Giving money to a trust fund

trust fund to cover that. I want to fund it on occasion when I have excess cash that I know my wife will not need. When I give money to the trust fund, do I have to pay a gift tax? Is there an annual exclusion? Does this come out of my unified credit?

spendthrift and I don't want her to have any control over the funds before the kids get to college. Alternatively, if I set up 529 accounts, can my son manage the 529 accounts as I trust him more than the daughter

First, a trust has an expense and layer of burden each year that may not be appropriate to your goals. You have a $13,000 per year (in 2012, this can change each year, usually just a bit) gift you may give anyone you wish. So does the Mrs. So, from a joint account, you can gift up to $26,000 per recipient.

To a trust, for the gift to be completed, it needs to land in an irrevocable trust, which as you suggest, can have your son as trustee.

On the other hand, the 529 is a simple way to handle this. Your son can be the account custodian and he'd choose from the limited investment options the 529 fund offers. He'd have the ability to transfer funds from one child's account to another if there are funds one child doesn't use for whatever reason.

One 529 benefit is that it grows and if used for college, is distributed tax free. The other benefit is if you wish to deposit over the 13/26K limit you may prefund up to 5 years worth of deposits, i.e. up to $65K/$130K without dipping into the unified credit, but needs to file Form 709 to declare what you did.

As I mentioned, 529 investing choices are limited, no 'pick any ETF or fund' but the good plans offer a cheap S&P index, and low risk choices as school gets closer.

Long life to you, sir. May you attend their graduations at 90. And drive your wife to the function.

Some trusts have expenses every year, others don't. There are many considerations, including whether the gifts qualify for the annual examption or not.

But if the trust is irrevocable, the gift may not qualify for the annual examption.

I suspect OP wants to set up a trust under his control now, and which will go to another trustee on his death. That's a traditional, revocable estate planning trust. Once it's set up, annual costs are normally not required. In this case, because the gift isn't complete until death, the annual exclusion isn't an issue.

For gifts to an irrevocable trust to qualify for the annual exemption, either the donee must be given the full contents of the trust by the time he reaches 21, or he must be given annual rights to withdraw the annual gifts (and hope he doesn't withdraw it).

Yes, that's an excellent option.

Ibid.

___ Stu

Since he was concerned with gift limits, I read it as a desire to get the money out of his estate, now. A revocable trust is not a completed gift and is of no present consequence. His concern seemed to be to keep the funds away from the Wife, but okay to have another person be in charge. Just my take on it.

Another option which you can use in addition to a 529 plan or by itself is a Coverdell ESA (educational savings account). This is a trust account much like an IRA is a trust account. It has two limitations but a lot of advantages over a 529 plan.

The maximum amount that can be contributed to all accounts for the same beneficiary can not exceed $2000 in a year. Any number of people can open an account and contribute, but when you add up the annual contributions for the designated beneficiary, they can not exceed $2000. You can contribute to CESAs for as many beneficiaries as you want. The only limit is the $2000 per designated beneficiary.

If your income or on a joint return your combined income is too high, you can not contribute to a CESA.

Here are some of the advantages:

Just about every financial institution (bank, broker, etc.) can open a CESA with a simple form.

If it is opened with a broker, you select the investments unlike a 529 plan where you are limited to what is offered by the plan administrator.

Many brokers do not charge an account maintenance fee. E.G., Charles Schwab has no fee but does have a minimum contribution of $1000 or $100/month to open. TDAmeritrade has no fee and no minimum to open an account. This is not an endorsement of either company.

The CESA can easily be rolled over tax-free into another CESA with the same beneficiary or a different beneficiary in the same family.

It is easy to change the designated beneficiary on an account.

Unlike the 529 Plan, funds can be distributed tax-free to pay for K-12 private school.

You can name anyone you want to administer the CESA. You can also name a successor.

Anyone can make a contribution to the account but see annual limit above.

There are rules regarding the ages of the beneficiary when the account is open (under age 18 when opened) and rules on when the funds must ultimately be withdrawn (earlier of death or age 30). There are penalties if the total of all contributions in a year for the same beneficiary exceeds $2000.

See the IRS link below for a summary and links to other documents with more details.

I agree, the situation does not have a simple solution. And since we don't have all the facts, that makes it more problematic.

If he wants to get the money out of his estate, either a minor's trust or a Crummey trust will likely be necessary. An insurance trust may be one option, but he may not want to set up something that requires regular payments.

I don't know enough about 529 plans, but based on what you said, that could be the best over-all option.

___ Stu

My wife is my primary concern. But after my wife, I want to keep the funds away from my spendthrift daughter while caring for the education of my grandchildren.

Originally, my goal was to get excess funds out of my (and wife's) estate, but I went and looked that the Unified Credit is a lot more than I thought.

Assuming you live past the end of this year (and assuming they don't change the law) you and your wife together can pass the first $2 million free of estate tax.

If that is sufficient, a normal trust-based estate plan should work well for you and do just what you want it to do.

___ Stu