assets are distributed to your spouse and/or descendants. You give up access to the gifted assets during your lifetime to benefit the charity, but preserve a portion of your assets for your family in the future. CLTs offer income and estate tax savings.

College Gifting Options

If you want to pay for the future college expenses of your children or grandchildren, you can consider using your annual gift tax exclusion to establish a 529 college savings plan. You also can use the unique accelerated five-year gifting feature of a 529 plan to make a combined gift of up to $70,000 ($140,000 per married couple) to each beneficiary. This falls under the $14,000 a year tax-free limit as long as no additional gifts are made to that beneficiary for four years after the year you give the lump-sum gift. In the event of your death before the end of the five-year period a prorated portion of the gift would be added to your estate for estate tax purposes.

Another option is to make payments directly to a qualified institution for tuition or to a health care provider for medical expenses on behalf of someone else. Payments of medical and tuition expenses that you make directly to a medical or educational provider are exempt from federal gift tax and do not offset your gift tax exemption or use up your annual gift exclusion amount. The medical care exclusion does not apply for amounts reimbursed by insurance. The tuition payment exclusion does not apply to books, supplies, or dormitory fees.

The Unlimited Federal Estate Marital Deduction

Assets in any amount may be transferred to your spouse, during your lifetime or at death, under what is called the unlimited marital deduction. This type of gifting does not incur federal gift or estate tax, provided that both parties are U.S S. citizens. The amount transferred is not subject to tax in the estate of the first spouse to die, but it is subject to state or federal tax in the estate survivor’s spouse.

Gifts In Trust

Irrevocable trusts are valuable estate planning tools that can result in substantial estate tax savings. Trusts designed to hold life insurance policies can help keep the proceeds from the policies out of your taxable estate. Other types of trusts can accomplish different objectives, such as facilitating charitable giving or effectively combining the use of the estate tax exemption and the unlimited marital deduction.

A comprehensive estate plan that includes gifting can help ensure your wealth is transferred according to your wishes and help you manage your estate’s tax bill. Complex federal and state laws can apply to the assessment of estate and gift taxes, causing some gifts and bequests to generate an income tax liability for the recipient. It is important to consult an estate planning professional to determine which gifting and estate planning strategies will work best for you.

Qualifed Personal Residence Trust.

A Qualified Personal Residence Trust (QPRT) is an estate planning device that allows a couple to transfer a personal residence and one other home, if applicable, at a reduced gift tax value to their children.

Qualified Terminal Interest Trust

A Qualified Terminal Interest Trust (QTIP) is named for trust property which funds a QTIP Trust, allowing it to be taxable in the estate of the survivor’s spouse upon his or her death, based upon an election or choice by the decedent’s representative to the IRS. Then taxes are deferred at the death of the first spouse. While the surviving spouse receives all the income from the QTIP Trust for life, the surviving spouse’s rights to trust principal are limited, based upon the terms of the trust.

Credit-Shelter Trusts

In 2016, Vermont’s estate tax is for estates over $2.75 million dollars, while the federal government taxes estates over $5.45 million dollars. Married couples should consider the estate tax impact of leaving their entire estate to their surviving spouse. Vermont has decoupled from the Federal estate tax exclusion amount of $5.45 million ($10.9 million for a couple).

The Vermont estate tax exclusion amount is $2.75 million dollars. A couple can avoid all federal taxes and some Vermont estate tax by utilizing a Credit Shelter or Bypass Trust in addition to a marital trust in their estate planning documents. The amount of the first $2.75 million funds a credit-shelter, or bypass trust for the survivor’s spouse, with the remainder distributed outright to the survivor’s spouse. The survivor’s spouse can also be granted an express power to disclaim (not receive in any manner) some or all of the excess portion above $2.75 million back to the credit shelter trust or the decedent’s trust. This can allow the survivor’s spouse to do further planning so there is no federal or state tax at the death of the first or second spouse. A Vermont estate tax may be due when the estate of the first spouse to die funds a bypass trust with funds greater than $2.75 million worth of assets at the death of the first spouse.

To learn more or to begin your estate planning process, please contact us at Aaron J. Goldberg, PLC.



“Used with permission 2016”


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Attorneys with Aaron J. Goldberg, PLC are members of the Vermont Bar Association and the National Academy of Elder Law Attorneys.