Introduction
A gift in trust is an estate-planning technique that lets you transfer wealth to someone indirectly by placing assets in a trust rather than giving them outright. The trust’s terms control how and when the beneficiary can use the assets. Properly structured gifts in trust can preserve family wealth, provide creditor and spendthrift protection, and—when combined with specific features such as a Crummey provision—permit the use of the annual gift tax exclusion while avoiding depletion of your lifetime gift/estate tax exemption.
Key takeaways
– A “gift in trust” transfers assets into a trust for a beneficiary instead of being handed to the beneficiary directly.
– With certain structures (for example a Crummey trust), annual contributions can qualify for the annual gift tax exclusion because they are treated as “present interest” gifts.
– 2025 federal limits (per individual): annual gift tax exclusion = $19,000; lifetime gift/estate tax exemption = $13.99 million. You must file IRS Form 709 to report some gifts.
– Trusts are legally and tax-wise complex—use an estate planning attorney and tax advisor for implementation.
What is a gift in trust?
A gift in trust means the grantor (person making the gift) funds a trust so that a trustee manages those assets for a beneficiary according to the trust’s terms. The gift is indirect: the beneficiary’s rights depend on the trust document rather than an outright distribution. Trusts can be revocable (grantor retains control and can change or revoke) or irrevocable (generally cannot be changed), and each choice has different tax, creditor, and control consequences.
How gift tax rules apply (2025 figures and concepts)
– Annual gift tax exclusion (2025): $19,000 per donee. You can give up to this amount to each recipient in cash or property without reducing your lifetime exemption or causing gift tax liability.
– Lifetime gift/estate tax exemption (2025): $13.99 million per individual—gifts above the annual exclusion reduce this exemption and may be subject to tax after the exemption is exceeded.
– Present interest vs. future interest: Only gifts that give the donee a present, unrestricted right to enjoy the property qualify for the annual exclusion. Gifts that are merely future interests generally do not qualify for the annual exclusion unless specially structured (see Crummey trust).
– Reporting: Gifts that exceed the annual exclusion or that are split with a spouse need to be reported on IRS Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return).
What is a Crummey trust (and why it matters)?
A Crummey trust contains a withdrawal (demand) right that grants beneficiaries a short window (commonly 30–90 days) after a contribution to withdraw all or part of that contribution. That temporary withdrawal right converts the contribution into a “present interest” gift for gift tax purposes—allowing the grantor to use the annual exclusion for each beneficiary even though the funds that remain are controlled by the trust. If beneficiaries don’t exercise the withdrawal right, the funds stay in the trust under the trust terms.
Advantages of giving via a trust
– Tax efficiency: Properly structured gifts may use the annual exclusion and preserve lifetime exemption.
– Control over distributions: You can set ages, conditions, and standards for distributions (education, health, support, etc.).
– Asset protection: Irrevocable trusts and spendthrift provisions can shield assets from beneficiary creditors and preserve funds from poor financial decisions.
– Continuity and specialized management: Trustee can manage investments and distributions for minors or incapacitated beneficiaries.
– Estate planning coordination: Trusts can be part of a larger plan (life insurance trusts, generation‑skipping strategies).
Disadvantages and risks
– Complexity and cost: Drafting and administering trusts—especially irrevocable and Crummey trusts—requires legal and tax assistance and ongoing administration.
– Loss of control: Irrevocable trusts typically mean you cannot change beneficiaries or reclaim assets.
– Beneficiary behavior: Giving withdrawal rights (Crummey notices) can lead to immediate withdrawals that thwart long‑term wealth preservation.
– Reporting burdens: Gift tax returns (Form 709) and accurate notice/recordkeeping are required; mistakes can cause audit risk or tax consequences.
– State law variations: State gift, inheritance, and estate taxes and trust rules can alter outcomes.
Practical step-by-step guide to making a gift in trust
1. Clarify objectives
– Define why you are gifting (e.g., fund education, minimize estate taxes, protect assets, provide for a minor).
– Decide desired control level, timing of distributions, and asset protection needs.
2. Select the type of trust
– Revocable living trust: control and probate avoidance, but not a gift for tax purposes while you are alive.
– Irrevocable trust (e.g., Irrevocable Life Insurance Trust, Irrevocable Gift Trust): more powerful tax/creditor benefits but less flexibility.
– Crummey (withdrawal-right) trust for using annual exclusions for gifts that remain subject to trust terms.
– Consider special-purpose trusts: education trusts, special needs trusts, generation‑skipping trusts.
3. Choose trustees and backup trustees
– Select trustworthy, competent trustees (individuals or corporate trustees). Consider successor trustees and professional trustees for complex assets.
4. Work with qualified professionals
– Engage an estate planning attorney to draft the trust document and advise on state law.
