In 2018, each person has a lifetime gift tax exemption of $11,180,000 and a lifetime generation-skipping transfer (GST) tax exemption amount of $11,180,000. In addition to these lifetime exemption amounts, a donor may make gifts up to $15,000 per donee each year via the gift tax annual exclusion and the GST tax annual exclusion without utilizing the donor’s lifetime gift or GST tax lifetime exemptions. When a donor makes a gift to grandchildren in trust, the trust must either qualify for the GST tax annual exclusion, or the donor must affirmatively allocate GST tax exemption to the transfer, thus utilizing a portion of the donor’s lifetime GST exemption amount. While the gift tax annual exclusion is relatively simple to qualify for, to qualify for the GST tax annual exclusion amount a trust must be drafted such that (i) during the life of the beneficiary no portion of the income or principal may be distributed to any person other than the beneficiary and (ii) the trust must either terminate during the life of the beneficiary or be included in the beneficiary’s estate if the trust terminates at the death of the beneficiary. If a client has multiple grandchildren and wishes to make gifts in trust for each grandchild, often a separate trust will be drafted for each grandchild to qualify for the GST tax annual exclusion. This can be burdensome and unwieldy for a client to keep track of multiple trust documents and making separate gifts to each trust.
To simplify planning for clients, a single trust can be drafted for the benefit of multiple children and grandchildren that will qualify for both the gift tax annual exclusion and the GST tax annual exclusion. The initial contribution to the trust and any subsequent contributions are divided equally between the beneficiaries of the trust and held in separate sub-trusts for the benefit of each beneficiary. The trust will include Crummey withdrawal provisions to allow the trust to qualify for the gift tax annual exclusion and can be drafted to terminate during the beneficiary’s lifetime or to continue in trust for the beneficiary until the beneficiary’s death and be included in the gross estate of the beneficiary via a general power of appointment to qualify for the GST tax annual exclusion. This allows a client to draft a single trust instrument and make a single gift to a trust while still receiving the tax advantages of qualifying for the gift and GST tax annual exclusions for each grandchild who is a beneficiary of the trust.
For more information please contact Tara Halbert in the Lexington office at 859-899-8711.