Question

Donald established an irrevocable trust on May 10, 2013. The trust named his wife, Melinda, as trustee and named his daughter, Daisy, as backup trustee. The trust instrument contained the following key provisions: This trust is irrevocable. To the extent allowed by law, the assets in this trust shall not be subject to the beneficiaries’ liabilities or creditors and shall not be subject to assignment or anticipation by any beneficiary. During the lifetime of the grantor, the trustee may, in her sole discretion, distribute assets to or for the benefit of the spouse and/or children of the grantor to the extent that she deems appropriate for their health, education, maintenance and support. However, no distribution shall be made for the benefit of Melinda under this Paragraph without the express consent of at least one child or grandchild of the grantor. During the first five years of the trust’s existence, the trustee may, in her discretion, also use trust income (but not principal) for the benefit of Donald, the grantor. After five years shall have elapsed from the execution of this trust, this power shall cease to exist and shall be null and void. After the death of the last to die of the grantor and his wife, the remaining trust assets, if any, shall be distributed to and among the children of the grantor, in equal shares, per stirpes. You may assume that the remaining provisions of the trust are fairly standard boilerplate provisions and are not relevant to this question. On June 1, 2014, Donald transferred $2,000,000 to this trust. Please answer the following questions regarding this trust: 1) 1. How much (if any) of the transfer is eligible for the gift tax marital deduction? Explain. 2) 2. Are the trust assets part of Donald’s taxable estate? What does this depend on? Explain. 3) 3. Why are gifts to this trust not eligible for the gift tax annual exclusion? What could be done to change that? Please describe. 4) 4. Are the trust assets part of Melinda’s taxable estate? Explain. 5) 5. For income tax purposes, is this trust considered a “grantor trust”? Explain.

Answer 1

1.All this can require some intricate estate planning because certain living trusts can dodge the usual rules.

If a decedent leaves property for the benefit of their surviving non-citizen spouse in a properly drafted "Qualified Domestic Trust, the "QDOT" will qualify for the deduction.

Property passing into other types of trusts created by one spouse for the benefit of the other also qualifies for the unlimited marital deduction. These include a marital deduction trust or a qualified terminable interest property trust, sometimes called a QTIP trust. This is the "A" Trust in an AB trust plan. Inter vivos qualified terminable interest property trusts, sometimes called inter vivos QTIP trusts, also qualify. These are created for the benefit of a spouse during the trustmaker's lifetime—the spouse who creates the trust.

2.Assets are removed from the grantor's taxable estate. The grantor is also relieved of any tax liability from income generated by assets that are placed into the trust. In some jurisdictions, this rule does not apply if the grantor also serves as the trustee. So the answer is no trust asset part of Donald's taxable estate.

3.

1. Gifting Issues
   Each individual is allowed to give $15,000 each year to whomever they choose without incurring a gift tax, as long as it is a present interest gift.
   • Present interest gifts: A present interest gift is a gift of property where the recipient has the power to immediately receive the money.
     • Example 1: You give your daughter $15,000, and she can use it however she wants. Congratulations, you’ve just made a present interest gift.
     • Example 2: You give $15,000 to an irrevocable trust. The irrevocable trust says your daughter gets the money when you die (that would be the future). Oops, you did not make a present interest gift! It’s only a present interest gift if the recipient can use the money in the present.
   • “Crummey” Powers: The IRS, based on the Crummey v. Commissioner case, allows the present interest requirement to be satisfied as long as the beneficiary has a present interest right to withdraw the gift, even if the beneficiary refuses to do so. That’s why you’ve probably heard of “Crummey” letters or “Crummey” powers.
     • How it works: You give $15,000 to an irrevocable trust. The irrevocable trust says your daughter gets the money when you die. The trustee of the irrevocable trust sends your daughter a letter (a “Crummey” letter) informing her that you’ve given $15,000 to the trust and that she has 30 days (this can vary) to withdraw the money if she chooses. Even if your daughter doesn’t take the money, the fact that she could have if she wanted to is enough to constitute a present interest gift. If the 30 days lapses and she hasn’t taken the money, she forever loses access to the money (until you’re dead anyway). Because of the withdrawal right, the gift is not subject to tax. Hooray!

How it works: You give $15,000 to an irrevocable trust. The irrevocable trust says your daughter gets the money when you die. The trustee of the irrevocable trust sends your daughter a letter (a “Crummey” letter) informing her that you’ve given $15,000 to the trust and that she has 30 days (this can vary) to withdraw the money if she chooses. Even if your daughter doesn’t take the money, the fact that she could have if she wanted to is enough to constitute a present interest gift. If the 30 days lapses and she hasn’t taken the money, she forever loses access to the money (until you’re dead anyway). Because of the withdrawal right, the gift is not subject to tax. Hooray! So it is based on decision taken beneficiary.

4.

• Estate taxes: Assets held in a revocable trust are included in the grantor’s taxable estate (however, the grantor can reduce or eliminate the estate tax by using bypass trust planning). Assets held in an irrevocable trust are not included in the grantor’s taxable estate (passing to the grantor’s designated beneficiaries free of estate tax). So the trust assets are not part of Melinda's taxable estate