A Gift for a Lifetime

Over the past 2 months, many clients have reached out discussing their wish to give gifts to their graduating children and Grandchildren. Many wanted to give significant assets of either cash or appreciating assets such as securities.

These parents and grandparents want to make a gift that will have a positive effect on the future of their newly graduated scholars. They want to pass on assets while they are alive and may be tempted to just give the gift and receive a thanks and a smile.

In my discussions, I may recommend a lasting gift through an irrevocable trust as a better way to preserve assets for their future.

What is an Irrevocable Trust?

A trust is a legal entity under which one person — the “trustee” — holds legal title to property for the benefit of others — the “beneficiaries.” The trustee must follow the rules provided in the trust instrument. An “irrevocable” trust cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you, and at your death, the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses.

The Advantages of Trusts

While gifting assets outright is a much simpler process than setting up a trust, the following are some of the advantages of setting up a trust instead:

• Income. Putting assets in a trust means you can receive income from the assets to continue to pay for living expenses.
• Control. With an irrevocable trust, you, as the grantor can maintain some control over the assets. You get to choose the trustees and establish the rules of the trust. You can also retain the right to change beneficiaries with a power of appointment in your will.
• Asset protection from creditors. If you give money to a family member directly, that money could be lost to the recipient’s carelessness, creditors, or divorce. Keeping the funds in a trust protects the assets for the future.
• Taxes. If the trust is structured properly, it can have a tax advantage for your beneficiaries. Assets that have gone up in value will receive a “step-up” in basis on your death, which means your beneficiaries will pay less in capital gains taxes. Assets that are gifted do not receive a “step-up.”

Putting large gifts in a trust allows you to plan while retaining some income and control over the assets. Sometimes “future benefit gifting” is the best gift of all.

Be Educated! Be Proactive!