Debra Rahmin Silberstein

Attorney and Counsellor at Law

 

69 Park Street

Tel 1-978-474-4700

Andover, MA 01810

Fax 1-978-474-4701

Debra@debrasilberstein.com

 

THE IRREVOCABLE LIFE INSURANCE TRUST

 

Most people buy life insurance to protect their family, not to increase the amount of federal estate tax their estate may have to pay. Your estate may bear a greater tax burden, however, if you are the owner of an insurance policy or you have an "incident of ownership" in a policy, such as the right to name and change beneficiaries, the right to borrow on policy cash values, or the right to surrender the policy for cash. Your ownership of the policy or retention of an incident of ownership in the policy will cause the insurance proceeds to be includible in your taxable estate, even though the proceeds pass directly to the designated beneficiary, and not through your probate estate.

 

If your surviving spouse is the beneficiary, the proceeds generally will not be taxed at your death, even if they are includible in your estate, because they will qualify for the estate tax marital deduction. The marital deduction, however, merely defers the estate taxation of the life insurance proceeds until your spouse's death to the extent that your spouse does not use up the proceeds during his or her lifetime. The result is the same if your spouse owns a policy on your life. Another alternative is to have your children own the policy. This may not be satisfactory if your children are not fiscally mature or you want your spouse to have use of the proceeds.

 

The irrevocable life insurance trust is a popular estate planning tool because it can be structured to give your spouse use of the policy proceeds while preventing the proceeds from being subject to estate tax at either your or your spouse's death. In fact, the trust can be used to insulate the insurance proceeds from estate tax for multiple generations. In addition to reducing estate tax costs the trust serves as a vehicle for managing the insurance proceeds for the beneficiaries. Generally, these trusts are structured so that they are irrevocable, which means that the grantor does not have the power to amend or revoke the trust.

 

There is at least one circumstance in which an irrevocable life insurance trust will not reduce estate tax. If you transfer an existing policy to a trust and do not survive the transfer by at least three years, the policy will be included in your estate for estate tax purposes. The trust generally provides for such a contingency by causing the policy proceeds to qualify for the marital deduction, thereby deferring the estate tax until your spouse's death.

 

Advantages of an irrevocable life insurance trust are that it reduces the costs and inconvenience of probate, allows access to funds for needed estate costs (administration and taxes), and it provides for monetary flexibility and stability because the trustee can invest and maintain the insurance proceeds while insuring that your surviving spouse receives an income from the trust.

 

Trust Features Relevant During Insured's Lifetime

 

The irrevocable life insurance trust is funded by transferring existing policies to the trustee or transferring funds to allow the trustee to purchase a new policy. The latter alternative avoids the possibility that the life insurance proceeds could be drawn back into your taxable estate should you die within the following three years. You will also make periodic contributions to the trust for the trustee to make the life insurance premium The trust does not generally "require" the trustee to make premium payments.

 

The policies and funds transferred to the trust are taxable gifts by you to the trust's beneficiaries. The gift tax value of an existing policy generally approximates its cash value. Gift tax can be reduced or eliminated, however, by drafting the trust so that the beneficiaries have a right for a limited period of time - generally 30 to 60 days - to withdraw property transferred to the trust. It is not intended that the beneficiaries exercise this right, but it allows gifts to the trust to qualify for the annual (approximately) $10,000-per donee exclusion from federal gift tax ($20,000, if you are married and elect to "split" the gift with your spouse). Each beneficiary's right of withdrawal may be further limited to $5,000 in order to ensure that, under another provision of the gift tax law, the beneficiary is not treated as having made a gift by forfeiting his or her right of withdrawal. As a result, the amount of annual premium that can be paid to the trust free of gift tax may be limited to $5,000, multiplied by the number of trust beneficiaries (your spouse and children, for example). If the value of an existing policy transferred to the trust exceeds the annual gift tax exclusion, you can use a portion of your combined gift and estate tax credit to shelter up to $650,000 (in 1999) from gift tax.

