When funding a trust does the gift tax exemption apply?

Question

I'm researching setting up a bypass trust with my spouse. When I fund the trust, do the funds/property that I put into the trust count against the annual or lifetime gift tax (a.k.a. transfer tax) exemption amounts?

Answer 1

The estate tax laws change almost year to year, so an explanation of bypass trust is probably in order. For this example, assume a $1 million estate exemption. If a couple has $2 million in assets, you'd think they can pass it along with no estate tax. But when the husband dies, and the wife has $2M in assets, on her death, the excess million is subject to estate tax. Enter the bypass trust. On hubby's death, the maximum exemption amount (here, the million) goes into the trust. The wife is permitted limited withdrawal, usually just interest, but the principal is out of her estate. Now, to answer the question, no, the annual limit doesn't apply, but as the trust is not irrevocable, the lifetime limit doesn't come in to play. Often, these trusts are worded so the limit in effect the year you die is the amount that funds the trust. Else, one might need an attorney visit every year.