abilities vary according to the terms of each trust. Seek professional legal and tax advice in setting up a trust.
The Perry Parker Dynasty
Perry Parker is the matriarch of a great family of great wealth. Upon the advice of her tax attorney, she has created a trust to transfer wealth out of her personal estate to provide income for her family through future generations and to achieve long-term tax advantages. She has transferred $20 million into the Perry Parker Family Trust and appointed her banker as trustee (the institution is the official trustee, but an individual at the bank administers). According to instructions, trust assets are to be invested for income and growth; her family of ten children and grandchildren are to receive income in equal amounts, per capita, and as Parker great-grandchildren come along, they too are to receive equal shares of trust income. Perry’s transfer of assets is considered a lifetime gift and is subject to gift and estate tax. In addition, because the trust will not end for generations to come, the transfer is also subject to a generation-skipping tax. Assuming Perry used her entire lifetime estate and gift tax credit and exemption when creating the trust, the balance of her estate will be taxable without additional tax credit when she dies, though the size of her taxable estate will have been reduced substantially by the amount transferred to the trust and the taxes paid. Luckily, Perry can afford it without affecting her own welfare. Going forward, the trust will be liable for annual tax on capital gains and income tax, and beneficiaries will be responsible for their respective income taxes. The key advantage to Perry and her family is that the $20 million she put into trust will be allowed to grow to perhaps bazillions. And from generation to generation, trust assets will avoid future estate and gift taxes— which were as high as 45 percent when the trust was created—that would otherwise have systematically diminished Perry’s legacy to her family. Matriarch indeed.
Gifts A gift is a wonderful thing. Giving is a joy. Receiving is a pleasure.
Donor: a person making a gift during his or her lifetime.
A valid gift has three elements: •
Intent: you want to give the gift
•
Delivery: you give the gift now, not the promise of a future gift
•
Possession: the gift has been received
Of course, the IRS has rules about gifts. Under the annual gift exclusion rule, every person is allowed to make gifts to as many individuals as he or she likes, in one year, free of gift tax, up to the amount of the annual gift exclusion. Spouses, and in some states domestic partners, are permitted to combine exclusions in making a tax-free gift to an individual. Gifts above the exclusion amount may be taxable to donors and must be reported to the IRS. Gift amounts reported are further excluded from taxes up to a lifetime exemption for each individual, but amounts above that exemption could be counted as part of an estate for tax purposes. As a point of reference, the annual exclusion has varied in the last several years between $10,000 and $13,000 per recipient, while the lifetime gift exemption has been $1 million per donor. These figures are subject to change.
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