California Trust Question (thank you!)

[chicopilot]

My sibling has $300,000 that was generated in a business I provided the idea for but I had no involvement in the operating of the business. He paid all of the taxes as he should, and is now left with the $300,000...of which half is mine. There are no disputes about the $150,000 that is mine.

I'm not in any huge hurry to get the money, and am fine with getting $14,000 per year gifted to me tax-free. We do, however, want to get the money protected in case he gets married and dies or whatever. It seems like an irrevocable trust is the best solution - agree?

If that's the solution, how would that work - the trust would gift me $14,000 per year?

Thank you!

 

[FlyingRon]

A revocable trust won't lock up the money (that's what the revocable part means).

There's no "gift tax exemption" for trusts. That will not work.

You seem to be misunderstanding the gift tax. The RECIPIENT doesn't pay taxes on gifts. The GIVER only pays tax on gifts after his lifetime exclusion (currently $11.4MM) is used up.

Frankly, if he earned it and paid taxes on it the money IS HIS.

 

[chicopilot]

A revocable trust won't lock up the money (that's what the revocable part means).

There's no "gift tax exemption" for trusts. That will not work.

You seem to be misunderstanding the gift tax. The RECIPIENT doesn't pay taxes on gifts. The GIVER only pays tax on gifts after his lifetime exclusion (currently $5.4MM) is used up.

Frankly, if he earned it and paid taxes on it the money IS HIS.

Ok - but I said irrevocable trust. Either way, my sibling knows that the $150k is mine, and somehow I'm going to get it tax-free. If he has to gift me $14k/yr for 10+ years, that's fine, but it doesn't protect the money in case he gets senile and forgets that it's mine. Hence the IRrevocable part. Ideally it would be gifted to me at the per-year max but in a structure that makes it irrevocable. See what I'm saying?

Thanks!

 

[TrustUser]

i would think an irrevocable trust would do what you desire

it could have instructions for the trustee to distribute the maximum exemption to you, the beneficiary

your sibling would be the grantor, but i am pretty sure that he CAN NOT be the trustee

you should be able to be your own trustee - just make sure that the trust does not give you leeway on distribution

 

[FlyingRon]

First off, for 2019 it's $15,000.
The issue again, is IT DOESN'T MATTER. He can give you the money NOW and it will have no taxability to either of you.
All the gifts he made over his life PLUS all the value of his estate when it dies doesn't become taxable until he hits $11,400,000.

THere's no need for a trust or other subterfuge. All he does is give you the money and file the gift tax return.

 

[chicopilot]

First off, for 2019 it's $15,000.
The issue again, is IT DOESN'T MATTER. He can give you the money NOW and it will have no taxability to either of you.
All the gifts he made over his life PLUS all the value of his estate when it dies doesn't become taxable until he hits $11,400,000.

THere's no need for a trust or other subterfuge. All he does is give you the money and file the gift tax return.

I don't understand...how would we get around the $15k per year? What's the point of that restriction if you can just ignore it? Thanks!

 

[Zigner]

I don't understand...how would we get around the $15k per year? What's the point of that restriction if you can just ignore it? Thanks!

If the gift is over $15k per year, then a return must be filed, but no taxes are due, except that taxes become due once the lifetime gifting amount reaches $11,400,000.

 

[chicopilot]

If the gift is over $15k per year, then a return must be filed, but no taxes are due, except that taxes become due once the lifetime gifting amount reaches $11,400,000.

I can't find any documentation that explains that. It all says up to $15k tax free.

 

[Zigner]

The numbers are no longer correct, but this is how it works:

https://www.irs.com/articles/7-things-you-should-know-about-gift-tax

6. Each Donor Has a Lifetime Exemption


This refers to the total amount that an individual can give away during their entire lifetime. If your gift exceeds the $14,000 annual threshold, it must be reported as a taxable gift on Form 709 — however, that doesn’t necessarily mean you’ll have to pay the gift tax. Instead, you can apply the gift towards your lifetime exclusion from the Federal estate tax.

 

[chicopilot]

The numbers are no longer correct, but this is how it works:

https://www.irs.com/articles/7-things-you-should-know-about-gift-tax

6. Each Donor Has a Lifetime Exemption


This refers to the total amount that an individual can give away during their entire lifetime. If your gift exceeds the $14,000 annual threshold, it must be reported as a taxable gift on Form 709 — however, that doesn’t necessarily mean you’ll have to pay the gift tax. Instead, you can apply the gift towards your lifetime exclusion from the Federal estate tax.

I see. Very interesting. Thanks for the help! Much appreciated.

 

[TrustUser]

you might want to ask your sibling if he has a problem filing a gift tax return ?

 

[Taxing Matters]

I see. Very interesting. Thanks for the help! Much appreciated.

A gift to an irrevocable trust isn't helpful because in general gifts to an irrevocable trust do not qualify for $15,000 annual gift tax exclusion. The only way around that is to make the gift to the trust immediately available to the beneficiary. But if you are going to do that, what is the purpose for using the trust? That's no different than giving the gift to the person directly. There is a purpose for using irrevocable trusts with gifts to minors with the use of what tax lawyers call a Crummey clause to preserve the annual gift tax exemptions but, without going into the details, that works because the beneficiary is a minor. Apart from that, a trust is not going to solve any tax problems for the two you of you in this instance nor would it be very useful otherwise if you get immediate use of the money.

Unless your sibling is at risk for giving away over $5 million in his lifetime + what he gives away at death it may simply be best all the way around that he simply give you your half now. He'd have to file a gift a tax return but unless he's used up around $11 million of his unified credit already he won't pay any gift tax on it. You'd get your half without the worry of what might happen to him in the future, and you'd be able to start investing or using the money now for your benefit rather than waiting over a ten year period to get it.

 

[chicopilot]

A gift to an irrevocable trust isn't helpful because in general gifts to an irrevocable trust do not qualify for $15,000 annual gift tax exclusion. The only way around that is to make the gift to the trust immediately available to the beneficiary. But if you are going to do that, what is the purpose for using the trust? That's no different than giving the gift to the person directly. There is a purpose for using irrevocable trusts with gifts to minors with the use of what tax lawyers call a Crummey clause to preserve the annual gift tax exemptions but, without going into the details, that works because the beneficiary is a minor. Apart from that, a trust is not going to solve any tax problems for the two you of you in this instance nor would it be very useful otherwise if you get immediate use of the money.

Unless your sibling is at risk for giving away over $5 million in his lifetime + what he gives away at death it may simply be best all the way around that he simply give you your half now. He'd have to file a gift a tax return but unless he's used up around $11 million of his unified credit already he won't pay any gift tax on it. You'd get your half without the worry of what might happen to him in the future, and you'd be able to start investing or using the money now for your benefit rather than waiting over a ten year period to get it.

Thanks, that's great advice, I appreciate you typing that all out. The only reason I thought a trust might be the answer is because I wanted to get the money into a place where my sibling could no longer access it or try to screw me out of it if we were to get into a giant fight or something. He's completely willing to give me half and doesn't dispute it at all, but if he was to simply gift me $15k a year, I might only get 2 years ($30k) before we have a giant fight and I never get anything beyond that. I think the chances of that are slim but I want to protect myself while he's cooperative.

But, clearly my understanding of how the gift tax works is lacking, because until recently I didn't know that you could give away more than the $15k/yr and not get taxed on it, as long as it didn't reach the maximum...which I also had no idea about.