What is a formula trust?

It’s not unusual for older estate planning documents to include a “formula funding clause,” which splits assets between a credit shelter trust and the surviving spouse — either outright or in a marital trust.

What is a formula gift for a trust?

The donor transfers assets to a trust using a defined dollar value formula gift that defines the gift of the hard-to-value property in an express dollar amount; The trust instrument expressly anticipates that the trust beneficiaries might disclaim some or all of their interests in the trust.

What is a wandry clause?

[/ref] A DVC is a formula clause that allows the taxpayers to determine a gift’s fair market value, for federal gift tax purposes, by referencing a fixed dollar amount rather than transferring a fixed quantity of property.

What is a defined value clause?

A defined value clause generally provides that if the IRS successfully challenges the valuation claimed by the taxpayer, the amount gifted would be reduced to fit within the annual exemption or credit amounts.

What is the trust exemption for an estate?

What Is an Exemption Trust? An exemption trust is a trust designed to drastically reduce or eliminate federal estate taxes for a married couple’s estate. This type of estate plan is established as an irrevocable trust that will hold the assets of the first member of the couple to die.

What is an AB or ABC trust?

Today an AB Trust or even an ABC Trust is used for blended families to protect the assets of a surviving spouse and children from creditors, and to shield assets in the event that a surviving spouse remarries and subsequently divorces.

How much can you gift to a trust per year?

Each year, a person can make transfers of $14,000 to the trust without any gift tax consequences. Moreover, the annual gift tax exclusion applies to each recipient, so multiple gifts in that amount can be made to as many children, grandchildren, or other individuals as the donor wishes.

Can you avoid gift tax with a trust?

A gift in trust is a way to avoid taxes on gifts that exceed the annual gift tax exclusion amount. One type of gift in trust is a Crummey trust, which allows gifts to be given for a specific period, establishing the gifts as a present interest and eligible for the gift tax exclusion.

What is a formula bequest?

Often, the formula refers to the donor’s or decedent’s available federal unified credit. For example, an individual testator might make a bequest to a designated beneficiary of the maximum amount of property that can pass free of estate tax.

What is a qualified domestic trust?

A qualified domestic trust (QDOT) is a special kind of trust that allows taxpayers who survive a deceased spouse to take the marital deduction on estate taxes, even if the surviving spouse is not a U.S. citizen.

What is a formula gift?

In very simplistic terms, formula clauses in estate plans operate to give an amount to family or friends up to whatever the applicable lifetime exemption from federal gift and estate taxes is at the time of the decedent’s death, with any excess going to charity.

What is a trust C?

The QTIP Trust (Trust “C”) allows any value of the decedent spouse’s estate that may exceed the federal exemption equivalent amount (i.e., to exceed the maximum value that can be funded to Trust “B”) to qualify for the marital deduction – without the decedent spouse losing control of his/her portion of the trust estate …

What is the difference between simple trust and AB trust?

For most families, a simple probate-avoidance trust is better than the much more complex AB trust. A simple revocable trust is, basically, a substitute for a will. It isn’t designed to continue past the death of a spouse; instead, the trust assets are quickly distributed to the people who inherit them.

Does a trust avoid gift taxes?

Present And Future Interest The IRS does not levy gift taxes on trusts, nor does it consider payments from the trust to a beneficiary as a gift (it may be taxable income to the beneficiary, however).

What is a pecuniary formula?

A pecuniary formula funds a specific dollar amount. For example, a pecuniary formula would direct the trustee to distribute to the marital trust the smallest amount that, if allowed as a marital deduction, would result in the least possible federal estate tax.

What is the terminable interest rule?

nondeductible terminable interest rule n : a rule in estate tax law: the value of a property interest that passes to a surviving spouse may not be deducted if it passes from the surviving spouse to another person for less than adequate consideration upon the happening of some event (as the passing of a period of time)