By: Martin M. Shenkman, CPA, MBA, JD
Combine charitable planning with planning for your grandchildren to avoid the harsh impact of the GST tax, while providing for educational and medical expenses for your descendants. If you intended to make charitable gifts anyhow, there is no real incremental cost to this planning. You would be leveraging your charitable gift to help avoid tax on transfers to benefit your grandkids. Assume you have a large taxable estate and want to pass wealth on to grandkids, and in particular, provide for the medical care of a grandchild struggling with multiple sclerosis, while benefiting the National Multiple Sclerosis Society (NMSS) under your will. If you combine charitable and GST planning techniques together, then you can accomplish both of your goals better, without allocating GST exemption. Direct payments of tuition or medical expenses are not subject to gift tax (IRC 2503(e)) and are not treated as taxable distribution from a trust for GST purposes (IRC 2611(b)). If these are the only distributions you make from the trust, then there are no taxable distributions. You cannot just set up a trust to fund education and medical costs of your grandkids, because that trust would be characterized as a “skip persons” for GST tax purposes, and a GST tax may be triggered when you transfer assets to the trust initially (fund). This transfer would be a direct skip for GST purposes. Instead, give an interest in the trust to your favorite charity (which is a non-skip person that will never die). Thus, there is no GST tax on funding the trust. Name a specified charity (do not leave it open for the trustee to name a charity). After your death, 25% of trust income will be distributed to your favorite charitable, say the NMSS. Your trustee has the discretion to pay medical and tuition expenses for your descendants forever.
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