erry is considering transferring assets valued at $400,000 to an irrevocable trust for the benefit of her son, Cliff, age 15, with First National Bank as trustee. Her attorney has drafted a trust agreement that provides that Cliff is to receive income at the trustee's discretion for the next 20 years and that at age 35, the trust assets will be distributed equally between Cliff and his sister
Joanna. Terry anticipates that her husband will consent to gift splitting. What tax issues should Terry and her husband consider with respect to the trust she is creating?
What will be an ideal response?
• Will any portion of Terry's transfer be classified as a gift of a present interest?
• Will the transfer in trust qualify for an annual exclusion under the 2503(c) trust provisions?
• Does gift splitting seem to be advisable?
The trust is a discretionary trust and so Cliff is not guaranteed to receive anything for 20 years. Also, Joanna will not receive anything until 20 years from now. Thus, Terry will make no transfers of present interests.
The trust is not a 2503(c) trust because it does not terminate when Cliff becomes age 21 (nor does it give Cliff a "window" soon after attaining age 21 to ask for the trust assets). In addition, when the trust terminates, some of the assets will go to Cliff's sister instead of all of them passing to Cliff.
We do not have sufficient facts about the spouses' prior gift history to give a definitive answer about whether gift splitting would be advisable. Because no annual exclusions will be allowed, the usual benefit of doubling the annual exclusion will not be available. However, if both spouses still have most of their unified credit available, gift splitting likely will be beneficial by reducing the tax rate on the gifts and allowing use of two unified credits.
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