Individuals often wish to make lifetime gifts to their loved ones as part of their estate plan. They frequently desire to make direct gifts to their beneficiaries because it is less complex than creating and utilizing a Trust. However, a properly structured Irrevocable “Gifting” Trust is a better way to preserve and maximize assets for the future generation. An Irrevocable Gifting Trust (IGT) is an estate planning tool that is often utilized by individuals to (1) reduce or eliminate estate taxes and/or (2) make gifts to individuals who are unable to properly manage assets (e.g., age, lack of maturity, lack of financial management, etc.).
Estate Tax, Income Tax & Gift Tax Advantages
Gifts made to the IGT are considered to be completed gifts and therefore excluded from the Grantor’s estate for estate tax purposes; provided, however, that he or she lives for at least three (3) years after funding his or her Trust (as per New York law). Not only are the IGT assets excluded from the Grantor’s estate, but any future appreciation of those assets is excluded from Grantor’s estate as well.
Additionally, while these IGT assets are not treated as part of the Grantor’s estate, they are typically treated as owned by the Grantor for income tax purposes. This means the Grantor is personally responsible to pay the income tax on the trust’s income at his or her personal tax rate, not at the compressed trust rate. This income tax feature enables further growth of the trust’s assets since the Trust assets are not being depleted to pay income tax every year.
Furthermore, the use of an IGT can offer gift tax advantages as well. A gift to a properly structured IGT is a great way to maximize the use of the federal annual exclusion amount for gifts. The 2022 federal annual exclusion for gifts is $16,000 per beneficiary. The Trust should provide each designated beneficiary with a temporary right to withdraw the annual gift exclusion amount. The beneficiary’s withdrawal right is referred to as a “Crummey power”. A gift to an IGT with multiple beneficiaries can utilize the $16,000 annual exclusion for each Trust beneficiary. For example, a $160,000 gift made in 2022 to an IGT that has 10 total beneficiaries who have each been given a “Crummey power” would not result in any gift tax consequence for the Grantor. This feature of the IGT allows gift tax consequences to be minimized or avoided entirely.
Protection from Beneficiary’s Personal Circumstances
Having an Irrevocable “Gifting” Trust (IGT) as part of your estate plan can also protect the Trust beneficiaries in cases of divorce, creditors, substance abuse, lack of financial management skills, etc. If an individual makes an outright gift to his or her loved one, the gifted assets become exposed to the beneficiary’s personal circumstances, which may be less than desirable. From a tax perspective, it may not be particularly desirable for the beneficiary to pay income tax on the income generated by the gifted assets at the beneficiary’s personal tax rate.
Additionally, an IGT provides greater planning flexibility in situations where the intended gift beneficiary is minor. Unlike a 2503(c) trust or a custodial account under the Uniform Gifts to Minors Act where such assets become immediately available to the beneficiary upon attaining twenty-one (21) years of age, an IGT can avoid such an early payout to the beneficiary. This is useful when the beneficiary may not be ready or capable of making appropriate financial decisions.
Indirect Access to Trust Assets
Although IGTs require the Grantor of the Trust to give up all control and access to the Trust funds, the Trustee is permitted to distribute Trust assets to the Trust beneficiaries during the Grantor’s lifetime. Typically, the Trust beneficiaries are the Grantor’s spouse and/or close family members. Therefore, if there is a need to utilize funds from the Trust, the Trustee does have the ability to make distributions to the beneficiaries.
With many estate planning options available, understanding the unique benefits of an Irrevocable Gifting Trust can help you maximize your assets for your loved ones.