 

Trust Features Relevant After the Insured's Death

 

After the insured's death, the trustee collects the insurance proceeds and invests them in income-producing assets. The income and principle may be used to provide for the support of your spouse and children. Following your spouse's death, the trust may continue for the benefit of your children and grandchildren, or may be distributed to your descendants when they reach specified ages.

 

This memorandum only highlights the features of life insurance trusts. The costs establishing and administering a trust must be weighed against the potential gain in estate tax savings and estate planning flexibility.

 

SUMMARY OF INTRA-FAMILY GIFTS OF LAND

 

 

Intra-family gifts can be an important method of reducing the burden of estate taxes. An estate owner whose estate already consists primarily of family lands which she wants to preserve for her children may be able to avoid a forced sale to pay estate taxes by reducing the size of her estate through lifetime annual exclusion gifts. Similarly, estate owners who simply want to take advantage of the annual exclusion but cannot spare the cash can give partial or undivided interest in real property each year. Listed below are various methods and criteria generally designed to give an interest in ones estate to another.

 

METHODS OF THE VARIOUS APPROACHES OF GIVING LAND

 

Form of Gift

 

A. Simple Deed. The Donor can deed undivided interests to her children as tenants-in-common. However this option is more cumbersome in the long range gift program because of the repeated costs of recording deeds and other necessary paper work.

 

B. Nominee Trust. The donor can transfer her entire interest in her estate to a nominee trust. This is a trust which acts as a shell, with the trustee subject to direction from those holding the beneficial interests. In this type of trust, only one deed in needed, into the trust, with future gifts reflected in amendments to the schedule of beneficial interests. These do not need to be recorded.

 

C. Limited Partnership. The donor can transfer her entire interest in her estate into a partnership and make annual gifts of partnership interest. The donor could serve as the general partner. When a limited partnership is set up as a way to allocate interests in property, the general partner who transfers part of her limited partnership to another, the other will only receive her share of the distributable cash flow of the partnership.

 

Consolidation of the family assets into a family limited partnership may lead to significant operational cost advantages. Families may have members and/or trusts which have been created through prior gifts. This can frequently cause levels of frustration due to the necessity of keeping up with the investments for the multiple investors. If the investments are consolidated into one partnership, this problem is solved. Secondly, the diversification of money managers for each of the and/or family members may not be possible because of the cost associated and/or certain minimal levels are not reached because of the multiple accounts. However, if the multiple recipients are consolidated into one recipient or one account, diversification of money managers and reductions of fees are both possible.

 

The use of the family limited partnership many times simplified annual giving by the matriarch. Many estates are often difficult to value. Therefore, it may be extremely difficult for an estate owner to make undivided gifts of that property. However, if the estate owner contributes those assets to a family limited partnership and assigns (through a simple form) certain partnership units to her children, all of the goals of the undivided gift are achieved. Secondly, besides the simplicity involved in making a gift of limited partnership interest, management of the assets are consolidated. Thus, it is usually much easier to effectuate gifts of assets through the limited partnership format than any other format. There are other benefits to a Family Limited Partnership such as but not limited to:

 

a. Family limited partnerships may be drafted in a manner which facilitates

keeping the family assets in the family;

 

b. Use of the family limited partnership provides some protection of family assets

from future creditors;

 

c. Use of the family limited partnership may provide some asset protection

against failed marriages;

 

d. A partnership agreement is comparatively flexible.

 

D. Sale with Notes Back. Under this approach, the parent sells the entire interest in the real estate to her children, in return for notes back from the children. As an initial matter, this technique has the advantage of shifting future appreciation to the children tax free. The parent may also get the current value of the property out of her estate by forgiving the notes to the extent of the annual exclusion each year.

 

E. Conclusion-Practical Considerations. Apart from the various tax issues identified above, any transaction of this type should be analyzed carefully in terms of the practical realities of the estate owners situation. Who will bear the maintenance, insurance, tax and related burdens? How will decisions be made concerning renovations or sales? Will the personal circumstances of the children lead one or more to feel unequally treated? For example, will the children get equal use from the property, can they bear the financial burdens, etc? Do the children have adequate estate plans so that the property will pass to appropriate family members in the event of a child's death? Regardless of the tax considerations of any particular transaction, factors such as these must be given early consideration.

