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Could a Crummey trust help you avoid gift taxes?

You, like many other Illinois residents, may find taxes stressful and inconvenient. This displeasure may stem from various misunderstandings about taxation as well as the potential for you or family members to owe a considerable amount of money to the government for various reasons. If you hope to gift money or provide for loved ones after your death, you may have an interest in how taxes could come into play.

Gift taxes often apply after you reach a certain threshold every year, and while you certainly understand that you cannot hold on to money after death, you may still feel that distributing your funds too early could cause tax complications. However, you may have the ability to avoid gift taxes by utilizing a Crummey trust.

Gifting to a trust

Many people find it useful to transfer assets into a trust for various reasons. Trusts can protect assets from needing to go through probate and ensure that the intended beneficiaries receive the assets in the manner you deem appropriate. When you gift money to a trust, you usually do not gain the benefit of gift tax exclusions. The reason for this relates to the fact that money placed in a trust typically does not get used until certain future events occur.

In order for a gift tax exclusion to apply, the intention for a present use of the funds usually needs to exist. However, due to Crummey trust provisions, you may have the ability to gift fund to a trust while avoiding gift taxation.

Crummey provisions

The ability to gift to a trust and avoid taxation stems from a 1968 court case that led the Tax Court to decide that the right to withdraw funds from a trust immediately allowed for a present interest in the funds. Due to this ruling, you could now gift funds to a trust up to the gift tax exclusion threshold every year -- which is $14,000 in 2017 -- without facing an taxation on that gift.

Creating a trust

In order to take advantage of this type of benefit, you would need to ensure that the trust you create includes a Crummey clause or meets Crummey trust provisions. Because understanding tax implications when it comes to estate planning may prove difficult, you may wish to gain reliable legal information on this potential option. You may also find that other estate planning tools could provide benefits and meet your planning needs.

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Leonard F. Berg, Attorney at Law