A split-gift is yet another way to increase the number of gift tax annual exclusions and unified credits available for each gift to a Crummey trust. A gift can be split by having the nondonor spouse agree to be treated as if he had made one-half of the gifts made by the donor spouse.
The election for a split-gift is made on the gift tax return for the year in which the gift is made. The gift tax return must be filed on or before April 15 of the following year. But the amount or existence of the beneficiary’s right to make a withdrawal should not be dependent in any way on the donor’s spouse’s agreement to split gifts. The reason is that this would make the beneficiary’s power contingent on an event that will not yet have occurred by the date of the gift.
The trust should specifically empower the grantor with the right to expand the beneficiary’s demand power with respect to future gifts by stating at the time of the gift that it is to be treated for demand purposes as if it had been made equally by the donor and his spouse.
Split-gifts can therefore increase the annual exclusion to $30,000 as indexed ($15,000 per spouse in 2019) per donee. But giving a powerholder the right to withdraw this amount sets up a tax trap in the powerholder’s estate; if the right to demand that much is allowed to lapse, the excess over the “five-or-five” maximum will be considered a gift to the remainder person subject to gift tax. That gift, coupled with the retention of a lifetime interest, will cause inclusion of a portion of the trust in the powerholder’s estate. Of course, if the beneficiary lives until the trust ends, a great deal of the trust may be in his estate anyway.
Permanent Withdrawal Rights
An additional way to increase the window is to make the withdrawal rights permanent. However, the powerholders’ rights do not lapse and therefore grow each year. The advantage is that a larger premium can be paid and sheltered by the gift tax annual exclusion. The disadvantage is that as the value of the property that can be taken grows, so does the beneficiary’s temptation to make a withdrawal. Another downside is the growing estate tax liability in the beneficiary’s estate. But, in the right circumstances (for instance if there are many beneficiaries, all of whom can avoid the temptation to make a withdrawal, and all of whom are likely to survive the grantor), this solution may prove quite advantageous.
All Out Maximum Transfers
This method is simple. The client makes a first gift equal to $300,000 (doubled to $600,000 if the client’s spouse will be splitting gifts and is not an income or principal beneficiary). The bulk of such a gift (i.e., the excess over $15,000 or $30,000, in the case of split-gifts, in 2019) will not qualify for the annual exclusion, so the client must use his lifetime exemption to avoid a current gift tax liability.
But, once at least $300,000 of assets are in the trust, the greater of $5,000 or 5 percent of the trust’s corpus is $15,000 ($30,000 if $600,000 is placed into the trust). So, from this point on, the client can make gift tax free gifts of the maximum annual exclusion amount. Even if the beneficiary doesn’t exercise his withdrawal rights, no taxable gift occurs because the entire contribution is shielded by the de minimis greater of $5,000 or 5 percent of trust principal rule. A married client with four children could therefore give each child $100,000 ($400,000 total) which would mean $30,000 (in 2019) would qualify for the annual exclusion and $70,000 of the client’s lifetime exemption would be exhausted per child (a total of $280,000). In all of the following years, the client could give up to $30,000 per child ($120,000 total) and there would be no taxable gifts per donee.
The all out maximum transfers technique is simple, easy to implement, and avoids naming an estate as beneficiary, the drafting of Crummey powers, or the uncertainty inherent in some of the more exotic and untested methods of balancing between the client’s tax and dispositive objectives.
The two downsides of the technique are equally obvious: First, the client must have a large amount of cash or other easily liquidated assets that he can afford financially and psychologically to permanently part with. Second, the client must be willing to use all or a large portion of his remaining unified credit.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM