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How gift tax applies to an irrevocable trust

Florida residents who have established irrevocable trusts for their beneficiaries may be interested in a recent Internal Revenue Service Private Letter Ruling that affects whether contributions to an irrevocable trust are subject to federal gift tax. The ruling, which was released on Feb. 13, concluded that a trustor's contribution is not a completed give and was not subject to federal gift tax.

However, the IRS did determine that principal or income that is distributed to a beneficiary is considered a completed gift. Upon the death of the trustor, the fair market value of the trust's property may be included in the gross estate of the trustor for the purposes of federal estate tax.

In other words, the trustor can make a contribution to an irrevocable trust without paying federal gift tax on the contribution. When the beneficiary receives funds from the trust from the principle or interest income, the federal gift tax may be applied to the funds.

A lawyer with a background in estate planning may answer questions about irrevocable trusts and how federal taxes, including federal gift tax, are applied to the trust. If an individual wishes to establish an estate plan, a lawyer may discuss the various types of documents, including wills and trusts, that might be used and assist the person with selecting the most appropriate devices for his or her needs. Next, a lawyer might help with the process of drafting the proper paperwork to legally establish the estate plan. After the plan is established, the lawyer may retain copies of the documents on the client's behalf.

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