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Setting up a trust to avoid gift tax?

Topic closed. 13 replies. Last post 7 years ago by TexasDreams.

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Entertaiment Capital
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April 19, 2006
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Posted: December 6, 2007, 12:33 am - IP Logged

 I am not sure how it works. So let's say I won the current Megamillions jackpot. Beside splitting the jackpot with my family members (10% for my parents and 1.5 for each of my sisters), I want to help out my friends, who are two of them. One wants Mustantg Cobra GT and the other needs to pay off hios home loan. So if I grant them some money, does setting up a trust and designate them as my benificiaries help? 

    justxploring's avatar - villiarna
    Wandering Aimlessly
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    Posted: December 6, 2007, 1:33 am - IP Logged

     Setting up a trust to avoid gift tax?

    No.  First of all, the correct word is "reduce" not "avoid" when you talk about paying taxes.  Also, a beneficiary is someone who gets your money when you die. But since you asked about gift tax (not estate tax) mentioning life insurance and other estate planning vehicles isn't going to answer your question.  No matter how old you are, all of us can get sick or die, so it's important to make sure that your loved ones are protected with either a will, a trust and a life insurance policy. 

    So my answer is, no matter what anyone tells you on an internet forum (including me) contact a reputable professional (I'd go to an attorney) after you win a big jackpot and before you ever claim the prize. If you create a pool and claim the ticket as a group or trust, it's possible that you can avoid most of the gift tax by each having a share in the pool.  Once you have the money, you can't just decide to create a trust and give away money to avoid taxes. The IRS is a lot smarter than that or everyone, not just lottery winners, would be doing it. But you can give away $12,000 to all of your friends and relatives every year, pay all of their medical bills, health insurance & tuition. 

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      Posted: December 6, 2007, 10:22 am - IP Logged

      Can I loan friends any amount of money? Then give them a life time to pay it back?

        csfb's avatar - Lottery-001.jpg

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        Posted: December 8, 2007, 3:16 pm - IP Logged

         I am not sure how it works. So let's say I won the current Megamillions jackpot. Beside splitting the jackpot with my family members (10% for my parents and 1.5 for each of my sisters), I want to help out my friends, who are two of them. One wants Mustantg Cobra GT and the other needs to pay off hios home loan. So if I grant them some money, does setting up a trust and designate them as my benificiaries help? 

        Trust is an extensive subject matter, but I am assuming you are referring to a revocable private trust, or what is commonly called living trust.  But there are other trusts and sub-trusts depending on what your ultimate objective is, the size of your estate, and the extent of your bounty.

        A trust is a good instrument when planning the preservation of your estate, without a big chunk of it going to estate taxes and gift taxes and assuring that your designated beneficiaries are well-provided. 

        I'm not sure what your ultimate objective is, but if you just want to  gift a car and pay off someone else's mortgage, today,  you can do that without designating them as beneficiaries to a trust.  Just be ready to pay gift taxes.

        If you have a sizable estate, it is a must for you to consult with an estate planning attorney and a certified public accountant.  It is well worth the consultation fee they'll charge you.

                 Sun Smiley             

          TheGameGrl's avatar - necros
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          Posted: December 8, 2007, 5:51 pm - IP Logged

          AN alternative suggestion- Which I have done in graciousness towards a family member.

           

          I bought a car, titled it in my name. Paid cash on the line. Six months later, I transferred ownership/title to my son for one dollar! The government cannot Mandate how much you chose to sell your personal property for. So it was completely legitmate. It wasnt a gift because he paid for it.

          This too can hold true for real estate. If I want to sell my land or house for a miniscule amount and transfer title to someone, that is my right. The only tax involved is school, which the persons would have to pay yearly or quarterly, depending ....

          As to a Trust fund. Yes one can be created whilst STILL alive. And the recipient can be granted funds or certain priveldges from that trust.

          Personally I like the idea of hiring them. Set them up with a matching IRA account. Give them company cars or an estate house they can reside in whilst you are traveling or conducting pleasure trips!

          ________________________________

          Signature quote-If I'd agree with you , we'd both be wrong.

