Can a Trust Protect Assets From Gift and Estate Taxes?

ANSWER: YES AND NO, BASED ON WHO THE TRUSTEE IS AND HOW DISTRIBUTIONS ARE DETERMINED.

If properly drafted, an irrevocable trust (a trust that cannot be changed) may reduce or even avoid gift and estate taxes on the amounts put in trust plus the income and appreciation on those amounts put in trust. There are significant annual gift tax exclusions of $19,000 or $38,000 for husband and wife to each beneficiary. In addition, husband and wife can use some or all of the lifetime exemptions of $15,000,000 for each of them or $30,000,000 for both of them.

Additionally, careful consideration should be given to the selection of a trustee. It is recommended that the trustee be independent of the family (not related to anyone in the family, ideally a professional, licensed trustee), and especially not be the parent, aunt or uncle of the beneficiaries. Additionally, the standards used for distribution to the beneficiaries are typically based on the health, support, maintenance and education of the beneficiary.

A trustee related to the family may be disregarded for gift and estate tax purposes as the related trustee can indicate to the IRS that the parents or family retain too much control, would act in accordance with the wishes of the family, and so the transfers as gifts are disregarded with adverse gift and estate tax consequences. Or it is possible that the beneficiary may have too much control by being trustee, in which case the IRS may disregard the trust for gift and estate tax purposes, or the trust records may indicate that the beneficiary simply paid money out when desired and ignored the trust terms, both leading to adverse gift and estate tax consequences. The proper trustee and trusteeship along with the standard for distribution can also reduce creditor claims but that is covered in another FAQ below. As the grantor is the one who typically creates the trust, and if the property is included in the estate of the grantor, then the creation of the trust can be a waste of time, money, and the opportunity to have had effective planning in the first place.

SOURCES:
26 USCS § 2503 - Annual gift tax exclusions are available for gifts of present interests in property.

26 USCS § 2036 - If a trustee is related to the family or is a beneficiary, the IRS may determine that the grantor or beneficiaries retain too much control over the trust, potentially causing the trust assets to be included in the grantor’s estate.

26 USCS § 2505 - Lifetime exemptions allow individuals to transfer up to $15,000,000 (adjusted for inflation) free of gift and estate taxes.

26 USCS § 2501 - This is a gift tax imposed, which can be subject to the lifetime exemption.

If you are searching for an experienced trust distribution and trust administration lawyer, to navigate the carefully timed trust administration process, Cheadle Law has specialized in trusts, estate planning, wills, tax related to a trust, tax deferral, and other trust related matters for over 30 years. Tucker Cheadle has been the administrator for several hundred trusts, some of which have large businesses and large portfolios of securities, and has the experience to optimize your trusts and the assets you place in them especially when related to the tax implications. Tucker Cheadle has been designated as an expert in civil court, family court, probate court, criminal court, and federal court. Contact Cheadle Law today at 949.553.1066 to set up a consultation to go over your specific needs.

READ THIS RELATED ARTICLE: Can creditors take assets from a trust?