Wealth

Trust gift

What is a trust gift?

A trust gift is a special legal and fiduciary arrangement that allows assets to be indirectly bequeathed to beneficiaries. The purpose of a trust gift is to avoid taxation of gifts that exceed the annual gift tax exemption limit. This trust is often used to transfer wealth to the next generation.

key takeaways

  • Trust gifts are often used to pass wealth from one generation to another by establishing a trust fund.
  • Generally, the IRS taxes the value of the gift being transferred, up to the annual gift tax allowance.
  • A fiduciary gift is a way to avoid taxation on gifts that exceed the annual gift tax exemption.
  • One type of fiduciary gift is a Crummey trust, which allows gifts to be given for a specified period of time, identifying the gift as a current benefit and qualifying for gift tax exemption.
  • One disadvantage of a trust gift is that when it is established without restrictions, it allows beneficiaries (such as children) to withdraw large amounts of money, jeopardizing the financial viability of the fund.

Learn about the gift of trust

Trust gifts are often used by parents or grandparents who want to establish a trust fund for their children or grandchildren. Establishing a trust is an estate planning strategy that can be used to transfer assets or wealth from the settlor (the owner of the assets creating the trust) to the beneficiaries who receive the wealth. Assets can be transferred at the grantor’s will, which means restrictions can be set so that recipients can only receive funds if they meet the instructions set out in the trust. For example, a parent might create a trust in which the child cannot access the funds until his 21st birthday.

Annual Gift Tax Allowance

Generally, the Internal Revenue Service (IRS) taxes asset gifts from one person to another. However, gift tax is only triggered when the value of the asset being transferred exceeds a certain amount (called the annual gift tax exclusion amount). The annual exclusion for gifts is $15,000 for tax year 2021 and $16,000 for 2022.

crumi trust

A trust gift is a viable way to avoid taxation on gifts that exceed the annual gift tax exemption limit. A gift giver can make gifts beyond the annual exclusion without paying tax by establishing a special type of trust, such as a Crummey trust. Gifts to the Crummey Trust allow the beneficiary to withdraw the gifted assets for a limited time, which makes the gift considered a current interest and eligible for gift tax exemption. Gifts without these time-limited withdrawal rights are considered future benefits and are subject to gift tax.

For example, a trust can be set up so that beneficiaries can make withdrawals within a set period of time, such as 60 or 90 days. After that, the gift funds held in the trust are subject to the withdrawal rules set by the trust grantor. In our example, let’s say the parents specified that the child cannot receive trust funds until the age of 21. Even if the child decides to use the trust immediately, they will only receive the most recent gift, as all previous gift funds remain protected in the trust account.

Crummey clauses can also be included in another type of trust. For example, traditional life insurance trusts often contain Crummey clauses.

Pros and Cons of Trust Gifts

Aside from the tax benefits, a trust gift is a way to build a financial buffer for future generations. Passing wealth from one generation to the next through a will or other inheritance is a complex undertaking, both logically and emotionally. At the same time, these rules can bring enormous benefits to individuals, families and communities. Understanding the nuances of gifting can bring added value to both the giver and the beneficiary.

One potential downside of a trust gift is that providing beneficiaries—especially children—with immediate access to large sums of money can jeopardize the fund’s ability to build long-term wealth. Some households get around this by setting limits, such as limiting the number or frequency of withdrawals, or terminating future gifts to recipients who withdraw funds immediately.

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