            TexasDreams's avatar - Trek ROMSYM2.gif
            Houston, Texas
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            Posted: December 11, 2007, 3:13 pm - IP Logged

             I am not sure how it works. So let's say I won the current Megamillions jackpot. Beside splitting the jackpot with my family members (10% for my parents and 1.5 for each of my sisters), I want to help out my friends, who are two of them. One wants Mustantg Cobra GT and the other needs to pay off hios home loan. So if I grant them some money, does setting up a trust and designate them as my benificiaries help? 

            Hi ambelamba,

            I posted a little info on trusts from a law firm who is certified in this area; however, it pertains to trusts under Texas law, but it didn't post. So I have copied/paste some information regarding trusts,again. A trust is a ideal asset protection, Estate Tax avoiding and Generation Skipping delay tool for people, especially lotto winners. Here's how it works in Texas-----

            Gift assets outright to third parties (typically family members)

             

             

             If an individual no longer owns an asset, his creditors generally cannot take

            such asset. Of course, the individual must be willing and able to part

            with the asset.

             
            Gift assets to irrevocable trusts for third party beneficiaries (typically

            family members). Same reasoning as above. Additionally, if the trust

             

            is drafted properly as a spendthrift trust, the trust assets will also be

            protected from the creditors of the trust beneficiaries.

            Transfer assets to a self-settled spendthrift trust in a jurisdiction that

            allows creditor protection for self-settled trusts
            . Certain jurisdictions

            allow an individual to transfer assets to a trust of which he or she is a

            beneficiary while at the same time protecting the transferred assets

            from some or all of the individual’s creditors.

            Self-Settled Spendthrift Trust Basics

            A. Generally, under Texas law, an individual (“Grantor”) can create a

            trust for another person (“Beneficiary”) and the assets in such trust can

            be safeguarded from the creditors of the Grantor and the Beneficiary

            (commonly referred to as a “spendthrift trust”).

            B. However, Texas law does not permit an individual to create a trust

            over which such individual has retained certain interests (i.e. the

            individual is a beneficiary, has a power of appointment or a revocation

            power) and protect such trust assets from the claims of the individual’s

            creditors. See Texas Trust Code §112.035. Such a “self-settled” trust

            offers no creditor protection in Texas. Most other U.S. states have

            similar laws.

            C. Conversely, a few U.S. states and some foreign countries do have laws

            that permit self-settled spendthrift trusts.

            **As quoted from----

            ASSET PROTECTION PLANNING:

            DOMESTIC TRUSTS AND FOREIGN TRUSTS by

            Scott Schepps, Shareholder

            Fizer, Beck, Webster, Bentley & Scroggins, a professional corporation

            Just for the record I have no interest in this law firm, other than finding this article when I was doing research for my parents when they set up their trust, I used a different law firm. I hope this helps in answering your question, and to any others, because after all tonight is a MEGA MILLION draw for $115 Million!!!!!!!!

            A few years ago, billionaire Warren Buffett advised  "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

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              New Member
              California
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              Posted: December 11, 2007, 7:38 pm - IP Logged

              AN alternative suggestion- Which I have done in graciousness towards a family member.

               

              I bought a car, titled it in my name. Paid cash on the line. Six months later, I transferred ownership/title to my son for one dollar! The government cannot Mandate how much you chose to sell your personal property for. So it was completely legitmate. It wasnt a gift because he paid for it.

              This too can hold true for real estate. If I want to sell my land or house for a miniscule amount and transfer title to someone, that is my right. The only tax involved is school, which the persons would have to pay yearly or quarterly, depending ....

              As to a Trust fund. Yes one can be created whilst STILL alive. And the recipient can be granted funds or certain priveldges from that trust.

              Personally I like the idea of hiring them. Set them up with a matching IRA account. Give them company cars or an estate house they can reside in whilst you are traveling or conducting pleasure trips!

              TheGameGirl...you are correct in saying that "the government cannot mandate how much you chose to sell your personal property for."  However the government (i.e. the IRS) dies have a way of not letting you avoid paying the gift tax, it is called fair market value.  See below the IRS position on Gift Taxes.

              Gift Taxes

               

              IRS Tax Tip 2007-39

              .