 

 

SUMMARY OF ESTATE PLANNING BASICS

 

            The Will    A Will is a set of written directions from you to your executor explaining how you want your property distributed after your death.  In Massachusetts, two adults must witness a Will.  If a witness is also a beneficiary, the Will is valid but the provisions benefiting the witness are null and void.  Your Will only controls the distribution of your probate property.

 

            What happens if you die without a Will?      If you die without a properly executed Will, state intestacy law directs how your probate property is distributed.  Since there is no assurance that state law will direct the distribution of your property in the manner you desire, it is important to have a properly executed Will even if you do not need any of the more complex estate planning instruments.

 

            Estate Tax    For federal estate tax purposes estates under $1,500,000 are not subject to tax in 2005.  Estates greater than $1,500,000 are taxed at graduated rates up to forty-seven (47%) percent, in 2005.

 

            Federal estate tax law allows each individual up to $1,500,000 (in 2005) in assets to pass at death, tax free, and an unlimited marital deduction.  Each person can give up to $1,000,000 in assets away during his or her life, free of gift or estate tax.  This $1,000,000 uses up a portion of the applicable federal exclusion amount available to you at death.  This is in addition to the annual exclusion amount of $11,000 per person per year.  The unlimited marital deduction means that if you leave your entire estate to your spouse it will pass tax free upon the first spouse’s death.  The marital deduction, however, is merely a deferment of estate tax and will generally be taxed on the surviving spouse’s death.

 

            Major changes to federal estate tax law made on May 26, 2001 increased the unified credit or exemption from federal estate tax (now known as the applicable federal exclusion amount) and reduced the federal estate tax rate as follows:

 

Year                Top Estate Tax Rate             Exemption Amount

2002                            50%                                    $1,000,000

2003                            49%                                    $1,000,000

2004                            48%                                    $1,500,000

2005                            47%                                    $1,500,000

2006                            46%                                    $2,000,000

2007                            45%                                    $2,000,000

2008                            45%                                    $2,000,000

2009                            45%                                    $3,500,000

2010                            repealed                                   N/A

2011                            55%                                    $1,000,000

 

There is a full repeal of the federal estate tax in 2010.  Simultaneously the plan reduces the top estate and gift tax rates gradually over the same period from 50% to 45%.  However, full repeal is only in effect for the year 2010.  In 2011, the bill provides for an automatic reinstatement of the 2001 estate tax rules will apply.  Tax experts disagree on whether the tax will be revived and if so, to what extent. 

 

            Upon full repeal of the federal estate tax, the law will replace the current stepped-up basis on assets given at death with carry over basis.  This will require heirs to keep track of the original basis.  The law does allow $1.3 million of basis to step up for some assets and $3 million to step up with regard to assets transferred to a surviving spouse.  This provision excludes property acquired by a decedent by gift from a non-spouse within three years prior to decedent’s death.

 

            The law retains the gift tax, in part to prevent the use of gifts to transfer property from higher to lower rate taxpayers.  Upon repeal of the federal estate tax the maximum gift tax rate will be 35% with a lifetime gift exclusion rising to $1 million in 2002 and remaining at the said $1,000,000.  The current annual exclusion is $11,000 per individual.  After 2010, transfers to a trust will be a taxable gift unless all of the trust’s income is taxed to the donor or the donor’s spouse under the Internal Revenue Code’s grantor trust rules. 

 

            The state death tax credit that had previously been allowed against the federal estate tax was phased out.  The law reduced the credit by 25% in 2002, 50% in 2003, 75% in 2004, and thereafter it is repealed and replaced by a deduction against the federal estate tax in place of the credit for the state death taxes paid.  It has been estimated[1] that this will result in a loss of $50-$100 billion to the states over the next 10 years, or approximately 1.5% of states tax collection.

 

            Effective January 1, 2003, significant changes were made to the Massachusetts estate tax.  These changes are summarized in a memorandum dated January 3, 2003 and attached hereto.

