Gift & Estate Tax Benefits of an Irrevocable Trust

Irrevocable trusts are novel in that they provide a method for you to transfer your assets while taking advantage of certain tax benefits. Although irrevocable trusts are not as popular as their revocable trust counterparts, they may be useful to you and your family depending on your specific financial circumstances.

If you have a high value estate, then you should consider creating an irrevocable trust so that your family is shielded from certain estate tax liabilities upon your death. As of 2020, if your family members inherit over a certain amount of assets under your will or trust, then they may be required to pay an estate tax.

What Are Gift and Estate Taxes?

Thankfully, if you live in California, you can avoid having to pay a state-imposed estate and gift tax on transfers. However, the federal government requires you to pay taxes on some transfers, like transfers of real estate, personal property (jewelry, vehicles, and financial accounts), or even certain personal loans, if the value of these transfers exceeds a certain amount during your lifetime.  The federal government only exempts taxes on gifts which are below a specified threshold. This is referred to as the “lifetime gift and estate tax exemption.”

If you transfer your assets for little or no value, either throughout your lifetime, or after your death through a will or trust, and such transfers exceed a certain amount, then you or your family will have to pay a federal gift or estate tax on the transfer. As mentioned before, this tax liability can range anywhere between 18% to 40%.

Are There any Gift and Estate Tax Exclusions?

In 2020, the IRS set the annual gift tax exclusion at $15,000 per individual ($30,000 for annual gifts made by a married couple). This means you can give that amount in funds or property to an individual on a yearly basis without triggering a gift or estate tax. If you go over that limit, then you will need to report your transfers to the IRS.

This is where things can get tricky, because even if you go over the annual limit, you may not necessarily have to pay a tax on the transfer. Rather, the annual limit is set so that the IRS can keep track of how you use your lifetime gift and estate tax exemptions. Once your total lifetime transfers exceed a certain amount (including estate transfers made after your death), the IRS will require payment of a gift or estate tax. Presently, the lifetime gift limit is around $11,500,000 for individuals and $23,000,000 for married couples.

Although some transfers can be exempted from gift and estate tax, you’ll still have to consider the combined value of these gifts made throughout your entire lifetime and upon your death. This is where creating an irrevocable trust may be the most beneficial for your situation. An irrevocable trust can help with distributing property to your loved ones while avoiding estate and gift tax expenses.

How Does an Irrevocable Trust Help You Take Advantage of Estate and Gift Taxes?

If you’re concerned that your lifetime transfers to family members may exceed the lifetime gift and estate tax limit, then it may be prudent for you to reduce the size of your estate by creating an irrevocable trust. Taking this course of action will ensure that your family receives the most from the property you leave behind for them.

By creating an irrevocable trust, you can pass your assets to your beneficiaries while still protecting your lifetime gift exemptions. When you place your assets in an irrevocable trust, that property technically leaves your direct ownership and transfers to your beneficiaries, but you can still retain a certain level of control over the assets. 

Placing your assets in an irrevocable trust effectively reduces the size of your taxable estate, and thus protects your family from paying significant taxes on property transfers and ultimately preserves your lifetime gift exemption.

How You Can Take Advantage of Tax Benefits

As you can see, determining an estate planning strategy based on your specific financial situation can get complicated. Understanding certain tax nuisances is key to setting up the right plan for your and your family. You should always seek the guidance from an experienced tax attorney when making these important considerations.

At Aliav Law we’re experienced in tax matters, and thoroughly consider estate and gift tax factors when drafting your estate plan. If you have a larger estate and are concerned about estate taxes, then call my office at (310) 800-2911 to see what options you have for your family.