Certainty in the estate and gift tax laws have brought a new bit of uncertainty to wealthy families. We now know that the estate and gift tax remain unified with a total lifetime exemption of $5.25 million for an individual and $10.5 million for a married couple. Wealthy parents can use the entire amount to gift money to their children tax-free. However, that has caused many people to wonder whether it is a good idea to give that much money to their children.
It is important to note that you do not have to give the money to your children as cash. The most common way to give large amounts of money to children is to use a Trust. This allows you to set up rules about when money should be given to the children and for what purposes. For example, a Trust could be designed that only gives money to the children for educational and medical expenses.
For some wealthy families, even a very restrictive Trust, however, still leaves some concerns that the children will not be motivated to make their own money as they will know that the Trust money will someday be theirs. These families are using what is known as a silent or quiet Trust. The beneficiaries of this type of Trust are not told of its existence until such time as is designated in the trust, for example when the beneficiaries are 30 years old. These Trusts are not legal in all states, but they are very popular in states where they are allowed. Another restriction is to provide that distributions from the Trust cannot exceed a beneficiary’s W-2 or 1099 earnings.
Talk to an estate planning attorney about the best way for you to use a Trust to give money to your children.
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