Confused: Gift Tax Return Question

[DiamanteBlu]

I am trying to find out if a gift tax needs to be filed in a particular situation. Hopefully one of our lawyers or accountants can chime in and can direct me to the source of the answer. I can''t seem to find a straight answer anywhere.

Situation:
A parent owns and lives in their principal residence. They transfer the residence into a revocable trust with a parent as the trustee and children as beneficiaries. Everybody continues to live in the residence as before. As far as the mortgage goes, it is a permitted transfer so nothing changes on that end. All other bills continue to be paid by the parents.

Question:
Is a gift tax return required for the transfer into the revocable trust?

 

[Independent Gal]

Hi Diamante, I''m no lawyer, nor an accountant. But I can tell you that if no one else chimes in, I''ve had great success actually calling the IRS and asking a person there when I''ve had tough questions. Unbelivable as it sounds, they''ve been pretty great.

 

[diamondseeker2006]

Oh, gosh, I am drawing a blank on the name, but we did a different kind of trust on my parent's house. I hope one of the attorney's chimes in! There was no gift tax.

 

[cara]

 

[MichelleCarmen]

Isn''t the point of the trust to avoid paying taxes?

You''re best bet would be to call the IRS hotline.

 

[rpanno]

A gift tax return may not be required because no present interest was exchanged. In other words, no gift was made in the property since the trust does not pay out to the beneficiaries until death of the grantor/trustee in this case. It ultimately depends on the specific type of trust you set up.

On the other hand, a trust that would likely work very well for this situation while also reducing the tax liability of your parents is a specific type of Grantor Retained Income Trust. It is specifically known as a Qualified Personal Residence Trust, which is a revocable trust. This would require a gift tax return, but this is not necessarily a bad thing. Gift Tax Returns are filed in order to allow the IRS to keep track of gifts and lifetime gifts so that the amounts are settled upon the death of an individual. Remember that each parent (donor)can give any number of children, etc. (donee''s) $12,000 annually without incurring a tax liability. This would be $24,000 per beneficiary. As a general rule of thumb, those that retain the control of the asset-property placed into a trust will be responsible for the tax liability.

If you have any more questions , I''ll try my best. I''m finishing my Master''s and taking the Uniform CPA exam this summer so please do consult a CPA/lawyer in your area to make sure that what applies here in TX applies there as well.

 

[rpanno]

Sorry for the typo, the Qualified Personal Residence Trust is irrevocable which essentially provides for the tax benefit since your parents have lost some of the control in the asset.

 

[fleur-de-lis]

Hi DiamanteBlu,

I don''t normally believe in giving out legal advice over the internet, but I feel a bit of an obligation to "pay you back" after that WONDERFUL eye candy thread of your recent big-ring shopping trip, hehehe.

As a general rule, revocable trusts do not require gift tax returns, whereas irrevocable trusts do require a gift tax return. The short answer, with an asterisk of course, is no-- but one would need to check out what the asterisk would have to say. The logic behind this distinction is as follows:

"An irrevocable trust is an arrangement in which the grantor departs with ownership and control of property. Usually this involves a gift of the property to the trust. The trust then stands as a separate taxable entity and pays tax on its accumulated income. Trusts typically receive a deduction for income that is distributed on a current basis. Because the grantor must permanently depart with the ownership and control of the property being transferred to an irrevocable trust, such a device has limited appeal to most taxpayers."

As the item is still under your control as part of a revocable trust, the IRS will probably say that no gift tax filings are due at this time. Of course, there are certain exceptions to this general rule which may concern your issue (split-interest trusts, charitable trusts, etc.) but you did not mention, so it''s impossible to either give or receive competent advice when based on broad strokes over the internet. Since I am not your lawyer nor does this constitute either legal advice or an attorney-client relationship, I would encourage you to speak to your own attorney or the IRS. In the meantime, here''s a fairly easy article on this matter, and the source of the quote above:
http://www.taxprophet.com/pubs/trust_nl.html

Hope this helps!

f-d-l

 

[DiamanteBlu]

Thanks for the info to all and thanks for the explanation and link, f-d-l. I appreaciate the broad brush explanations. Those were exactly what I was looking for. The funny thing is that I used to know this stuff inside out [I used to consult for privately owned businesses and succession planning] but that was over 25 years ago and I have forgotten most of it! LOL!

BTW, there is no gift tax return required in this instance.

Thanks again!