Gift tax considerations and estate planning trusts

On Behalf of | Feb 28, 2015 | Estate Planning

In a decision released on Feb. 13, the Internal Revenue Service set standards regarding issues about the gift tax, clarifying whether contributions to a trust are completed gifts. The letter also discussed whether the fair market value of property held in trust was included in a trustor’s estate. This federal letter ruling may affect some estate plans in Nevada.

The letter ruling was released in response to a specific situation involving one woman’s estate plan. The plan included a trust that would be dispersed to her living children equally, and if those children were deceased, the share would be transferred to the child’s issue. If the trustor had no living issue, the funds would be dispersed to her father and the living issue of her siblings. Finally, if there was no living issue under either method, the funds would be given to a foundation.

In handling the case, the service determined that any contributions of property to the trust were not considered completed gifts because the woman remounted control over the device. As such, that transfer was not subjected to the gift tax. However, when the income or principal of the trust was distributed to a beneficiary that was not the trustor, this was a completed gift, which made it subject to taxation. In addition, the IRS found that the FMV of the trust’s property should be included in the woman’s estate for the purpose of determining if federal estate taxes applied.

As this case shows, an estate plan can be complex, and the rules of taxation may be difficult to predict when forming a trust or drafting a will. However, an attorney who is familiar with estate and gift taxes as well as estate planning methods could help a client create a strategy that limits the devaluation of an estate, preserving the client’s wealth as efficiently as possible as it is transferred to beneficiaries and heirs.