Gifting to an offshore trust can be a complex matter with significant tax implications. Both the Biden and Trump administrations have had their respective impacts on tax regulations related to gifting and estate planning. Let’s explore the tax implications of gifting to an offshore trust under these administrations.
Under current tax laws, when you give assets to someone, whether it’s cash, stocks, or other assets, the government may require you to report the gift and potentially pay taxes on it. However, a large portion of your gifts or estate is excluded from taxation, and there are several ways to give assets tax-free. These include:
- Using the annual gift tax exclusion: Currently, you can give up to $17,000 to any number of people in a single year without incurring a taxable gift. This exclusion amount is adjusted annually for inflation. Spouses can “split” gifts, allowing for a combined exclusion of $34,000. Recipients typically owe no taxes on these gifts, and they don’t have to report them unless the gifts come from a foreign source.
- Using the lifetime gift and estate tax exemption: The gift and estate tax exemption has seen significant changes under the Tax Cuts and Jobs Act (TCJA) implemented during the Trump administration. The current exemption levels for the gift and estate tax are substantially higher compared to previous years. As of 2023, the exemption amount is $12.92 million per individual, or $25.84 million for a couple. This means that any gifts or estate transfers below these amounts are not subject to gift or estate taxes.
It’s important to note that the $12.92 million exemption applies to both gift and estate taxes combined. Any portion of the exemption used for gifting reduces the amount available for the estate tax. The exemption is temporary and is set to expire on December 31, 2025. Unless Congress makes these changes permanent, the exemption will revert to $5.49 million (adjusted for inflation) on 1 January 2026.
To take advantage of the higher exemption, individuals can consider gifting assets to their loved ones during their lifetime rather than waiting until after their death. By making gifts sooner, the assets can grow in value in the hands of the recipients, potentially reducing the taxable estate.
When gifting substantial assets, it’s essential to ensure that the recipients are prepared to handle the responsibility of managing the gifted assets. For instance, if the recipient is a young child or teenager, establishing an irrevocable trust can be a way to protect the assets from misuse. The trust allows the donor or settlor to set rules and guidelines for how the assets will be managed and distributed.
If you are looking to establish or gift assets to an offshore trust to take advantage of the lifetime exemption, contact us now.