Published on:

Beware of gifts that are pegged to the tax code

treasure-160004_150Today, I was reading a trust written in the late 1990’s. In it, the Grantor made a gift to her grandchildren that was to be equal to the Generation Skipping Transfer (GST) tax exemption. This is the amount of money that a person can give to someone, like a grandchild, who is more than 37.5 years younger than the donor, without having to pay a separate tax that is equal to the maximum gift/estate tax, or 40%, on the transfer.

Back then, that GST exemption was a bit more than $1 million. So, my client was making a gift to her three grandchildren of $1 million, divided into equal thirds. So far, so good.

Skip ahead to today. The current GST exemption is $5.34 million! Suddenly a generous gift from grandmother would give everything to the grandchildren, and nothing to my client’s two sons. This is not what my client intended to do.

The issue was easy enough to fix, instead of pegging the gift to the GST exemption, we amended the trust to limit the gift to $1 million, capturing her original intent. But, of course, the fix required attention and it required an amendment.  Had my client just ignored it, at her death her estate would have gone in an unexpected direction.

Here’s another example: A husband and wife each had separate trusts because this was a second marriage and they each had children from their previous marriages. Each trust left a gift to the adult children of the deceased spouse of an amount equal to the federal estate tax exemption. At the time these trusts were drafted, which was the early 2000’s, the exemption amount was $675,000.  The remaining assets were left in trust for the surviving spouse. By 2009, the federal estate tax exemption had risen to $3.5 million.

Without an amendment, at the death of the first spouse, the adult children would have gotten the ENTIRE estate, and the surviving spouse would have received nothing. This wasn’t what that couple meant to do. Again, an amendment fixed the problem by limiting the gift to the adult children to $1 million, so that the surviving spouse would have enough assets to live their life comfortably.

So, if your trust was written more than a few years ago, and any gifts you are making are stated in terms of the tax code, not as a specific amount or a percentage of the estate, it’s worth taking a look  and thinking about whether or not your trust needs some amending to accomplish your goals.