Family Trusts & Gifts

By John Cromwell

A family trust is an estate planning device used to transfer assets to family members without those assets having to go through probate. When a person creates a trust, he voluntarily transfers his property into the trust for the benefit of others. As a result, creating the trust may be considered a gift to the beneficiaries. Creating a trust is difficult and subject to state laws, which vary. Consider hiring a local licensed attorney or using a third-party legal document service.

Revocable Vs. Irrevocable

Generally, family trusts are created while the creator is alive. As a result, the creator has the choice to make the trust either revocable or irrevocable. A revocable trust allows the creator of the trust to change the terms of the trust at any time. He can also terminate the trust and retake the property. The creator of an irrevocable trust cannot do that; once he donates the property, he cannot change the terms of the trust or regain the property. Despite the lack of control, a trust creator may make the trust irrevocable to protect the donated property from creditors, secure Medicaid benefits, or avoid estate taxes on the property.

QTIP Trust

A qualified terminable interest property trust -- QTIP -- allows a person to leave property to his spouse in a trust. It is created when one spouse dies. The trust property is used by the living spouse for the rest of her life. When the surviving spouse dies, the property in the trust is distributed based on the terms established by the first deceased spouse. By organizing a QTIP, any estate tax on the trust property is deferred until the surviving spouse dies. These sorts of trusts are particularly popular when a person is in a second marriage and wants to leave his property to his children from the first marriage. QTIPs can be complicated to create, so consider hiring a licensed attorney to help you draft the relevant trust documents.

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Gift Tax

The gift tax is a federal levy on the transfer of any property where the transferring individual receives less than the full value for the property. The transferring party is responsible for paying the gift tax. Gifts to spouses are not taxed. The annual exclusion allows you to give a certain amount of property to any individual without incurring a tax. As of March 2012, the annual exclusion amount is $13,000. So if John gives Sally and Jerry $13,000 each, he would not have to pay any gift tax. Property that is donated to an irrevocable trust is subject to gift taxes, while property donated to a revocable trust is not.

Income Tax

Often, the property in a trust generates income. This income must be taxed as it is earned. Who pays taxes on that income depends on the type of trust. If the trust is revocable, the creator of the trust pays the tax on the income. If the trust is irrevocable, the beneficiaries of the trust pay the tax.

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Tax Benefits of Irrevocable Trust

References

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An inheritance is the transfer of property after a person passes away. Property can be transferred at any point before or immediately after the person's death. How that property is transferred depends on the wishes and priorities of the donor. One key issue is whether the donor wants to retain the use and control of the property for the duration of her life or is willing to relinquish it. Another issue is taxes. Many property transfers will be taxed as gifts or as part of an estate. Minimizing tax liability may be an important consideration when determining if and how to transfer property prior to death.

What Are the Disadvantages of an Irrevocable Trust?

A trust is a legal device that permits a grantor to place assets under the control of a trustee, then who administers the assets for the benefit of beneficiaries named by the grantor. A living trust is a trust created while the grantor is still alive -- as opposed to a testamentary trust, which is created by the terms of the grantor's will. A trust is irrevocable if the grantor cannot unilaterally revoke it.

Does a Living Trust Change When a Person Remarries?

A living trust is created by a grantor when he transfers property to a trustee to hold and manage for the benefit of specific beneficiaries. When a person creates a living trust, it is normally a part of a broader estate plan. Oftentimes, the creator names himself as beneficiary and initial trustee, but when he passes away, the trust then conveys his property to other designated beneficiaries instead of by will. If the creator of the trust remarries, the terms of the trust generally do not change automatically. However, many times the trust can be altered to include a new spouse as a beneficiary to the trust.

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