The Family Bank Vault Trust: Give Gifts to Your Family During Your Lifetime while Protecting the Value of the Gift

(updated May 30, 2012)

New Estate Tax Laws have left many people wondering how they can set aside assets for their families to take advantage of higher exemptions while preserving and protecting the value of those assets. One very effective way to do so can be through a Family Bank-Vault Trust.

First, let's review a couple of pertinent issues regarding the tax laws...

The Good News:

The laws (currently effective until 2013) allow for gifts beyond the annual exclusion (currently $13,000/donee) of up to a lifetime aggregate $5,120,000 without cutting into your exemption.

What this means: if this $5,120,000 is not reduced, many people will be able to make yearly gifts even larger than the annual exclusion for the rest of their lives without incurring a federal gift tax on those gifts, and without reducing the size of their estate tax exemption. Note: Connecticut's gift tax exemption applies only to aggregate Connecticut taxable gifts of $2.0 million NOT $5,120,000. The $13,000 annual exclusion, however, does currently apply in Connecticut as well.

The better news for those of us who may have a more conservative outlook on the future of the Estate and Gift Tax laws:

Regardless of the future status of the $5 million exemption, you can still take advantage of the $13,000 annual exclusion to provide gifts to your loved ones which will reduce the size of your estate for tax purposes.

So What Are The Potential Problems?Larger outright gifts can result in...

  • less protection from creditors and predators and lawsuits
  • a greater potential for misuse of funds (even responsible children don't always make the best decisions regardless of age)
  • loss of value if appreciating property is not maintained properly, or if it is sold right away

So how can you provide a financial benefit to your loved ones regardless of your outlook and still protect both them and the value of the benefit?

Consider discussing a Family Bank-Vault Trust with your Estate Planning Attorney and Financial Advisor:

Key Features:

  • Irrevocable - just like an outright gift, so if structured properly assets in the trust will not be included in your estate for estate tax purposes
  • "Grantor" Trust - asset growth is preserved since income taxes are paid by you instead of the trust (this creates an additional non-taxable gift to the beneficiaries of the trust)
  • Annual Gift Exclusion is Utilized - transfers to the Trust can take advantage of your annual exclusion and may not apply to your lifetime exemption
  • Spouse can serve as Trustee over the nest-egg that accumulates in the trust
  • Control - trustees can have discretion to make distributions to be used for your spouse or another beneficiary's support DURING THEIR LIFETIME
  • Creditor Protection - the Co-trustee relationship and the discretionary distributions provide better creditor protection than outright gifts.

As you can see, the Family Bank-Vault Trust can be a very beneficial tool to preserve the value of gifts to your loved ones. Please note however, that as with any estate planning tool the effectiveness of this strategy will depend on your individual circumstances in the context of all applicable laws. Furthermore, the above information is meant to provide only an overview of the value and some of the important considerations of this type of planning. You should discuss the legal, tax and practical implications of this strategy in the context of your situation with a competent professional before moving forward.

If you would like to discuss with us how this strategy might work in your estate plan, click here to set up a consultation.