 

Both the federal and state estate tax changes are difficult for “planning”.  Revisions to wills and trusts and/or the funding of the typical revocable trust will be necessary on an ongoing basis.  Full repeal of the estate tax will occur only for one (1) year, 2010.  The automatic reinstatement of the 2001 rules in 2011 will undoubtedly force Congress to revisit this issue again.

 

            Revocable or Living Trust    The revocable trust, sometimes referred to in the popular press as a “living trust”, is revocable and amendable.  The consequence of that retained control is that any income from assets which are transferred to the trust during the Grantor’s life are taxable to the Grantor.

 

            The primary benefits to the use of a funded revocable trust are:

 

            1)         Avoiding probate which can expedite the administration of an estate and distribution of assets.  In Massachusetts there is generally no significant savings of estate administration expenses as a result of transferring assets to a revocable trust prior to death.

 

            2)         Privacy, your estate plan and assets are not exposed to public record.

 

            3)         Management of assets in the event of disability.

 

Probate v. Non-Probate Property     Property held as a joint tenant, i.e., real estate, bank accounts, will not pass through a Will but pass automatically to the surviving tenant.  Life insurance proceeds, revocable trust property, and retirement plan benefits (payable to a person or entity other than the estate) also are not part of a probate estate but are included, in whole or in part, in the estate for tax purposes.  The gross estate for estate tax purposes includes all property in which the decedent possesses an interest or exercises control of at death.

 

Gifting   Gifting is one method used in estate planning to reduce the size of an estate.  An individual can give up to approximately $11,000.00 in money or property to each donee in each calendar year free of gift tax.

 

Durable Power of Attorney     The Durable Power of Attorney can be invaluable as it allows the management of one’s affairs in the event of incapacity without requiring the appointment of a fiduciary by a court or requiring application to a court for permission to conduct certain transactions.  The named attorney is also given the power to consent to surgery or any other medical procedure or treatment, or withholding of the same.  I strongly advise the execution of a Durable Power of Attorney as well as a specific Durable Power of Attorney for the conveyance of real estate.

 

Health Care Proxy    The Health Care Proxy Statute, M.G.L. c 201D, allows an individual to designate an agent to make health care decisions in the event he or she cannot make or communicate his or her wishes.  Although the proxy will not be effective until a formal determination is made by the attending physician that he or she lacks the capacity to make or communicate health care decisions, it allows the individual to declare whether he or she wishes to be kept alive by artificial measures or die naturally.  The proxy may be revoked at any time, orally, in writing, or by act.  Any health care proxy should be given to the treating physician(s).

 

Living Will    Although Massachusetts does not formally acknowledge a Living Will (the enactment of the Health Care Proxy Statute was the Commonwealth’s response), I do advise execution of one along with the Health Care Proxy to add guidance and further express ones wishes regarding his or her health care agent and the court, if their religious beliefs are consistent therewith.

 

 

These materials are intended to assist readers as a learning aid but do not constitute legal advice and, given their purpose, may omit discussion of exceptions, qualifications, or other relevant information that may affect their utility in any planning situation.  Diligent effort was made to insure the accuracy of these materials but Attorney Silberstein assumes no responsibility for any reader’s reliance on them and encourages all readers to verify all items by reviewing all original sources before applying them.  The reader should consider all tax and other consequences of any planning technique discussed.

                                                                                                Last updated March 2005

 

FAMILY LIMITED PARTNERSHIP

 

here are both tax and non-tax reasons to consider the use of the Family Limited Partnership. The non-tax reasons include income shifting, protecting assets from creditors, and the ability to transfer a business or other assets to other family members while still retaining control. The tax advantages usually include: (i) obtaining valuation discounts; and (ii) reducing the senior family member’s assets for estate planning purposes, even though the senior family member retains control.

