If you are making gifts to minor children or grandchildren, it might be advisable to set up a trust to hold the money. However, the $12,000 annual gift tax exclusion applies to gifts of present interests, not future interests. Thus, if you give $12,000 to a trust for your 3-year-old grandson, with instructions that the trustee hold the money until your grandson turns 35, such a transfer won’t qualify for the gift tax exclusion. You’ll have to file a gift tax return and gift tax might be due.
Fortunately, there is way for a gift in trust to qualify for the annual exclusion:
1. Give money to the trust, up to $12,000 per beneficiary. If the trust is set up for your two grandchildren, for example, you can transfer up to $24,000 to the trust this year.
2. Once the gifts are made, have the trustee send out notices to each beneficiary. These notices can inform the beneficiaries of the gifts and give them, say, 30 days to take out their $12,000. This opportunity converts a future interest to a present interest, the transfer qualifies for the gift tax exclusion, and no gift tax return need be filed.