               

              Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

               

              Do you really think the IRS is foolish enough to let someone buy a car and or property and have them sell it for a low price to avoid paying Gift Tax?   

                psykomo's avatar - animal shark.jpg

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                Posted: December 11, 2007, 10:16 pm - IP Logged

                 I am not sure how it works. So let's say I won the current Megamillions jackpot. Beside splitting the jackpot with my family members (10% for my parents and 1.5 for each of my sisters), I want to help out my friends, who are two of them. One wants Mustantg Cobra GT and the other needs to pay off hios home loan. So if I grant them some money, does setting up a trust and designate them as my benificiaries help? 

                Great question........but,  worded  in a stupid>>>>>>>>>>>>>>> CONTEXXXXXXXXXXX!!!!................................HAhaHAhaHAaaaaaHA

                First of all......you will need a G@@D^^^^^^^^^^law firm??????????????????????????????????????????????

                Most Megamillion winner's are a "MARK" for most lawyer's & a JOKE^^^^^^^^^^^^^^^^^ (beware FIN's^^^^^^^^^)

                too, and they laugh their ass-off if they think they actually HAVE a 

                real Megamillion winner in their OFFICE!!!!!!!!!!>>>>>>>>HAHAHA!   

                LOL>>>>>>>I am sure you will pay TX an lawyer fee'sssssss

                congrat's on winning the JACKPOT>>>>>>>>>megamillion'sssssss

                PSYKOMO 

                  TheGameGrl's avatar - necros
                  Pennsylvania
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                  Posted: December 12, 2007, 6:24 pm - IP Logged

                  TheGameGirl...you are correct in saying that "the government cannot mandate how much you chose to sell your personal property for."  However the government (i.e. the IRS) dies have a way of not letting you avoid paying the gift tax, it is called fair market value.  See below the IRS position on Gift Taxes.

                  Gift Taxes

                   

                  IRS Tax Tip 2007-39

                  .

                   

                  Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

                   

                  Do you really think the IRS is foolish enough to let someone buy a car and or property and have them sell it for a low price to avoid paying Gift Tax?   

                  The Government (IRS) doesnt get the title transfer information.

                  I appreicate your effort to look into the IRS, but the IRS doesnt audit state departments where the records are kept.  What was stated is completely legal. Ask a tax lawyer. I know I did. :)

                  ________________________________

                  Signature quote-If I'd agree with you , we'd both be wrong.

                    justxploring's avatar - villiarna
                    Wandering Aimlessly
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                    Posted: December 12, 2007, 6:34 pm - IP Logged

                    "I bought a car, titled it in my name. Paid cash on the line. Six months later, I transferred ownership/title to my son for one dollar! The government cannot Mandate how much you chose to sell your personal property for. "  So it was completely legitmate. It wasnt a gift because he paid for it. This too can hold true for real estate. If I want to sell my land or house for a miniscule amount and transfer title to someone, that is my right.

                     

                    This is totally false.  Yes, it is a gift.  The IRS people aren't blind to this and they know that buying a car or a house and then transferring the title for much less than the appraised value is the same as hiding money to avoid gift tax. If it adds up to more than the allowable lifetime exemption you would be breaking the law. 

                    I don't know your net worth, but if you currently have over $2 million it would be obvious what you were doing.  If a financial planner told someone to do this for his children and grandchildren to avoid paying gift or estate tax, he would be punished severely for advising someone to commit fraud.

                    Edit:  I just saw where you said a tax attorney gave you this advice.  Don't use this person when you win the lottery if you want to stay out of jail. Wink Think about it -  why wouldn't every person 75 years old with over $2 million run around and buy real estate and cars for their heirs so they wouldn't have to pay estate tax when they die?  The car is different.  I know someone who became very ill and transferred the title to his girlfriend. That was legal because nobody is going to argue that it's worth over $12,000.   A house is different. 

                    Hopefully all estate and gift tax will be repealed in a few years anyway.

                      justxploring's avatar - villiarna
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                      Posted: December 12, 2007, 6:59 pm - IP Logged

                      Can I loan friends any amount of money? Then give them a life time to pay it back?

