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Back to the Basics – The Gift Tax

Putting your assets in an irrevocable trust has a number of benefits, including: allowing the settlor, also known as the maker of the trust, to establish how his or her assets will be kept and eventually distributed, it allows the settlor to have access to the income produced by the trust, as well as the numerous tax benefits such as capital gains taxes being either deferred or in the event of gifting, avoided.

According to the Internal Revenue Service, the federal tax code applies a gift tax on an individual level, however, that tax does not apply to trusts. If you transfer funds from your personal account, whether it is a savings or checking, to another, in excess of $14,000 you will be subject to a tax for the gift made, however, the IRS does not place these same taxes on trusts, depending on how the gift was made.

If the beneficiary makes a discretionary gift to another, a gift that can be shown to be made for the immediate benefit of another, it depends on whether the donation is viewed as present or future interest in the gift. If it can shown that the gift was made for the future interest of another, the IRS will not subject the trust to gift tax, however if it can be perceived that the gift was made for a temporary relief of another, the gift tax will be applied to the donation made.

Additionally, there are some donations that are not subject to the gift tax, such as political donations, educational expenses and medical costs paid on someone else’s behalf, qualified charities and transfers to spouses.

In order to qualify a gift for annual exclusion as a present interest gift, the beneficiary must be granted the right of withdrawal of the funds, also known as the gift, for a certain time period after the gift was made. A gift tax return will be required if a gift is made to a beneficiary, in excess of the annual exclusion amount, the settlor’s spouse wanted to use the spouse’s annual exclusion amount, which increases their gift to double the annual exclusion, or the trust was created with the intention of being a generation skipping trust. It is important to remember when transferring assets, the higher the assets appreciate, the more that future growth grows with the trust, and may be taxable.

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