Q: I wish to set up an Irrevocable Trust for my son and daughter by putting $5,000,000 or lets round it up to $5,300,000 in each. Will this not trigger a gift tax since I have exceeded my unified credit?
A: As of 2014, each individual has a basic exclusion amount of $5,340,000 from the federal gift and estate taxes. This exclusion amount covers lifetime transfers (gift tax) or post-death transfers (estate). To the extent an individual transfers assets in excess of $5.34 million during his or her lifetime, gift tax is due and payable. So, your proposed plan to transfer $5 million or $5.34 million to each child would exceed the exclusion amount and gift taxes would be payable. However, if you are married, you and your spouse could each transfer $5.34 million during life into trust for the benefit of your children. Through this latter strategy, you and your husband avoid paying any taxes. You would still have to prepare and file a Form 709 Gift Tax Return.
Keep in mind that you and your husband can each take advantage of the $14,000 annual exclusion amount from federal gift taxes. As we approach year-end, you can each contribute $14,000 to a trust for the benefit of each child for a total of $28,000. Then, in 2015, you can each gift another $14,000 to your children. In a matter of several months, you can distribute $56,000 free of tax to your children