                      That's a great question, Tinker.  That's why I like the answer csfb gave the best because a good CPA is worth the fee.  As much as I know (or think I know) there's a lot more that I don't know.  Nobody is going to get "caught" by slipping someone $500 when you go to lunch or taking a friend on vacation.  But any dramatic change in one's lifestyle would be noticed.

                      There are probably a lot of ways to help your friends, like buying yourself a 2nd home and letting them stay in it.  The IRS frowns on this of course, but maybe you can hire them as caretakers.  I've known people who started an LLC and hired their spouses, children, cousins and paid them very well.  All of that is legal, as long a you don't pay a receptionist $200,000 a year.  If you leased your secretary a car, you might need to show the need (i.e, she runs errands for the company, picks up the mail, makes deliveries) and keep records.

                      You still would have to pay the appropriate business taxes, however.

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                        Posted: December 12, 2007, 7:08 pm - IP Logged

                        The Government (IRS) doesnt get the title transfer information.

                        I appreicate your effort to look into the IRS, but the IRS doesnt audit state departments where the records are kept.  What was stated is completely legal. Ask a tax lawyer. I know I did. :)

                        Your right that the IRS doesn't get the title  transfer information.  However should the IRS want to look into the title information and they have a good reason to I'm sure they could get a subpeona and thereby get the information.

                        As far as your suggestion, it is highly unlikely that the IRS would catch onto this scheme.  However as far as it being legal, don't think so, even if your tax lawyer says so.  My advice to you would be to get a secoond opinion and then a new lawyer! 

                          Coin Toss's avatar - shape barbed.jpg
                          Zeta Reticuli Star System
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                          Posted: December 12, 2007, 11:48 pm - IP Logged

                          Think about this - if you take out a safe deposit box a a bank in your name, the IRS can go through that box anytime it wants to. If you form a coprporation, they can't legally go through it. 

                          Of course, there's all kinds of reasons not to form a corporation (as a private individual) but let's just say if you ever come into a big score, get advice from people who relly know their stuff.

                          Two things you never want to mess with are the tax people and the SEC.  

                          Those who run the lotteries love it when players look for consistency in something that's designed not to have any.

                          Lep

                          There is one and only one 'proven' system, and that is to book the action. No matter the game, let the players pick their own losers.

                            TexasDreams's avatar - Trek ROMSYM2.gif
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                            Posted: December 14, 2007, 9:38 pm - IP Logged

                            This might answer some questions regarding if its legal, its a paper from an attorney who is a specialist in this area, but remember it pertains to Texas law and each state is different, I don't believe it addresses the IRS, I am sorry if its a long post but I am not aware of an attachment link-

                            TRANSFERS OF PROPERTY

                            Many asset protection techniques involve an evaluation of the ownership of property

                            available to satisfy claims. In many circumstances, a debtor's assets available to creditors

                            will include not only assets owned by the debtor at the date of the claim, but also assets

                            that have been previously owned by the debtor. The law prohibits transfers in

                            fraud of creditors. Examples of these laws include the following:

                            A. Bankruptcy.

                            If a party declares (or is forced into) bankruptcy, the bankruptcy court may

                            set aside certain preferential transfers made within 90 days of the filing of

                            the bankruptcy (or within 1 year of the filing of the bankruptcy for transfers

                            made to related parties), and "fraudulent" transfers (i.e.. those without

                            adequate consideration) made within 1 year of filing. Thus, a party

                            contemplating a transfer of assets must determine whether bankruptcy is likely

                            in the near future and whether the transfers contemplated might be set aside

                            by a bankruptcy court. In addition to the preferential and fraudulent transfer rules of

                            the Bankruptcy Code, a trustee in bankruptcy has all the rights and powers of a

                            hypothetical state law creditor under the fraudulent transfer laws of the state. Texas

                            has adopted the Uniform Fraudulent Transfer Act, found at Chapter 24 of the Texas

                            Business and Commerce Code ("TBCC"). Under this statute, as explained below, a

                            bankruptcy trustee could look back 4 years (and even further if the transfer is

                            concealed) in an attempt to avoid fraudulent transfers.

