Can you fund an irrevocable trust with an inheritance, after estate tax paid, w/out incurring gift/other tax?

Question

Here's the situation...

Father of two children (me and another) will be getting an inheritance. I am not concerned with the actual inheritance tax with this question.

We would like to set up two irrevocable trusts for myself and my brother with the money. We would like to put the money in one irrevocable trust with brother 1 as the trustee and brother 2 as the beneficiary, and one irrevocable trust with brother 2 as the trustee and brother 1 as the beneficiary. We would also have the father having a limited right to both trusts for living and medical expenses as needed- by submitting a request to one of the brothers as trustee for one of the trusts. Obviously father wouldn't have ability to autonomously withdraw money, as a purpose of this setup is to preclude estate/gift taxes when father dies or becomes incompetent.

Can an inheritance whose estate tax has been paid be used to fund an irrevocable trust(s) in this manner without additional, other than the estate tax, tax penalty (concerned about gift tax)?

Could the inheritance be paid to the father and then put into an irrevocable trust immediately? I presume this would incur gift tax?

Other intriguing option, if the inheritance was issued as two checks made payable to the irrevocable trust, could the money, after paying estate taxes, be placed into the irrevocable trust(s) without additional tax penalty? The theory is that nobody takes possession of the money other than the trust, so there is no gift tax- as it came directly from the already-taxed estate.

Can anyone advise on this matter?

The object is to provide for the two children but keeping the money safe from potential judgments, creditors, and divorces.

Does having each brother be a trustee for a separate trust with the sole beneficiary as the other brother successfully accomplish this?

I'm most concerned with the initial funding though- can you simply take post-estate-tax inheritance and put it directly into the trust from the estate's check without incurring gift tax? Could the father cash the check and fund the trusts with it without incurring gift tax (I'm guessing not)?

Answer 1

There is no tax on inheritances. After you inherit, the money and property in your hands is your own money or property. So it will be treated in the same way as your own earned income and property.

read: http://taxipay.blogspot.com/2008/02/tax-...    

Answer 2

If I understand your question, you are expecting an inheritance.  Any estate tax due on this inheritance will have been paid before you receive the funds.  What you do with the funds then has no effect on the tax.  Setting up a trust is another matter, and the attorney that assists you with that can advise you on any tax consequences of the various trust plans.  This would be separate from the estate tax on the inheritance which will have already been paid.

Answer 3

Hire an attorney with specialization in this area to advise you.  There is too much involved to do anything else.

Answer 4

Your father needs to see an Estate Planning attorney. However you must realize that the money you are talking about is not yours. And you really have no say over what your father does with his money. If your father is not incompetent, he can set up his trust, revocable or irrevocable, in any way he chooses.  The trust income can pay his expenses while passing the principle (or residue if it becomes necessary to use principal to pay for his care) after he passes.  If your father is incompetent, then you need to have a conservator named so that his money is safe and to pay for his care.  Whether a trust could then be set up by the conservator depends on the laws in your locality.  People who fund( put money into) an irrevocable trust don't pay gift tax since the money hasn't really been given yet.  Inheritance taxes don't come into play until the person making the trust dies.

Basically, Dad needs to see an Estate Planning Attorney.

Answer 5

So, your dad is getting an inheritance and you want him to fund 2 irrevocable trusts with the money he gets, keep a life estate, but make the beneficiaries you and your brother and you are hoping that such a scenario won't cause your dad to incur gift taxes?

Dream on.