does a living trust qualify for annual gift tax exclusion?

inky dink · Joined: 25 Aug 2007 Posts: 18

someone has recently stated that an annual gift must be made from a personal
account, because a revocable living trust does not qualify for the annual
gift tax exclusion. This does not sound right to me, as the IRS considers
revocable living trusts to not exist for tax purposes.

any thoughts? any references?

I did a web search and found only one reference, but it refers to a trust
(not specifically a revocable living trust) not qualifying.

thanks.

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Archived from group: misc>taxes>moderated

Phil Marti · Joined: 25 Aug 2007 Posts: 2520

"inky dink" wrote:

> someone has recently stated that an annual gift must be made from a
> personal account, because a revocable living trust does not qualify for
> the annual gift tax exclusion. This does not sound right to me, as the
> IRS considers revocable living trusts to not exist for tax purposes.
>
> any thoughts? any references?

I'd ask "someone" for a reference since it appears that's who doesn't know
what (s)he's talking about.

--
Phil Marti
Clarksburg, MD

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Benjamin Yazersky CPA · Joined: 02 Jan 2008 Posts: 41

On Feb 21, 12:02 am, "inky dink" wrote:
> someone has recently stated that an annual gift must be made from a personal
> account, because a revocable living trust does not qualify for the annual
> gift tax exclusion. This does not sound right to me, as the IRS considers
> revocable living trusts to not exist for tax purposes.
>
> any thoughts? any references?
>
> I did a web search and found only one reference, but it refers to a trust
> (not specifically a revocable living trust) not qualifying.
>
> thanks.
>
> --

In order for a gift to qualify for the annual exclusion, it has to be
a gift of a present interest.
You should be sure that your gift meets the criteria of being a
present interest, rather than a future interest.

>>
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Gil Faver · Joined: 25 Aug 2007 Posts: 72

"inky dink" wrote in message $kj1.9804@bgtnsc04-news.ops.worldnet.att.net...
> someone has recently stated that an annual gift must be made from a
> personal account, because a revocable living trust does not qualify for
> the annual gift tax exclusion. This does not sound right to me, as the
> IRS considers revocable living trusts to not exist for tax purposes.
>
> any thoughts? any references?
>
> I did a web search and found only one reference, but it refers to a trust
> (not specifically a revocable living trust) not qualifying.
>
> thanks.

I found the following:

"Gifts made from a revocable living trust for which you are a trustee will
be included in your estate if you die within three years of the gift.
Accordingly, it is better to change the title on such a gift from the
trustee to your name individually, and only then give the property to the
intended recipient"

perhaps this is what he was thinking about.

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Stuart Bronstein · Joined: 25 Aug 2007 Posts: 561

"inky dink" wrote:

> someone has recently stated that an annual gift must be made from
> a personal account, because a revocable living trust does not
> qualify for the annual gift tax exclusion. This does not sound
> right to me, as the IRS considers revocable living trusts to not
> exist for tax purposes.
>
> any thoughts? any references?

Your "someone" is mixing up different concepts.

First of all, a revocable living trust is transparent for all tax
purposes - in other words it's treated as if it's not there. Gifts can
certainly be made from such trusts, and they do qualify for the annual
exclusion.

Once a trust becomes irrevocable (assuming it's no longer a grantor
trust), the trust is the legal owner of the property and the maker of
the gift, so it will not qualify for the annual exclusion. Further,
the law generally prohibits gifts from irrevocable trusts, unless the
trust specifically, and in no uncertain language, allows the gift.

Now, a gift TO an IRREVOCABLE trust likewise does not qualify for the
annual exclusion. The reason is that this is considered to be a gift
of a future interest, and that kind of gift is excluded by statute from
the annual exclusion.

Stu

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Stuart Bronstein · Joined: 25 Aug 2007 Posts: 561

"Gil Faver" wrote:

> I found the following:
>
> "Gifts made from a revocable living trust for which you are a
> trustee will be included in your estate if you die within three
> years of the gift. Accordingly, it is better to change the title
> on such a gift from the trustee to your name individually, and
> only then give the property to the intended recipient"
>
> perhaps this is what he was thinking about.

If it was, it was wrong. Some gifts made within three years of the
date of death are included in the donor's estate. But this has nothing
to do with living trusts. A revocable trust is, for tax purposes,
treated as if it doesn't exist. The person who funded the trust is
treated as the owner of that property, and it either qualifies for the
annual exclusion or doesn't based on the gift tax law, not on the law
of trusts.

Stu

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Gil Faver · Joined: 25 Aug 2007 Posts: 72

"Stuart Bronstein" wrote in message @130.133.1.4...

Some gifts made within three years of the
> date of death are included in the donor's estate.

Stuart, as long as we are on this subject, what under what circumstances are
gifts included in the donor's estate? Is there any distinction here of
gifts made personally, or from a living trust?

thanks. Not much I could find on this in my searching.

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Stuart Bronstein · Joined: 25 Aug 2007 Posts: 561

"Gil Faver" wrote:
> "Stuart Bronstein" wrote
>
>> Some gifts made within three years of the
>> date of death are included in the donor's estate.
>
> Stuart, as long as we are on this subject, what under what
> circumstances are gifts included in the donor's estate? Is there
> any distinction here of gifts made personally, or from a living
> trust?

