Trusts without gift tax

We received the proceeds of a Life Insurance policy that we would like to put into a Trust for the minor daughter of the deceased. How do we tansfer the money to a trust without incurring any gift tax? We would like to remain as Trustees or at least set up the distribution guidelines per the deceased wishes (eg. pay for college and medical insurance and distribute remainder at the age of 25). Who pays the tax on income earned by the trust?

Were the terms of the policy such that you legally had to follow the decedent’s wishes about, college and medical insurance, and the distribution to the child at 25?

The policy simply listed my wife as the beneficiary. The deceased had a will which outlined specific guidelines for a Trust, but he did not leave any money to his estate. We believe that we can do whatever we want with the money, but would prefer to do something close to the intent of the will. The 2 most important items being that the money be available to pay for college tuition with the remainder to be distributed when his daughter reaches the age of 25. We would like to minimize the amount of money that must go towards paying any type of tax (e.g. gift) but would be willing to compromise on a solution if it meant that more money would be available to his daughter. One other difficulty in planning this, is that the deceased did NOT want the mother of his child to control (manage, distribute, etc) the money.

What is the amount that you want to put into the trust?

$100,000

The simplest way to handle this would be for you to put all the money into the trust at one time. Since this would be a gift from you and your spouse, there would be a $20,000 annual exclusion. That leaves a taxable gift of $80,000. You would therefore have to file a gift tax return. But, between you and your spouse, you have lifetime exclusions totaling $1,350,000. You would use up $80,000 of the exclusions and the result would be no gift tax.

If you do not want to use up any of the lifetime exclusion, put $20,000 into the trust each year for 5 years. That way the annual $20,000 exclusion would shield you from gift tax and from having to file a gift tax return.

Thanks for the replies. We really want to make this as simple as possible and are considering setting up two accounts (one in our name and the other in the child's) and transferring $500-700 per month for the next 16 years (child is 9 now). That should make about 1/2 of the money available when the child is college age and the balance transferred when she's 25. While we will not have any control over the money in her account, we can discourage misuse of the funds by stopping the transfers until she's 25. Could we create a "trust" with these same sort of guidelines ... #1 money available for college, #2 remainder of money distributed at age 25, #3 do not allow any other use of the money.

Yes, you definitely can set up such a trust. I would suggest you put in a clause allowing distributions for emergencies, such as medical.