Does a Trust Have a Federal Gift Tax Exemption?
A trust offers a way to set aside assets for heirs or to manage money for a beneficiary. If you bequeath money or property to heirs through a trust, your estate will avoid probate court, although the estate may still be subject to estate taxes at the federal and state levels. If you make donations or gifts out of the trust, the trust is not directly subject to gift taxes, but as the grantor of the trust, you may need to file a gift tax return with the Internal Revenue Service.
The Gift Tax
By the federal tax code, gift tax applies only to individuals, not to trusts. If you transfer money or assets to another individual in excess of $14,000 (as of 2013), you may need to file a return and pay a gift tax. There is a lifetime exclusion amount of $5.25 million on gift taxes and estate taxes combined (also as of 2013). This means that if your 2013 gifts exceed $14,000, the excess amount counts toward the lifetime exclusion. The law and rates on gift and estate taxes change frequently, so it's wise to keep abreast of the current IRS rules if you might be gift- or estate-tax-liable.
Present And Future Interest
The IRS does not levy gift taxes on trusts, nor does it consider payments from the trust to a beneficiary as a gift (it may be taxable income to the beneficiary, however). However, if you make a gift "in trust," meaning you donate money to a trust for someone's immediate benefit, then the gift is subject to gift tax and the exclusion amount. The crucial issue is whether the person receiving the donation has a "present interest" or "future interest" in the gift. The IRS does not consider a "future interest" to be subject to gift tax. However, if you make the gift available for a temporary and brief period (for example, up to 90 days), the gift tax applies. Any amount given over the annual limit applies to the lifetime exclusion. .
Special Remainder Trusts
Some rather complex rules allow you to set up structured trusts and transfer assets to a beneficiary while slipping by the gift tax rules. With a grantor-retained annuity trust, for example, you receive a stream of payments from an annuity for a few years, then transfer the remainder of the asset to the beneficiary at the end of the term. The remainder is calculated at the time of creation; any increase over and above this amount is gift-tax-free. A personal residence trust works the same way, but with a house rather than an annuity; appreciation in the value of the property is also free of gift tax.
Not all gifts are subject to gift tax, and this includes gifts made within and outside of a trust. Donations to political groups are excluded, as are educational expenses paid on behalf of another person or medical costs covered by the gift. The money must be paid directly to the political, educational or medical organization that provided the benefit to the recipient. In addition, the IRS does not apply the gift tax rules to money you transfer to spouses who are U.S. citizens or to qualified charities. The exclusion amount applies doubly to couples; thus a husband and wife together can make a gift of under $28,000, as of 2013, free of any gift tax.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.