– Consult a tax advisor to model gift/estate tax consequences, GST tax exposure, and Form 709 reporting.
– If you hold complex or illiquid assets, involve financial advisers or appraisers.
5. Draft and execute the trust document
– Make the terms clear: beneficiaries, distribution standards, trustee powers, Crummey notice mechanics (if applicable), spendthrift clauses, trust duration.
– For irrevocable trusts, understand that funding transfers will be treated as gifts.
6. Fund the trust
– Transfer assets into the trust: cash, securities, real estate, life insurance trusts (ownership change), business interests (careful with valuation).
– For non-cash gifts, obtain valuations or appraisals to determine fair market value at transfer date.
7. If using a Crummey provision, implement notice and timing procedures
– Send timely written Crummey notices to beneficiaries (commonly 30–60 days) informing them of their limited withdrawal right.
– Keep proof of notice delivery and any election to withdraw.
8. Maintain records and monitor limits
– Track contributions per beneficiary and per donor each year to determine whether the annual exclusion covers the gift or whether Form 709 must be filed.
– If married and using gift‑splitting, coordinate and file Form 709 to elect split gifts.
9. File required tax returns
– File Form 709 for gifts that exceed the annual exclusion, and to elect gift-splitting between spouses.
– If generation‑skipping transfers are involved, account for GST exemption allocation.
10. Review and adapt
– Revisit the plan when laws change, asset values change, or family circumstances evolve.
– Watch annual inflation adjustments to gift/estate limits.
Practical examples
– Simple Crummey gift: Parent contributes $19,000 (2025 annual exclusion) to a Crummey trust for child. Parent sends a 60‑day notice informing the child of the right to withdraw. Child doesn’t withdraw; funds remain in trust until age 25. Because of the withdrawal right, the contribution qualifies for the annual exclusion and does not reduce the parent’s lifetime exemption.
– Larger gifting: Parent funds an irrevocable trust with $200,000 for a grandchild. The first $19,000 (per donee) might be excluded, but the remainder reduces the grantor’s lifetime exemption; Form 709 must be filed.
Reporting and tax filing details
– Form 709: Report gifts other than those fully covered by the annual exclusion or qualifying transfers (certain gifts to spouses or charities). If spouses elect gift-splitting, that election is made on Form 709.
– Portability and estate filing: Portability of a deceased spouse’s unused exemption requires timely filing of the deceased’s estate tax return (Form 706) in most cases—consult your advisor.
– State taxes: Several states have their own estate or inheritance taxes with lower exemption amounts than federal rules. Review state laws.
Special considerations
– Generation-Skipping Transfer (GST) Tax: Large transfers that skip a generation (e.g., to grandchildren) can trigger GST tax unless you allocate GST exemption. The GST exemption amount generally tracks the federal lifetime exemption—confirm current figures with your advisor.
– Special needs beneficiaries: Use a properly drafted special needs trust to preserve beneficiary eligibility for means-tested government benefits.
– Insurance trusts: Irrevocable life insurance trusts (ILITs) can remove life insurance proceeds from your taxable estate when properly structured and funded (often using Crummey powers for premium gifts).
Common mistakes to avoid
– Failing to deliver Crummey notices properly — lack of evidence can jeopardize annual exclusion treatment.
– Improperly funded trusts — a signed but unfunded trust will not accomplish transfer goals.
– Neglecting to file Form 709 — even if no tax is due, reporting may be required (e.g., to elect gift-splitting).
– Not accounting for state-level taxes or for GST exposure.
When to consult professionals
– Drafting or changing irrevocable trusts.
– Funding a trust with complex assets (closely held business interests, real estate, or illiquid assets).
– Coordinating gifts with an overall estate plan, insurance planning, and GST allocation.
– When gift amounts approach or exceed the lifetime exemption.
– To ensure compliance with notice and transactional formalities (Crummey notices, appraisals, trust funding).
The bottom line
A gift in trust—especially when combined with structures like Crummey provisions—can be a powerful tool to transfer wealth, preserve assets, and achieve estate tax efficiency. However, the legal and tax rules are technical and change over time (annual exclusion and lifetime exemption amounts are adjusted). For meaningful gifts or complex family situations, use experienced estate planning counsel and a tax advisor to implement the trust correctly, comply with reporting requirements, and protect both grantor and beneficiary interests.
Sources and further reading
– Investopedia, “Gift in Trust” — https://www.investopedia.com/terms/g/gift-in-trust.asp
– Internal Revenue Service, “IRS Releases Tax Inflation Adjustments for Tax Year 2025” — https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025
– Internal Revenue Service, “About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return” — https://www.irs.gov/forms-pubs/about-form-709
Disclaimer: This article provides general information and does not constitute legal or tax advice. Laws and limits change—consult an estate planning attorney and tax advisor before taking action.