Chapter 29 - § 29.2 • GENERAL OVERVIEW

• Jurisdiction: Colorado

§ 29.2 • GENERAL OVERVIEW

§ 29.2.1—Removing Assets from the Taxable Estate

An irrevocable trust is an arrangement whereby the beneficial ownership is separated from the legal ownership. Many irrevocable trusts are designed to remove assets from a client's estate so long as the client does not retain certain rights and powers. The irrevocable trust can be for the benefit of the client's spouse, descendants, or others. The trust can also be designed or administered to have the trust's income taxable to the client, to the trust, or to the beneficiaries.

Important provisions of the trust must be carefully incorporated into the trust document in order to avoid having the trust assets included in the settlor's estate. Specifically, the client must avoid retaining or possessing any powers as described more specifically in the Internal Revenue Code (I.R.C. or Code) under §§ 2036 through 2038, and I.R.C. § 2041. Also, if life insurance is owned by the trust, the client must avoid having any of the powers described in I.R.C. § 2042.

§ 29.2.2—Intentionally Defective

Having the trust income taxable to the settlor allows for further removal of assets from the settlor's estate in that he or she pays income taxes on the trust's income for the benefit of the trust's beneficiaries (i.e., effectively, further gifts). This is discussed in more detail in § 29.4 of this chapter.

§ 29.2.3—Gift Tax

The transfer of assets to the trust can be designed as completed gifts. Completed gifts are subject to gift taxes or would utilize the donor's exemption from gift taxes to the extent of the donor's then-available applicable exemption amount. One exception to this involves gifts that are within the annual exclusion amounts (currently $16,000 per donee, or $32,000 per donee if "gift-splitting" with the donor's spouse is elected), provided that the gifts qualify as "present interest" gifts. Generally, to qualify as a present interest gift, the donee must have a current right to benefit from such gift (i.e., an immediate, unrestricted right to the use, possession, or enjoyment of the contributed property or the income therefrom). This can be accomplished by incorporating into the trust a provision known as a Crummey provision. Such a provision allows the beneficiaries of the trust a short window of opportunity to withdraw each contribution from the trust. The trust agreement can allow the contributor to designate which beneficiaries have the right to withdraw with respect to any...