It always feels good to give to those you love. But gifting large amounts may raise some unintended tax consequences. Luckily, there are many ways you can minimize the hit or avoid it all together. One way is by establishing a trust. This is a legal entity that holds assets for the benefit of others.
There are several types of trusts out there, each with different benefits. But before we explore these options, it’s best to understand the basic tax implications of gifting.
Gift and Estate Tax Exclusion
For 2025, you can give up to $19,000 in assets like cash or stocks to any individual or entity without triggering any tax implications. A married couple can double that to $38,000. So, for example, a married couple can give up to $38,000 each to their daughter and grandson without getting the attention of the Internal Revenue Service. This is what’s known as the annual gift tax exclusion.
But any amount that goes over that limit will begin to be subtracted from your lifetime gift and estate tax exemption. That is $13.99 million per person in 2025 or $27.98 million for married couples. After breaching those levels, you may face taxes.
However, many trusts effectively pull assets out of your estate, thereby reducing it. So let’s take a look at some key gifting trusts.
Irrevocable Living Trust
An irrevocable living trust permanently removes assets and any appreciation from a wealthy individual’s estate, thereby shrinking it. And you can transfer a wide variety of assets to the trust including cash, investments, and physical property like real estate. You decide who gets what and under what terms. For example, you may decide that a certain amount of money gets transferred to your child after they reach a certain age or after they reach a certain milestone like graduating college. Moreover, you get to choose a trustee to manage the trust and distribute assets at the appropriate time.
But as grantor or trust creator, you lose ownership of the assets you transfer to the trust. Still, it can be an effective estate planning and generational wealth transferring tool.
Crummey Trust
Irrevocable trusts can be solid ways to reduce a large estate, while providing future benefits to your loved ones. But the keyword here is “future.” Transfers to irrevocable living trusts are considered gifts to the trust. And because these gifts are considered future interests (e.g., money you’ll pass down to your daughter after she graduates college), they don’t qualify for the annual exclusion. This means it reduces your lifetime gift and estate tax exemption.
So if you transfer $2 million to an irrevocable trust, $2 million is reduced from your $13.99 million lifetime exemption.
But you can place a Crummey provision to your irrevocable trust. Crummey powers give beneficiaries a time frame (typically 30–60 days) to follow through on the legal right to withdraw assets (typically up to the annual exclusion limit of $15,000 for 2025).
Beneficiaries need to be notified of this right via a Crummey Notice or Crummey Letter. This gives the beneficiary a present interest in the gift and so it qualifies for the annual gift tax exclusion amount, even if the person doesn’t withdraw the funds. As a result, the transfer doesn’t impact your lifetime gift and estate tax exemption.
Grantor Retained Annuity Trust
For wealthy families with assets like shares of a family business or pre-initial public offering stocks which they expect to appreciate significantly in value, a grantor retained annuity trust (GRAT) can be an effective estate-planning tool.
A GRAT is a type of irrevocable trust that provides the grantor with annual annuity payments for a certain time frame. And appreciation of the trust assets is passed onto heirs free of gift or estate taxes.
So how does a GRAT work?
A grantor transfers assets to the GRAT. But they have the right to retain the initial value of assets transferred over the life of the GRAT along with interest called the 7520 rate defined by the IRS at any given time. When the GRAT’s term expires, what’s left is transferred to beneficiaries. This is basically asset appreciation minus the IRS assumed return rate.
A GRAT is successful when assets in the trust grow by more than the IRS rate in place when the trust was funded.
Here’s an example: Say you funded a 10-year GRAT with $15 million (above the lifetime exception) in company stock. Assume the current Section 7520 rate is 3 percent. And each year, you receive an annuity payment of 10 percent of the original amount contributed to the trust plus the 3 percent IRS rate. This means you get $1.75 million in cash or shares from the trust each year. Let’s assume you keep the shares in the trust and allow them to keep potentially appreciating.
So the IRS expects the initial $15 million to grow to $17.5 million over 10 years. But let’s say it actually grows to $217.5 million. The difference of $200 million which remains in the trust is passed onto your beneficiaries gift tax free.
But one important note is that you must outlive the trust term for it to be effective. If you pass away before that term ends, most or all of the assets in the trust and any appreciation would remain in your estate for estate tax purposes.
The Bottom Line
Trusts can be effective ways to pass on assets to your loved ones and leave behind a legacy. Each one has distinct benefits and risks. So they’re not one size fits all. In fact, they are highly complex. So if one piques your interest, you should consult a qualified estate planning attorney for guidance.
The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