Background

 

A family limited partnership may be used in estate planning to restructure a family business. In a typical transaction, a parent contributes the business assets to a limited partnership in exchange for both general and limited partnership interests. The parent then generally makes gifts of the limited partnership interests to his or her children. The parent retains the general partnership interest and, thus, the management of the partnership and control over partnership distributions. The children who are limited partners do not participate in management, cannot compel partnership distributions, and have limited liability. When the limited partnership is dissolved (generally after the parent’s death), the assets are divided among the remaining partners – the children.

A partnership is formed when two or more persons carry on a trade or business together and is governed by the agreement, or the contract between the partners. The agreement can be formal or informal, oral or written. A partnership can be flexible when compared with other estate planning techniques. For example, an irrevocable trust, such as the QSST (used for "S" corporations), or the QPRT (Qualified Personal Residence Trust) may not generally be amended, however if all the partners in a family partnership agree the partnership may be amended or terminated. With a limited partnership there are two classes of partnership interests: general and limited. The limited partners have limited liability and are at risk financially only to the amount each has individually invested in the partnership. To avoid unlimited liability, the limited partner should avoid all participation in the management of the partnership. The term of the limited partnership is spelled out in the certificate of limited partnership agreement for services rendered to the partnership (IRC section 704(e)(2)). The limited partnership does not dissolve with the death of a partner. The general partner in many family partnerships is a corporation, a limited liability company (L.L.C.) or a revocable trust.

 

 

The limited partnership percentages do not have to be equal. There can be restrictions in the partnership on the sale of a limited partner’s interest. For example, there can be a right of first refusal back to family members.

Income-shifting Opportunities

A family limited partnership is also used to shift income for tax purposes from high-bracket senior family members to lower-bracket family members. When a partnership interest is transferred by gift, the donee/partner can report his or her distributive share of partnership income individually as long as the donor/partner receives reasonable compensation for services rendered to the partnership (IRC Section 704(e)(2)).

This rule prevents the shifting of income attributable to personal services (rather than capital investment) from the higher-bracket donor/partner to the lower-bracket donee/partner. In addition, income attributable to partnership capital must be allocated between the donee/partner and the donor/partner in proportion to their respective interests in partnership capital (Reg. Sec. 1.704-1(e)(3)(i)(a) and (b)). As a potential disadvantage, the transfer of the limited partnership shares to the children will reduce your parents income flow. The partnership does not pay the income taxes, the partners, however are taxed on the income (even if the income is not actually distributed to the partners). The partnership can distribute that portion of income attributable to the increased taxes to each partner.

Protection from Creditors

Holding assets in a family limited partnership can also protect those assets from the claims of family members’ creditors. A judgment creditor’s remedy against a limited partner’s interest only extends to a charging order against the limited partnership interest. The creditor can obtain rights to the partnership distributions but not the limited partnership interest itself. Since the general partner (the parent, in the typical family partnership) is usually responsible for the amount and timing of partnership distributions, the creditors right to receive distributions may be of little value because the general partner can simply decide not to make distributions. Moreover, under the pass-through income-tax rules applicable to partnerships, the creditor in this situation may be subject to income tax on an allocable share of partnership income as if the creditor were the owner of the partnership interest even though nothing has been distributed from the partnership.

Of course, any creditors of the partnership itself can reach the partnership assets. Therefore, planners generally recommend the formation of a separate limited partnership for each business venture to limit the assets exposed to creditors.

Valuation Discounts

The transfer of an interest in a limited partnership from parent to child is a taxable gift. If the value of the annual gift is approximately $10,000 or less, the annual gift-tax exclusion of IRC Section (2503(b)) may shelter the entire transfer from tax. Use of the minority interest and lack-of-marketability valuation discounts in valuing the gifted partnership interests can allow a parent to transfer a greater share of the partnership to a child under the protection of the annual exclusion. Because partnership agreements usually restrict the right of a donee/partner to sell his or her interest to non-family members, such discounts may be significant.

Example. The assets of a partnership are worth $1,000,000. Therefore, a $10,000 gift would normally represent 1% of the partnership. However, assuming a limited partnership interest can be discounted 40%, a parent could give his or her child an interest representing 1.67% of the partnership each year without incurring gift tax, due to the annual exclusion.

