Gift in Trust

What Is a Gift in Trust?

A gift in trust is a special legal and fiduciary arrangement that allows for an indirect bequest of assets to a beneficiary. The purpose of a gift in trust is to avoid the tax on gifts that exceed the annual gift tax exclusion limit. This type of trust is commonly used to transfer wealth to the next generation.

Understanding a Gift in Trust

Gifts in trust are commonly used by parents or grandparents who want to establish a trust fund for their children or grandchildren. A gift in trust is a viable method to avoid taxes on gifts that exceed the annual gift tax exclusion limit. For the 2021 tax year, that amount is $15,000 or less made in a calendar year by an individual and $30,000 from a couple (the same as 2020).

Gift givers can give gifts in excess of the annual exclusion without paying taxes by establishing a special type of trust, such as a Crummey trust. A gift to a Crummey trust allows the beneficiary to withdraw the gift assets for a limited time, which makes the gift considered to be a present interest and eligible for the gift tax exclusion. If the gift did not have these limited-time withdrawal rights, it would be considered a future interest and be subject to gift taxes.

For example, the trust could be set up so that the beneficiary can make withdrawals within a set time period, such as within 60 or 90 days. After that, the gift funds held in the trust fall under the stipulated withdrawal rules as set by the trust's grantor. In our example, let's say the parent designates that a child can't access trust money until they turn 21. Even if the child decides to tap into the trust immediately, they only have access to the most recent gift, as all previous gift funds remain protected within the trust account.

A Crummey provision can also be housed within another type of trust. For example, traditional life insurance trusts often contain a Crummey provision.

Advantages and Disadvantages of a Gift in Trust

In addition to tax benefits, a gift in trust is one method of establishing a financial cushion for future generations. Transferring wealth from one generation to the next via a will or other means of inheritance is a complicated endeavor, both logistically and emotionally. At the same time, these rules can bring enormous benefits to individuals, families, and communities. Understanding the nuances of gifting can bring added value to both grantors and beneficiaries.

One potential drawback to a gift in trust is that providing beneficiaries — in particular, children — with immediate access to sizable sums may jeopardize the fund's ability to accumulate long-term wealth. Some families bypass this by setting restrictions, such as limiting the amount or frequency of withdrawals or ending future gifts to recipients who withdraw funds immediately.