Definition of Gift in Trust

A gift in trust is an indirect bequest of assets to a beneficiary by means of a special legal and fiduciary arrangement. The purpose of a gift in trust is to avoid taxes on gifts that exceed the annual gift tax exclusion amount. Gift givers almost always pay gift taxes if gifts exceed $13,000 in one year. Gifts in trust are commonly used by parents or grandparents who wish to establish a trust fund for their children or grandchildren.

Breaking Down Gift in Trust

Gift givers can give gifts in excess of the annual exclusion without paying taxes by establishing a special type of trust, such as a Crummey trust. A gift to a Crummey trust allows the beneficiary to withdraw the gift assets for a limited time, which makes the gift considered to be a present interest and therefore eligible for the gift tax exclusion. If the gift did not have these limited-time withdrawal rights, it would be considered a future interest and would consequently be subject to gift taxes. However, it is generally understood that the beneficiary will not actually withdraw the funds during the withdrawal period.

KEY TAKEAWAYS [PLEASE PLACE THESE KEY TAKEAWAYS IN A CALLOUT BOX]
--A gift trust is a viable method of avoid taxes on gifts that exceed the annual gift tax exclusion amount.
--A gift to a Crummey trust lets beneficiaries withdraw the gift for a limited time, which makes designates the gift as a present interest and therefore eligible for the gift tax exclusion.
--The IRS periodically changes the estate and gift tax exemption, but according to the latest figures announced in 2018, the exemption is $5.6 million per individual and $11.2 million per married couple.

Gift in Trust and Gift Tax Details

In 2018, the IRS announced the estate and gift tax exemption is $5.6 million per individual and $11.2 million for a married couple. The individual limit is up from $5.49 million in 2017. The annual gift exclusion amount is $15,000, up from $14,000 in 2017. Along with the 2018 limits, the IRS also released several additional updates, including a new online Transcript Delivery Service (TDS), which provides individuals and authorized practitioners with the ability to view and print instant account transcripts for estate tax returns.

In prior years, the gift tax exclusion has been the following amounts:

  • $1,500,000 (2004-2005)
  • $2,000,000 (2006-2008)
  • $3,500,000 (2009)
  • $5,000,000 (2010-2011)
  • $5,120,000 (2012)
  • $5,250,000 (2013)
  • $5,340,000 (2014)
  • $5,430,000 (2015)
  • $5,450,000 (2016)
  • $5,490,000 (2017)

Gift in Trust and Inheritance

Gift in trust is one method of establishing a financial cushion for future generations. Transferring wealth from one generation to the next via a will or other means of inheritance is a complicated endeavor, both logistically and emotionally. At the same time, these rules can bring enormous benefits to individuals, families, and communities. Case in point: in May 2017, the Hinrichs Family Trust donated $17,273 to the Solano Community Foundation, by distributing a sum to the cause--directly from their trust. Understanding the nuances of gifting can bring added value to both grantors and beneficiaries.

[Important: A Crummey provision can be housed within another type of trust. For example, traditional life insurance trusts often contain a Crummey provision.]