Trust Distributions Before January 1 Might be Wise

As the end of the year draws closer, trustees and beneficiaries are scrambling to review trusts and arrange plans to distribute before January 1. Now is an opportunistic time to transfer money down generations and avoid a 55% GST tax. Taxpayers could save up to $550,000 on a $1 million payout from a non-exempt GST trust made on December 31 rather than January 1. However, this opportunity isn’t risk free due to the possibility of Congress enacting tax legislation retroactively. Beneficiaries who receive payouts should reserve sufficient funds to cover the GST taxes should they be required to do so.

There are some situations in which distributions cannot be made, or in which it would not be wise to do so. If the trustee doesn’t have broad discretion to make distributions, or if the grandchildren are minors, the trustee may not be able to make distributions. If the parents cannot afford for the money to go to the grandchildren, or if a beneficiary is in need of creditor protection, it may be better to leave the money in trust.

Julie Kwon, an estate planner in California, has a case that is an ideal situation for this technique of avoiding the GST tax. “[S]he is helping a family work with a corporate trustee to distribute out a $12 million summer vacation property to four adult grandchildren. The middle generation beneficiary, the now 80-year-old ‘child’ whose parents set up the trust, is happy to see the property being handed down before his death. By getting the property out of the trust this year, the grandchildren are avoiding a huge tax that otherwise may have forced them to sacrifice the property to pay it, Kwon says. She has warned the family of the risk of retroactive taxation which would mean that they would have to find the money pay the GST tax in 2011. But they are willing to take the risk since they already know a GST tax will apply at the 80-year-old’s death.”

Ashlea Ebeling, Payday for Trust Babies, Forbes, Dec. 2, 2010.