In the world of trusts, including gift-giving and asset protection, the current landscape has never been better to consider making large gifts to trusts for family members. The reason is threefold.
- Gifts of up to $11.4 million (or $22.8 million for a co-spousal gift) are free of any gift taxation. These allowable amounts will continue to increase through the year 2025, but then could drop to close to half of these amounts. We now know that if one takes advantage of these large allowable exempt gifts, then in the event the allowable amounts drastically decrease in 2026 (as currently slated under the law), there will be no recapture of any taxes that had been saved by gifting prior to 2026 (which was a concern for advisors prior to now). The gifting caps can even be greater if LLCs are used in the process. Also, the 2026 deadline could close in sooner as any change in administration in Washington DC occurs.
- With the current trend of trust designs and evolving laws that allow for irrevocable trusts to be modified to adjust for changes in laws, family circumstances and goals, trusts have become extremely flexible tools as desired recipients of gifts. “Rainy day” provisions and terms can be added to the trust that allow assets to be reverted to the person (the “settlor”) who created and made the gifts to the trust. Such reversion can result if unforeseen circumstances (e.g., divorce, forced early retirement, unexpectedly outliving a beneficiary, loss of a job) occur that create a need to use the assets in the trust. Such reversion capabilities provide added comfort to that settlor, knowing that such reversion can be accommodated.
- Speaking of evolving laws, seventeen states that have enacted “self-settled” (meaning the settlor is a beneficiary of the trust) spendthrift trust protection laws (known as domestic asset protection trusts or “DAPTs”) and numerous offshore jurisdictions allow such trusts to be created to also protect the trust assets from predators that come into existence via lawsuits, bankruptcies, divorces and other creditor situations. Being “self-settled” however can invite added scrutiny during litigation, encouraging a creditor to argue more entitlement to break into such trusts. Therefore, trusts with the above-mentioned “rainy day” provisions may be preferable since the settlor’s beneficiary status is more tenuous. In fact, until the above mentioned “rainy day” events occur, the trust assets cannot be reverted to the settlor, which means such trusts are not nearly as likely to be considered “self-settled” trusts. As such, all fifty states, and not just the seventeen DAPT states, generally recognize and enforce the spendthrift (translates to “asset protection”) nature of such trusts.
The fact that reason 1. above highlights the tax motivation for creating these trusts also bolsters the asset protection effectiveness of such trusts because a creditor has a much more difficult time in successfully arguing that the trust was nothing more than a transparent attempt to hinder or defraud creditors. This form of argument is a common strategy used by creditors when they can show there is no tax or other reason for creating the trust. When the sole motive behind setting up the trust is for asset protection from the settlor’s creditors (versus tax or other reasons), this opens the door for such creditor arguments (i.e., assertions of fraudulent transfers or voidable transactions) in their endeavors to unwind the gifts or to seek a claw-back of such gifts from the trust.