Re: Annual Exemption
We want to use the annual gift exemption and give our kids a few dollars. Our children are over 21 years of age.
Is there a way we can open an account with their name on the account without them knowing about it or having access to the funds?
If your total estate is expected to be under $5.5/11mil per person/couple, you don't have to worry about using the annual gift exemption; and you can open accounts in your names with a pay/transfer on death to your children. They won't know it and you can change the beneficiary of the accounts any time. These accounts will also bypass the probate process . You will pay taxes on the income of those accounts (because it is still you accounts).
If your estate is expected to be close to the lifetime exemption, then there is an advantage to setting up irrevocable trusts -- the main one I can think of is sheltering those assets from your children's creditors -- law suits, divorces, etc. Think of the cost as insurance. The trust could be grantor (income taxed to you) or non-grantor (income taxed to the trust) trust. It may also has an income tax advantage for those who live in states with a high state income tax. You can set up the trust in a state with no state income tax; and consequently the total tax paid by the trust (Fed. only) may not be higher (or even lower) than what you would pay (Fed + State).
In article you write:
Since any earnings or capital gains would be taxable to them, I sure hope not.
It sounds like what you want is an irrevocable trust for their benefit but that is a lot more complicated than writing a gift check.
R's, John
Well, you can, both legally and practically. But if you do the gifts won't qualify for the annual exemption. Under your circumstances your gift would be considered either incomplete or the gift of a future interest. In either case you don't get the exemption.
Exactly correct. "Crummey" trust is not a value judgment, but the name of a litigant in a court case that validated the use of these trusts. Specifically a beneficiary is given a limited time to withdraw the gift before the right lapses, and that makes the gift a present interest rather than a future interest, so it qualifies for the annual exclusion.
It also means that it is a grantor trust with the beneficiary treated as the grantor. So any income earned by the trust is treated as earned personally by the beneficiary.
There are some other rules that go along with these trusts, such as that income from the trust cannot be used to pay for premiums on life insurance. This trust is considered ideal as a life insurance trust (with the gifts going to pay insurance premiums rather than trust income) because it reduces the grantor's taxable estate for estate tax purposes, but the "death benefit" is income tax free to the beneficiary. In my experience this is the most common use of this trust now, though it is really only useful for the wealthy because the estate tax exemption is high enough that this sort of arrangement isn't helpful for most people.
While your information, while for the most part correct, is potentially misleading in its simplicity.
First, most gifts to irrevocable trusts do NOT qualify for the annual gift tax exemption. Crummey trusts qualify for the annual exemption because the beneficiary must be notified of any gift, and given the right to withdraw it for at least 30 days after he receives the notice. A Crummey trust is considered a grantor trust, but the "grantor" is not the person who makes the gift - the beneficiary is considered the grantor for income tax purposes, and is taxed on the trust's income.
Irrevocable non-grantor trusts are not generally considered good vehicles for holding taxable income, because bracket creek is extremely steep. For example the top tax rate (39.6%) kicks in for married couples when income goes over $250,000. However that same top rate is charged on trusts for income over $7,500.
Yeah.
I am a trustee of a trust that has a large capital gain this year. It terminated on the death of the primary beneficiary earlier this year and I am in the midst of coordinating the accountant and custodian to be sure the trust pays everything out to the remaining beneficiaries closes out before the end of the year so the gains are taxed at the beneficiaries' MFJ rate rather than the much higher trust rate.
I haven't researched this but my guess is that, as long as you which identify assets go to which person, and the trust is in the process of winding up, that you can probably get away with transferring tax liability before you actually transfer the cash.
But I have been known to be wrong on occasion. Perhaps others here will let me know just how wrong I am about that.
Everyone involved swears it'll be done before Christmas so I hope I won't have to find out.
R's, John
That would be best. I was curious so did a little preliminary research on the point. I didn't find anything specifically on point. But a trust can deduct a charitable contribution that has not been actually paid but has been permanently set aside for that purpose. By normal rules of statutory interpretation, if they had to enact a statute to let that be the case for charities, it is not the case for everybody else.
How times have changed. When my wife and I had our child, the exemption was $650K. Even ignoring any assets, our insurance policies, $1M each were enough to cause issues. The trust was mainly set up to avoid this, by gifting the money, having a trustee sign a letter back that they would leave the money in the trust, and having the trust own the insurance. As you noted, the $11M/person exemption negates the need for all of this, except for those at a much higher wealth/insurance level.
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