The rule is in section 2035 of the Internal Revenue Code. It's
pretty complex, but the basic rule is:

"(a) If —

"(1) the decedent made a transfer (by trust or otherwise) of an
interest in any property, or relinquished a power with respect to any
property, during the 3-year period ending on the date of the
decedent's death, and

"(2) the value of such property (or an interest therein) would have
been included in the decedent's gross estate under section 2036,
2037, 2038, or 2042 if such transferred interest or relinquished
power had been retained by the decedent on the date of his death, the
value of the gross estate shall include the value of any property (or
interest therein) which would have been so included.

"(b) Inclusion of Gift Tax on Gifts made During 3 Years Before
Decedent's Death — The amount of the gross estate (determined without
regard to this subsection) shall be increased by the amount of any
tax paid under chapter 12 by the decedent or his estate on any gift
made by the decedent or his spouse during the 3-year period ending on
the date of the decedent's death."

Subsection (e) of that statute could be what the "someone" was
thinking of, though all it does is to state the general rule that
revocable trusts are treated as though they don't exist. It says,

"For purposes of this section and section 2038, any transfer from any
portion of a trust during any period that such portion was treated
under section 676 as owned by the decedent by reason of a power in
the grantor (determined without regard to section 672(e)) shall be
treated as a transfer made directly by the decedent."

Stu

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Gil Faver · Joined: 25 Aug 2007 Posts: 72

"Stuart Bronstein" wrote in message @130.133.1.4...
> "Gil Faver" wrote:
>> "Stuart Bronstein" wrote
>>
>>> Some gifts made within three years of the
>>> date of death are included in the donor's estate.
>>
>> Stuart, as long as we are on this subject, what under what
>> circumstances are gifts included in the donor's estate? Is there
>> any distinction here of gifts made personally, or from a living
>> trust?
>
> The rule is in section 2035 of the Internal Revenue Code. It's
> pretty complex, but the basic rule is:
>
> "(a) If -
>
> "(1) the decedent made a transfer (by trust or otherwise) of an
> interest in any property, or relinquished a power with respect to any
> property, during the 3-year period ending on the date of the
> decedent's death, and
>
> "(2) the value of such property (or an interest therein) would have
> been included in the decedent's gross estate under section 2036,
> 2037, 2038, or 2042 if such transferred interest or relinquished
> power had been retained by the decedent on the date of his death, the
> value of the gross estate shall include the value of any property (or
> interest therein) which would have been so included.
>
> "(b) Inclusion of Gift Tax on Gifts made During 3 Years Before
> Decedent's Death - The amount of the gross estate (determined without
> regard to this subsection) shall be increased by the amount of any
> tax paid under chapter 12 by the decedent or his estate on any gift
> made by the decedent or his spouse during the 3-year period ending on
> the date of the decedent's death."
>
> Subsection (e) of that statute could be what the "someone" was
> thinking of, though all it does is to state the general rule that
> revocable trusts are treated as though they don't exist. It says,
>
> "For purposes of this section and section 2038, any transfer from any
> portion of a trust during any period that such portion was treated
> under section 676 as owned by the decedent by reason of a power in
> the grantor (determined without regard to section 672(e)) shall be
> treated as a transfer made directly by the decedent."
>
> Stu

so, this three year rule is true even if you are not using a living trust.

Does the IRS actually check this? I can't imagine most such gifts are put
back into the decedent's estate tax calculation.

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inky dink · Joined: 25 Aug 2007 Posts: 18

"Phil Marti" wrote in message $_T3.6814@trnddc07...
> "inky dink" wrote:
>
>> someone has recently stated that an annual gift must be made from a
>> personal account, because a revocable living trust does not qualify for
>> the annual gift tax exclusion. This does not sound right to me, as the
>> IRS considers revocable living trusts to not exist for tax purposes.
>>
>> any thoughts? any references?
>
> I'd ask "someone" for a reference since it appears that's who doesn't know
> what (s)he's talking about.

that "someone" is an accountant/tax preparer, but I don't consider him a
good source for a variety of reasons.

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Stuart Bronstein · Joined: 25 Aug 2007 Posts: 561

"inky dink" wrote:
> "Phil Marti" wrote
>> "inky dink" wrote:
>>
>>> someone has recently stated that an annual gift must be made
>>> from a personal account, because a revocable living trust does
>>> not qualify for the annual gift tax exclusion. This does not
>>> sound right to me, as the IRS considers revocable living trusts
>>> to not exist for tax purposes.
>>>
>>> any thoughts? any references?
>>
>> I'd ask "someone" for a reference since it appears that's who
>> doesn't know what (s)he's talking about.
>
> that "someone" is an accountant/tax preparer, but I don't consider
> him a good source for a variety of reasons.

It's possible you misunderstood. If not, the accountant is simply
wrong. I've known accountants and lawyers to be wrong - even very
wrong.