Summary

The non-transfer tax reasons to consider the family limited partnership:

    1. Retain the power to control distributable cash flow of the partnership
    2. Consolidation of family assets may lead to operational cost advantages
    3. Simplifies annual giving
    4. May be drafted to facilitate keeping family assets in the family
    5. Provides some protection of family assets from future creditors
    6. May provide some asset protection against failed marriages
    7. Comparatively flexible (v. Irrevocable Trust)
    8. Provides greater flexibility in making investments (more liberal business judgment rule)
    9. The family limited partnership agreement institutionalizes family communication on family business and financial matters
    10. The family limited partnership can save legal costs associated with out of state probate

Revocable Living Trusts

 

MEMORANDUM

______________________________________________________________

 

TO:                 Estate Planning Clients

FROM:           Debra Rahmin Silberstein

RE:                 Revocable Living Trusts

DATE:            Updated -June, 2001

 

 

I.  Background Information

 

            A revocable living trust is a non-probate asset.  The grantor of a revocable living trust retains the power to revoke and amend the terms of the trust.  The grantor is typically the trust’s initial trustee or co-trustee as well as its lifetime beneficiary.  Upon the grantor’s death, the living trust becomes irrevocable and either 1) continues as a trust for the benefit of successor beneficiaries; 2) is split into separate trusts; or 3) terminates and distributes trust assets to the named beneficiaries.[2][1]

 

II.  Advantages of a Revocable Living Trust

            There are numerous advantages of a revocable living trust.  Such advantages include reduction of probate costs, avoiding publicity associated with probate proceedings, some protection against potential will contests, expedited distribution of assets, flexibility, and property management.

            Those involved with the creation of a revocable living trust have the luxury of being able to confer with the grantor regarding various details of the assets that will be funding the revocable living trust.  Such is not the case with a testamentary trust, which is created upon the death of the grantor.  The grantor usually knows more than anyone else regarding the location of the records and details of the property being transferred.  Thus, since the grantor is alive when the trust is funded, the grantor can assist with the title transfers and other administrative matters.

A.  Reduction of Probate Costs

 

            Property in a revocable living trust that continues after the grantor’s death is not part of the grantor’s probate estate[3][2].  This generally results in a reduction in probate court filing fees, executor’s commissions, legal fees and delays associated with probate administration.

            Despite the benefits of “avoiding probate”, there are protections and some benefits offered by the probate administration process.  An executor is protected by court approval of his decisions, making him less vulnerable to lawsuits by the estate’s creditors or beneficiaries.  Because probate court approval is required (for example, the filing of an accounting) it is more difficult for the executor to defeat a testator’s intent.  The probate process can guard against an executor’s ability to illegally remove assets from the probate estate, make mistakes borne of inexperience or otherwise cause harm to the estate.

B.  Avoid Publicity/Privacy

 

            Unlike a Will, and the related filings, i.e., inventory, accounting, which become part of the public record, the assets of a living revocable trust can be administered and disposed of in privacy after the grantor’s death.

C.  Potential Will Contests

            If a Will contest is anticipated, a living trust can be created without informing the future beneficiaries.  If the existence of the trust were to be uncovered during the grantor’s lifetime, beneficiaries whose interest in trust assets will vest in the future may be unable to initiate lawsuits due to a lack of standing.

            After the grantor’s death, individuals who might want to challenge the trust may never be aware of its existence.  It is also more difficult to obtain information about the trust assets.

 

D.  Facilitating the Distribution of Assets

            Revocable living trusts generally allow the grantor’s assets to be distributed more expeditiously to beneficiaries than in a typical probate situation.

            Further, non-probate planning (such as the creation of a revocable living trust) is generally a good idea if one owns real estate in several jurisdictions.  Typically, this will avoid ancillary probate administrations in other states, which can be expensive and time consuming.  However, one must be careful to ensure that the trust is valid and will be recognized in every state in which the real property is located.

