Setting up an irrevocable trust

[Anonymous]

Say I have a net worth of $20 million.

Can I set up an Irrevocable trust to avoid estate tax on my estate going to my 2 kids? If I create the trust with them as beneficiaries and fund it with $15 million, do I not pay a gift tax on that amount? Does the trust pay taxes? Or do just the kids pay taxes when the get paid from the trust?

Are payments to beneficiaries taxed as capital gains or other income?

[Anonymous]

Maybe talk with a CPA or tax attorney ?

[Anonymous]

tax attorney. we did it. and I'm an attorney

[Anonymous]

Anonymous wrote:tax attorney. we did it. and I'm an attorney

^^ often called an estate attorney

[Anonymous]

A benefit of an irrevocable trust is that the money does not have to go through probate. No gift tax is levied. The money no longer belongs to you and your beneficiaries will pay taxes on the income produced by the trust at a higher rate. One disadvantage of the trust is that the assets will not get a stepped up basis upon your death so the beneficiaries will pay capital gains based on the original purchase price.

[Anonymous]

An individual has a lifetime exemption of about $13 million, so $26 million for a couple but that rule expires in or after 2025 when it will be less than half that unless extended. If you set up the irrevocable trust it will pass to your beneficiaries tax free. However, the annual trust income is taxed but if the trust is also a grantor trust those taxes can be paid outside of the trust so the appreciation stays inside the trust. In effect, the tax you pay outside the trust is another gift that isn’t taxed.

[Anonymous]

Anonymous wrote:An individual has a lifetime exemption of about $13 million, so $26 million for a couple but that rule expires in or after 2025 when it will be less than half that unless extended. If you set up the irrevocable trust it will pass to your beneficiaries tax free. However, the annual trust income is taxed but if the trust is also a grantor trust those taxes can be paid outside of the trust so the appreciation stays inside the trust. In effect, the tax you pay outside the trust is another gift that isn’t taxed.

There's no way congress will not pass legislation to make this new cap permanent. They all work for the 'same side' in matters such as these.

[Anonymous]

Anonymous wrote:An individual has a lifetime exemption of about $13 million, so $26 million for a couple but that rule expires in or after 2025 when it will be less than half that unless extended. If you set up the irrevocable trust it will pass to your beneficiaries tax free. However, the annual trust income is taxed but if the trust is also a grantor trust those taxes can be paid outside of the trust so the appreciation stays inside the trust. In effect, the tax you pay outside the trust is another gift that isn’t taxed.

This is correct. You can create an irrevocable trust with your entire exemption. The rest will be taxed when you die no matter what you do with it. You can still put it in trust so it avoids probate but it will be taxed at 40%.

[Anonymous]

Anonymous wrote:

Anonymous wrote:An individual has a lifetime exemption of about $13 million, so $26 million for a couple but that rule expires in or after 2025 when it will be less than half that unless extended. If you set up the irrevocable trust it will pass to your beneficiaries tax free. However, the annual trust income is taxed but if the trust is also a grantor trust those taxes can be paid outside of the trust so the appreciation stays inside the trust. In effect, the tax you pay outside the trust is another gift that isn’t taxed.

This is correct. You can create an irrevocable trust with your entire exemption. The rest will be taxed when you die no matter what you do with it. You can still put it in trust so it avoids probate but it will be taxed at 40%.

I don’t follow this added response. What is the tax benefit of the irrevocable trust if the amount you put in it still counts against your exemption when you die?

Assume the higher exemption is not extended for purposes of discussion.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:An individual has a lifetime exemption of about $13 million, so $26 million for a couple but that rule expires in or after 2025 when it will be less than half that unless extended. If you set up the irrevocable trust it will pass to your beneficiaries tax free. However, the annual trust income is taxed but if the trust is also a grantor trust those taxes can be paid outside of the trust so the appreciation stays inside the trust. In effect, the tax you pay outside the trust is another gift that isn’t taxed.

This is correct. You can create an irrevocable trust with your entire exemption. The rest will be taxed when you die no matter what you do with it. You can still put it in trust so it avoids probate but it will be taxed at 40%.

I don’t follow this added response. What is the tax benefit of the irrevocable trust if the amount you put in it still counts against your exemption when you die?

Assume the higher exemption is not extended for purposes of discussion.

The growth in the trust is not subject to the estate tax

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:An individual has a lifetime exemption of about $13 million, so $26 million for a couple but that rule expires in or after 2025 when it will be less than half that unless extended. If you set up the irrevocable trust it will pass to your beneficiaries tax free. However, the annual trust income is taxed but if the trust is also a grantor trust those taxes can be paid outside of the trust so the appreciation stays inside the trust. In effect, the tax you pay outside the trust is another gift that isn’t taxed.

This is correct. You can create an irrevocable trust with your entire exemption. The rest will be taxed when you die no matter what you do with it. You can still put it in trust so it avoids probate but it will be taxed at 40%.

I don’t follow this added response. What is the tax benefit of the irrevocable trust if the amount you put in it still counts against your exemption when you die?

Assume the higher exemption is not extended for purposes of discussion.

The growth in the trust is not subject to the estate tax

And also, you get the benefit of the current estate tax exemption. If you didn’t make an irrevocable gift and the exemption sunsets or is reduced, you would be out of luck.

Oh and one more - the trust can be generation skipping, meaning it stays out of your children’s estate and your grandchildren are the ultimate beneficiaries, even though your kids can use the money too. That way if your kids have enough of their own money to be worried about estate tax, your money isn’t part of their total and taxed again.

[Anonymous]

Anonymous wrote:A benefit of an irrevocable trust is that the money does not have to go through probate. No gift tax is levied. The money no longer belongs to you and your beneficiaries will pay taxes on the income produced by the trust at a higher rate. One disadvantage of the trust is that the assets will not get a stepped up basis upon your death so the beneficiaries will pay capital gains based on the original purchase price.

Is that not the case with a revocable trust?

[Anonymous]

Anonymous wrote:

Anonymous wrote:A benefit of an irrevocable trust is that the money does not have to go through probate. No gift tax is levied. The money no longer belongs to you and your beneficiaries will pay taxes on the income produced by the trust at a higher rate. One disadvantage of the trust is that the assets will not get a stepped up basis upon your death so the beneficiaries will pay capital gains based on the original purchase price.

Is that not the case with a revocable trust?

* Specifically not getting the stepped up basis upon death .

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:A benefit of an irrevocable trust is that the money does not have to go through probate. No gift tax is levied. The money no longer belongs to you and your beneficiaries will pay taxes on the income produced by the trust at a higher rate. One disadvantage of the trust is that the assets will not get a stepped up basis upon your death so the beneficiaries will pay capital gains based on the original purchase price.

Is that not the case with a revocable trust?

* Specifically not getting the stepped up basis upon death .

a revocable trust gets stepped up basis at death because they are part of the deceased’s estate. an irrevocable trust is a gift that cannot be clawed back into the estate so it does not.