SELF-TRUSTEED TRUST

Written by Skolnick Law Firm. Posted in Articles

Oftentimes we are reluctant to make gifts to our children or grandchildren for fear that they will squander the gift and not use it as we would like them to.

We have been advised that to prevent this from happening, we need to make the gift to a trust for the benefit of the child or grandchild, but many practitioners have advised us that we would have to pick someone else to be the trustee-manager of the money besides ourselves.

New drafting techniques now allow us to create trusts for our children or grandchildren and be the trustee-manager of the property/money inside the trust and meet the Internal Revenue Service criteria for its recognition that the gifts are complete. Such trusts also provide that if we pass away before the trust terminates and the property/money is distributed to the child or grandchild, the trust’s assets are not part of our estate for federal estate tax purposes. In addition, this trust will meet the I.R.S. criteria that the trust is the taxpayer on all income earned by the trust and not the parent or grandparent.

A self-trusteed trust must be irrevocable and unamendable.

In addition, gifts to the trust must be complete for federal gift tax purposes. We must part with dominion and control over the transferred property and not reserve any power over its disposition for the benefit of our estate.

The parent or grandparent can still retain discretion over the distribution of income or principal as long as the distributions are subject to an “ascertainable standard” as defined by I.R.C. §2511. This ascertainable standard is met in a self-trusteed trust with language such as the following:

“For the benefit of the child’s health, support, maintenance, or education, including attendance at elementary, secondary, vocational, college, graduate or professional schools, whether public or private, after taking into consideration other financial resources available to such child or grandchild for those purposes.”

Further, the parent or grandparent must not have the power to terminate the trust which would likely be deemed to disqualify the trust. A self-trusteed trust can meet this criteria.

SUMMARY

With careful drafting and planning, a parent or grandparent can make cash gifts to their children or grandchildren into a trust in which the parent or grandparent is the trustee, managing the money on behalf of the child or grandchild so long as such a trust is carefully drafted to meet I.R.S. criteria.

As you know, every person has the right to gift any other person property or money with a value not exceeding $14,000.00 per year, effective 2013, without being subject to the gift tax or any gift tax reporting. A husband/wife combination can double this amount to $28,000.00 per year to any one person. For example, with three grandchildren, a husband/wife can gift $28,000.00 each per year which would total $84,000.00. Over a five-year period, $420,000.00 would be gifted, without tax, out of the parent’s or grandparent’s estate. If this sum remained in the parent’s or grandparent’s estate and if it were subject to an estate tax because of the size of the estate, it would be taxed at 45% or more. Periodic gifting in this fashion, in the above example, would eliminate estate tax of at least $189,000.00 on the $420,000.00 gift, while at the same time allowing the parent or grandparent to manage the monies on behalf of the child or grandchild.

If you would like to discuss this further and explore it for your and your family’s personal situation, please contact my office to arrange a mutually convenient time to come in to talk about STINTS, “Self-Trusteed Irrevocable Non-Grantor Trusts”.

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