                            B. "Fraudulent" Transfers.

                            1. Transfers Resulting in Insolvency.

                            Under Texas law, transfers made (or obligations incurred) by a debtor

                            can be set aside by a court, for creditors claims arising prior to the

                            transfer, if the debtor was insolvent at the time of or as a result of the

                            transaction. See TBCC § 24.006. "Insolvent" means that the sum of

                            the debtor's debts exceeds the fair market value of the debtor's

                            nonexempt assets. See TBCC § 24.003(a). A debtor who is generally

                            unable to pay his debts as they come due is presumed to be insolvent.

                            See TBCC § 24.003(b). In order to set aside such a transfer, a

                            creditor must show either:

                            a.

                             

                            The debtor failed to receive a "reasonably equivalent value" for

                            The debtor failed to receive a "reasonably equivalent value" for

                            the transfer; or

                            b. The transfer was to an "insider" of the debtor, made to pay off

                            a pre-existing debt. See TBCC § 24.006.

                            2. Intent to Defraud Creditors.

                            The law also provides that a court can avoid any transfer made (or

                            obligation incurred) by a debtor with "the actual intent to hinder,

                            delay or defraud" any creditor whose claim arose within a reasonable

                            time before
                            or after the transfer. See TBCC § 24.005(a). Thus, even a

                            transfer that does not render a debtor insolvent can be set aside by a

                            creditor whose claim arises a reasonable time before or
                            after the

                            transfer, if the creditor can establish "intent" to defraud. Since a

                            transferor's "intent" is difficult to prove, Texas law has established eleven

                            factors (sometimes called "badges of fraud") which courts may consider

                            in establishing the actual intent of a debtor,

                            a. The eleven factors set forth by statute [See TBCC §

                            24.005(b)] are:

                            (1) Whether the transfer is to an "insider" (family member,

                            partner or affiliated business);

                            (2) Whether the debtor retains possession or control of the

                            transferred property;

                            (3) Whether the transfer is concealed;

                            (4) Whether the debtor has been sued or threatened with suit

                            prior to the transfer;

                            (5) Whether the transfer is of substantially all of the debtor's

                            assets;

                            (6) Whether the debtor leaves the jurisdiction of the court;

                            (7) Whether the debtor conceals assets or removes them

                            from the jurisdiction of the court;

                            (8) Whether the value received by the debtor in exchange for

                            transferred assets is reasonably equivalent to the value of

                            the transferred assets;

                            (9) Whether the debtor is insolvent as a result of, or shortly

                            after, the transfer;

                            (10) Whether the transfer occurs shortly before or shortly after

                            a substantial debt is incurred; and

                            (11) Whether the debtor transfers essential business assets

                            to a creditor, who then re-transfers the assets to an

                            insider of the debtor.

                            b. The above factors are not exclusive. On the other hand, the

                            existence of one or more factors does not create a

                            presumption that a transfer is fraudulent. Rather, the court must

                            determine the existence of intent based upon all facts and

                            circumstances of a particular case, with the listed factors to be

                            used as guidance.

                            3. Constructive Fraud.

                            Texas law further provides that a transfer of property for which the

                            debtor does not receive "reasonably equivalent value" is deemed to be

                            constructive fraud. See TBCC § 24.006. In such a circumstance, a

                            creditor whose claim arises a reasonable time before
                            or after the

                            transfer need not show an actual intent to defraud, if the creditor can

                            establish that:

                            a. The debtor intended to incur, or believed he would incur, more

                            debts than he would be able to pay after giving effect to the

                            transfer; or

                            b. The debtor was left with an unreasonably small amount of assets

                            with respect to the risks associated with the transactions or

                            business activities in which the debtor is engaged, or about

                            to become engaged. "Reasonably equivalent value" is

                            defined in TBCC § 24.004(d) as being a value "within the

                            range of values" of an arm's-length transaction.

                            **as stated by:

                            ESTATE PLANNING TO PRESERVE ASSETS

                            FIZERBECK

                            Fizer, Beck, Webster, Bentley & Scroggins,

                            A few years ago, billionaire Warren Buffett advised  "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."