 

E.  Flexibility

            In comparison to an irrevocable trust, a revocable trust offers considerable flexibility; i.e., an irrevocable trust may cause problems where family, economic, or other circumstances change unexpectedly.  The revocable trust can be amended or even revoked, generally, at any time prior to grantor’s death or incapacity.

 

F.  Managing Property

 

1.         Living revocable trust arrangements can be attractive by providing the grantor with professional management of his/her property.  This may be beneficial to those people who are either inexperienced in managing investments or who are too busy to devote time to managing their financial affairs.

2.         Individuals also choose living revocable trusts as a means of planning for their own potential incapacity.  Often, a competent grantor will serve as trustee of a trust, which is initially either fully or partially funded.  A revocable trust’s terms may provide that, in the event of the grantor’s incapacity, a successor trustee (individual or corporate) will take over trust management on behalf of the grantor.  Usually, the certification of one to two or more licensed physicians is required to determine incapacity.  If the revocable living trust is only partially funded at first, the grantor should grant any successor trustee a durable power of attorney so that the grantor’s assets can be transferred to the trust when or if incapacity occurs.

            The above strategy, a funded revocable living trust or a durable power of attorney, enables one to avoid the potential need for a court-supervised guardianship which is expensive and time-consuming.  Further, the trustee can manage the trust’s assets free of court involvement.[4][3]

III.  Post Mortem Tax Planning Considerations

 

            The income from a revocable living trust is generally taxable to the grantor on his/her individual income tax return.  The grantor trust rules of IRC Section 671 apply and thus the income of a revocable trust during the grantor’s lifetime is taxable directly to the grantor (even if paid to a beneficiary other than the grantor).  Generally during the grantor’s lifetime, all transfers to others from the trust are considered gifts made by the grantor (assuming that they would have been gifts if made directly by the grantor).

            At the grantor’s death, however, all assets of a revocable trust are included in the grantor’s gross estate for estate tax purposes.[5][4]  Subsequent to a grantor’s death, the trust will be subject to income tax as a trust, not as an estate.


 

 

GIFTING

 

2503(b)

An individual can gift annually $12,000 per person, free of gift tax.  Such amount is not included in the total amount of gifts during that year if the donee actually receives the gift or can access it.  In other words, such amount is “excluded” from the definition of a taxable gift.  Such gifts, although excludable as a “taxable gift”, nevertheless count as a transfer for MassHealth Long Term Care eligibility purposes. 

 

2503(e)

Exclusion for certain transfers for educational expenses or medical expenses.  The following transfers are deemed “qualified transfers” and are not treated as “gifts”:

 

(1)               Tuition paid to an educational organization (IRC section 170(b)(1)(A)(ii)) for education or training of such individual (see 2503(e)(2)(A)); (room and board, books and supplies are not included); and

 

(2)               Gifts to any person who provides medical care (IRC 213(a)) as payment for such medical care.  Medical costs do not include amounts reimbursed by insurance companies.

 

Lifetime Exclusion

Current law:   The first $1 million dollars, exclusive of the transfers described above, of lifetime transfers are exempt from gift tax.  This is known and referred to in the federal tax code as the gift tax applicable exclusion amount. 

 

As stated above, the gift excluded amount is not included in the total amount of gifts during that year if the donee actually receives the gift or can access it.  The gift must be a gift of “present interest”.  For example, if an individual makes a gift of $42,000 in 2006, ($30,000 above the $12,000 annual exclusion), the taxable portion of the gift is $30,000.  Said $30,000 is deducted from the lifetime exclusion remaining.  A gift tax return would be required to be filed for the $30,000 gift, but no tax would be due.  If the same gift were made to a trust where the donee could not access it, then the full $42,000 would be a taxable gift.

 

 


Copyright D.R.Silberstein 2003, All Rights Reserved.


[1] New York Times article dated June 21, 2001

 

[3][2] NOTE:  Such property may still be included in the Grantor’s estate for estate tax purposes.

[4][3]  We have already indicated that there can, at times, be benefits to court involvement.

[5][4]  Your attention is called to recent estate tax changes in the Tax Relief Reconciliation Act of 2001.