Broker Check
Exploring the Benefits and Options of Gift Trusts

Exploring the Benefits and Options of Gift Trusts

April 05, 2024

Many people want to make sure that their loved ones are set up for financial success well into the future. One way to ensure that you can pass some of your wealth onto the next generation is to fund irrevocable gift trusts for your children, grandchildren, or other beneficiaries. A gift trust could provide them with the money they need to live comfortably or make a big purchase like a first home.  

What are the benefits of establishing gift trusts over simply giving cash to your loved ones as a one-time gift? Here’s what you need to know to make a savvy financial move that benefits you and your beneficiaries. 

What is a Gift Trust? 

Gift trusts are an efficient way to transfer a portion of your wealth to a child or grandchild and avoid the gift tax. If you know you want to give something to a future generation that will exceed the annual gift tax exclusion ($18,000 in 2024 or $36,000 for married couples), then you may want to transfer those assets to a gift trust. 

Keep in mind that gift trusts still allow you to set stipulations on how your beneficiary receives the financial benefit of your assets. For example, you could set it to be distributed to them when they reach a particular age and are mature enough to handle the windfall of cash. You can also stagger the ages so distributions increase with age, and hopefully, wisdom.

If you set up your gift trusts with a fiduciary, you can ensure that your wishes will be upheld and that you are acting in both your best interest and the beneficiary’s best interest. But be careful: banks and trust companies can be expensive and one-sighted in their investment philosophy.

Benefits of Irrevocable Gift Trusts

To protect your wealth and pass it along to the next generation, an irrevocable trust may be the best move. Unlike revocable trusts, irrevocable trusts are more set in stone and come with additional advantages.

It is important to note that there are several different types of irrevocable trusts – and there may not be a one-size-fits-all solution. For example, you might find more benefits of a charitable remainder trust that hits all of the key points you are looking toward.  

Here are a few benefits of a general irrevocable gift trust that will get you thinking and planning for the future. 

Tax Advantages

The first and perhaps most significant reason to place your assets in an irrevocable gift trust is to minimize your tax liability. Assets donated to a trust are considered separate from the rest of your estate. As a result, your beneficiaries will not need to pay estate taxes on the assets within the trust upon your passing. 

There is another significant tax benefit to irrevocable trusts: the assets aren’t depleted by income tax. Instead, you can pay any income taxes due at the end of the year at your personal tax rate. It helps you avoid paying taxes based on a compressed trust rate and allows you to protect assets from depletion. 

Access to Trust Assets

Funding an irrevocable gift trust means you are surrendering both control and access to the funds contained within the trust. However, this does not necessarily mean that you lose access to the trust assets. You may be able to indirectly access them, especially if the named beneficiary is your spouse. 

For example, you may continue to live in a house that has been gifted to the trust.  

The trustee may also be able to make payments to beneficiaries during your lifetime, allowing you to access those funds if an emergency should pop up. 

Protection Against Creditors

Many people are concerned about their beneficiaries losing the wealth and assets that they wish to pass on to them. If they work in a high-risk field that puts them at risk of a lawsuit, you may feel more at ease knowing that an irrevocable gift trust is protected. It cannot be included in the sum of a judgment against your loved one. 

Trusts are also protected from creditors who might come knocking. Similarly, it is also protected from being factored into a divorce settlement. 

If you worry about your beneficiary’s money management skills, the trust can protect your legacy while still supporting your loved ones. You can set the terms and conditions of the trust so that they do not necessarily gain access to a windfall of cash all at once, preventing them from spending it frivolously or losing it to creditors or divorce. 

Easier Transfer of Wealth

Upon your passing, your loved ones will be distraught and every task will feel monumental. If your assets are not already transferred into an irrevocable gift trust or a charitable remainder trust, those finances could be tied up for a long time in probate. Instead, trusts can bypass this tedious and arduous process, allowing your loved ones to benefit from your generosity sooner.  

If you are concerned about the care of a loved one, a trust ensures that there will be less time to get those assets to them. While probate could be tied up for months, the payout from a trust is faster and more efficient. 

Of course, it should also be noted that a trust has significant financial benefits for estate planning. The assets contributed to an irrevocable trust are no longer considered part of your estate and can thus bypass this hefty tax. You will want to consult with a tax professional if you are thinking about your estate planning and how trusts can help smooth the process.

Get Comprehensive Estate Planning with Magellan

When you feel ready to consider forming an irrevocable trust for your loved ones, first ensure that you’re making the right move for your unique situation. Magellan can help, providing you with a one-stop shop for everything from estate and financial planning to the legal and tax implications of forming a trust. We’ll walk you through the pros and cons of gift trusts compared to other trust types, like charitable remainder trusts, to help you pick the best vehicle for your wishes.

If you’re ready to embrace a brighter financial future for your loved ones, contact us today to learn more about irrevocable gift trusts! 

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.


This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.