Stu

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inky dink · Joined: 25 Aug 2007 Posts: 18

"Stuart Bronstein" wrote in message @130.133.1.4...
> "inky dink" wrote:
>> "Phil Marti" wrote
>>> "inky dink" wrote:
>>>
>>>> someone has recently stated that an annual gift must be made
>>>> from a personal account, because a revocable living trust does
>>>> not qualify for the annual gift tax exclusion. This does not
>>>> sound right to me, as the IRS considers revocable living trusts
>>>> to not exist for tax purposes.
>>>>
>>>> any thoughts? any references?
>>>
>>> I'd ask "someone" for a reference since it appears that's who
>>> doesn't know what (s)he's talking about.
>>
>> that "someone" is an accountant/tax preparer, but I don't consider
>> him a good source for a variety of reasons.
>
> It's possible you misunderstood. If not, the accountant is simply
> wrong. I've known accountants and lawyers to be wrong - even very
> wrong.

naw, he's wrong - again. thanks

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cballard · Joined: 25 Aug 2007 Posts: 107

On Feb 21, 12:02 am, "inky dink" wrote:
> someone has recently stated that an annual gift must be made from a personal
> account, because a revocable living trust does not qualify for the annual
> gift tax exclusion. This does not sound right to me, as the IRS considers
> revocable living trusts to not exist for tax purposes.
>
> any thoughts? any references?
>
> I did a web search and found only one reference, but it refers to a trust
> (not specifically a revocable living trust) not qualifying.

The issue was actually more complicated than this, and was fixed by a
change in the law in 1997.

Code section 2035(c) requires that certain gifts made by a decedant
within three years of death be included in the gross estate of the
decedant for estate tax purposes. This rule was put into place to
discourage fraudulent deathbed gifts.

Under Code section 2035(c)(3), any gifts that do not require a gift
tax return (e.g. gifts that are under the annual exclusion amount) do
not have to be included in the decedant's estate tax return under the
2035(c) rule.

Prior to 1997, there was a considerable amount of litigation regarding
whether a gift made directly from a revocable living trust to a gift
recipient would be brought back into a decedant's estate if the
grantor/decedant died within 3 years of the gift. The IRS relied on a
very strict interpretation of Code section 2035, saying that gifts
made directly from trusts were not eligible for the 2035(c)(3)
exception, since the donor had not made the gift, the trust had made
the gift. The contrary view said that this was form over substance,
and that the gifts should be deemed to have been distributed first out
to the beneficiary of the trust and then the gift deemed to be made
from the beneficiary to the recipient.

The court cases went both ways. Eventually, the IRS conceded that the
2035 provisions would not apply to a gift made directly out of a trust
if the grantor of the trust was the only permissible distributee from
the trust under the terms of the trust instrument. The IRS continued
taking a hard line in cases where the grantor was not the only
permissible distributee of the trust.

Congress put the entire issue to rest in 1997 by adopting 2035(e),
which says that a gift from a grantor trust is to be deemed to be a
gift directly from the grantor to the gift recipient. Therefore the
small gift exception applies to gifts made directly from a revocable
trust, and people no longer need to worry about going through the
formality of first distributing assets to themselves and then making
gifts from their personal accounts.

--Chris Ballard

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kastnna · Joined: 25 Aug 2007 Posts: 44

On Feb 21, 1:06 pm, Stuart Bronstein wrote:

> Now, a gift TO an IRREVOCABLE trust likewise does not qualify for the
> annual exclusion. The reason is that this is considered to be a gift
> of a future interest, and that kind of gift is excluded by statute from
> the annual exclusion.

I'm confused by this statement. Please help me understand.

Example:
Suppose an irrevocable trust owns and pays the premium on a life
insurance policy. That premium is $12k annually. The insured/donor
"gifts" $12k to the ILIT, the ILIT issues Crummey letters, and 30 days
later the trustee pays the premium using the funds.

Does the $12k not qualify for the annual exclusion?

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Stuart Bronstein · Joined: 25 Aug 2007 Posts: 561

kastnna wrote:
> Stuart Bronstein wrote:
>
>> Now, a gift TO an IRREVOCABLE trust likewise does not qualify for
>> the annual exclusion. The reason is that this is considered to
>> be a gift of a future interest, and that kind of gift is excluded
>> by statute from the annual exclusion.
>
> I'm confused by this statement. Please help me understand.
>
> Example:
> Suppose an irrevocable trust owns and pays the premium on a life
> insurance policy. That premium is $12k annually. The insured/donor
> "gifts" $12k to the ILIT, the ILIT issues Crummey letters, and 30
> days later the trustee pays the premium using the funds.
>
> Does the $12k not qualify for the annual exclusion?

If it's a qualified Crummey trust, yes it does. Simply issuing Crummey
letters is not sufficient. The trust must state that the beneficiary
be given notice of any gift, and have a reasonable time to withdraw the
gift. So for that time (generally 30 days minimum) the gift to the
trust is revocable by the beneficiary.

Normally a gift to a trust is considered a future interest. But if the
beneficiary has the immediate right to withdraw the gift, it's not
considered a future interest, and as a result qualifies for the annual
exclusion.

Stu

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