Estate & Trust Administration For Dummies, 2nd Edition
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When it comes down where the action is as far as administration is concerned, the real meat and potatoes of trusts are the irrevocable trusts, or trusts that grantors have created to hold property where the trust instrument may not be revoked or changed. So what is an irrevocable trust?

  • The grantor has given up all right, title, and interest to the assets held in an irrevocable trust, and has also given up any right to terminate the trust.

  • The property held by the trust is used for the benefit of the named beneficiaries (or unascertained interests who are defined by the trust instrument).

  • The remainder interests (those people or organizations who are entitled to receive what’s left of the trust property, if anything, when the trust terminates) in the trust property are clearly spelled out in the trust instrument.

That’s what all irrevocable trusts have in common. But because a person can draft trust instruments in many different ways and for many different circumstances, a wide variety of types of trusts fall into this category.

When a grantor funds an irrevocable trust with property during his or her lifetime, and the grantor is neither a trustee nor beneficiary of the trust, he or she is giving up all right, title, and interest to that property — the legal definition of a gift. Depending on the size of the gift, the grantor may have gift tax and/or generation-skipping transfer tax consequences as a result of the transfer.

If the grantor is making a taxable transfer to an irrevocable trust (taxable means any amounts over and above the amount of the annual exclusion, which is $14,000 in 2013), he or she will have to complete a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, giving the name and taxpayer ID number of the trust, and showing the size of the gift.

Unless the amounts involved are huge, the grantor probably won’t actually pay a tax on the transfer; this Form 709, however, becomes part of his or her permanent tax records. Together with any other taxable transfers the grantor makes during his or her lifetime, this gift will be included when calculating the grantor’s taxable estate which will be used to determine the total estate tax due upon the grantor’s death.

Married couples may opt to minimize gift tax consequences by so-called gift-splitting, where the two spouses each show one-half of the gift on their Forms 709 (you’re not allowed to file a joint Form 709), even if they didn’t own the gifted property jointly.

Splitting gifts between husbands and wives doubles the amount of annual exclusion gifts available to the grantor and reduces the amount of any taxable transfer. For instance, in 2013 the two spouses could transfer $28,000 (2 × the $14,000 exclusion amount), no matter whose assets actually were transferred.

If the transfer is to a trust for the benefit of a skip person (your grandchild, a more distant relative, or a nonrelated person who is more than 37 1/2 years younger than the grantor), you also have to complete the generation-skipping part of Form 709.

Property the grantor gifts irrevocably into a trust keeps the same basis, or acquisition cost and acquisition date, as it had in the grantor’s hands unless the asset is worth less on the date of the gift than the grantor’s original basis. In this case, the basis will be the lower of cost or market value at the time of transfer.

This information is crucial in determining whether there’s a taxable gain or loss when the trustee disposes of the property. It’s best to give these records to the trustee at the time the gift is made, and then the trustee should be certain to maintain good and complete records going forward.

About This Article

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About the book authors:

Margaret Atkins Munro, EA, has more than 30 years of experience in trusts, estates, family tax, and small businesses. She lectures for the IRS annually at its volunteer tax preparer programs. Kathryn A. Murphy is an attorney with more than 20 years of experience administering estates and trusts and preparing estate and gift tax returns.

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