Qualifying Trust Transfers for Split-gift Treatment

Section 2513 of the tax code allows a married couple to split gifts, meaning they can both take advantage of tax exclusions and exemptions for gifts made by one spouse. This can help minimize gift tax liability and maximize the amount that can be gifted to others. It can get complicated when the non-gifting spouse is a beneficiary of a trust, but it’s a useful tool for estate planning. The split-gift rules apply to gifts made by both spouses if they are married, U.S. citizens or residents, and both agree to treat the gift as a split-gift on IRS Form 709. The gift must be made to a third party, such as a trust, and cannot be directly or indirectly given to the non-donor spouse. If all these requirements are met, the gift qualifies for split-gift treatment for tax purposes. If a spouse sets up a trust with multiple beneficiaries, including the other spouse, and the shares of the gift to each person are clear, then the part of the gift to the other beneficiaries can be treated as a split gift for tax purposes. However, if it’s not clear what part of the gift goes to each person, then none of it can be treated as a split gift. In some cases, when the donor spouse is a trust beneficiary, the rules can be applied to determine which part of the gift qualifies as a split gift for tax purposes. When a spouse transfers property to a trust where the trust doesn’t give the beneficiaries the right to take out money, it can complicate tax treatment. This often comes up when funding a trust that holds a life insurance policy or when there are few beneficiaries with withdrawal rights. If a trust doesn’t give beneficiaries the right to take out money, any transfer to the trust might not qualify for split-gift treatment. This means the gift could be treated as one big gift, instead of separate gifts to the spouse and other beneficiaries. In Robertson v. Commissioner, the court looked at whether a trust transfer qualifies for split-gift treatment when the non-donor spouse is a beneficiary and the transfer exceeds the spouse’s withdrawal powers. The trustee could only pay out the trust’s principal to the spouse for her “maintenance and support” with consideration of her other sources of funds. The court examined the spouse’s financial situation to determine if the trustee would likely exercise this distribution power. The Tax Court ruled in the cases of Robertson and Kass that when one spouse puts money into a trust for the other spouse, the tax treatment of the gift depends on how much control the trustee has over the money and how likely it is that the trustee will give the money to the spouse. If the trustee doesn’t have much control and it’s unlikely that the money will be given to the spouse, then the gift can be split between the spouses for tax purposes. Simply put, in a recent court case, the taxpayer didn’t provide enough evidence about their spouse’s financial situation to show that the trust’s distribution power would likely be used. Because of this, the court ruled that the transfer to the trust didn’t qualify for special tax treatment. This issue was also addressed in a previous case, where a similar trust arrangement was upheld for split-gift treatment. The Tax Court decided that when one spouse gives property to their spouse and to other people, split-gift treatment only applies to the part given to the third parties, if it can be separated from the part given to the spouse. In a case called Wang, the Tax Court ruled that a trust with a broad distribution standard did not qualify for split-gift treatment because it was not specific enough. Since the trust’s distribution power was not limited, the Tax Court did not need to look at the spouse’s financial situation. In simpler terms, if a trust doesn’t have clear limits on how the money can be used, it doesn’t qualify for split-gift treatment. Recently, the IRS issued a ruling about whether a trust transfer can be split between spouses for tax purposes. The ruling said that if the trust has specific rules for how the money can be used, then it can count as a split gift. In the ruling, they didn’t look at the spouse’s financial situation, which some people thought was surprising. Overall, the ruling gives us a better understanding of how the IRS thinks about this issue. The IRS ruled that part of the money given to a trust by a husband and wife can be split for gift tax purposes, but it didn’t say how to figure out the exact amount. Previous court cases and IRS rulings also don’t provide clear guidance on this issue. So, it’s still unclear how to calculate the amount that can be split for gift tax purposes. When creating a trust, it’s important to make sure that if one spouse is not contributing to the trust, their ability to benefit from it is limited. This ensures that the entire trust can be treated as a split-gift for tax purposes. Recent IRS rulings show that a trustee’s power to distribute trust property must be limited by an “ascertainable” standard in order for the trust to qualify for split-gift treatment. When drafting a trust agreement, it’s important to carefully limit the trustee’s power to distribute income or principal to the trust beneficiaries to meet these requirements. The law has specific rules about how a trust can give money to a spouse. If a trust says it can give money for “health, education, support, or maintenance” that’s okay. But if it says “comfort, welfare, or happiness,” that’s not okay. It’s best to use the specific words from the law to avoid any problems. If the trust doesn’t use the right words, we have to look at state law to see if it’s okay. It’s also a good idea for the lawyer to keep detailed information about the spouse’s money, to show that the trust probably won’t give them any money. This will help avoid problems with the IRS. When transferring money to a trust, it’s important to follow the rules to avoid extra taxes. If one spouse gives a gift to a trust, the other spouse’s financial situation might also be considered. If the nondonor spouse has access to enough money outside the trust, then the gift to the trust might not be taxed. This is based on a couple of court cases and a ruling from the IRS. So, if you’re thinking about giving money to a trust, make sure to get advice from a tax professional to understand the rules. William R. Swindle is a tax expert and senior vice president at Wachovia Wealth Management. He is really knowledgeable about taxes and estate planning, and has a lot of education and experience in this area. He often writes and talks about these topics. This article was written on behalf of the Tax Section.

The shortened version: William R. Swindle is a tax expert at Wachovia Wealth Management who knows a lot about taxes and estate planning. He often writes and talks about these topics. This article was written on behalf of the Tax Section.

Source: https://www.floridabar.org/the-florida-bar-journal/qualifying-trust-transfers-for-split-gift-treatment/