(c) 2008 Newsday. Reprinted by Permission
ASK THE EXPERT
KAREN E. KLEIN
The problem: I’m the trustee of an “irrevocable grantor trust” created a year ago by my father-in-law with his two daughters as beneficiaries. Circumstances have changed and we’re considering paying out the trust principal and having the beneficiaries gift the entire amount back to my father-in-law. Is this legal? What about taxes?
The expert: Bridget T. Faldetta, estate planning attorney, DePinto Law Associates, P.C.
The rules: As long as the trust terms allow it, there will be no legal consequences for you if you distribute the entire trust estate. Also, it is legal for the daughters who receive the trust estate to gift the entire amount back to your father-in-law.
The strategy: If your father-in-law is like many people, he created the trust in order to protect his assets from the costs of long-term care. Gifting those assets back to him is likely to cause your father-in-law to have excess resources and be ineligible for Medicaid benefits.
How it works: The transfer to the beneficiaries could be considered taxable gifts by your father-in-law, depending on whether the initial trust funding was considered a “completed” or
If it was a completed gift, distributing the assets will not be considered a taxable event for anyone. If, conversely, the initial trust transfer was an incomplete gift, the distributions would be considered a reportable—and possibly taxable—gift by your father-in-law.
When the beneficiaries transfer the assets back to your father-in-law, they will be considered to be making a reportable, and possibly taxable, gift.
If any reportable gift totals less than $1 million, no gift taxes are due. Reportable gifts made by either a beneficiary or by your father-in-law will reduce each of their $1 million lifetime gifting exemptions and require a gift tax return filing. Only gifts in excess of $1 million will cause a tax to be due.
The results: Trusts are complex and should not be established or dissolved lightly. Get professional advice about all the implications of your plan, including how it will affect your father-in-law’s future.