How Much Money Can You Put in a Trust?

A trust is a legal arrangement allowing a third party, known as a trustee, to hold assets on behalf of a beneficiary or beneficiaries. This arrangement serves various purposes, including wealth management, asset protection, and charitable giving. Trusts are commonly used as an estate planning tool, providing a structured way to manage and distribute assets according to specific wishes. Many people wonder about the limits on how much money can be placed into a trust and the financial implications of such transfers.

General Principles of Trust Funding

There is no inherent legal limit to the amount of assets that can be placed into a trust. Individuals can transfer a wide range of assets, including cash, real estate, stocks, bonds, and business interests, into a trust. Practical considerations, particularly those related to taxation, dictate how much is funded.

The tax treatment of assets within a trust depends on whether the trust is revocable or irrevocable. Assets placed in a revocable trust generally remain part of the grantor’s taxable estate. In contrast, assets transferred to a properly structured irrevocable trust are removed from the grantor’s taxable estate. This distinction is key to understanding the tax implications.

Gift Tax Implications of Funding

Transferring assets to an irrevocable trust is considered a taxable gift with tax consequences. The Internal Revenue Code provides rules for these transfers. The annual gift tax exclusion under Section 2503(b) allows an individual to gift a certain amount each year to any number of recipients without incurring gift tax or using their lifetime exemption. For 2024, this amount is $18,000 per recipient, increasing to $19,000 per recipient for 2025. A married couple can double this amount through gift-splitting, allowing them to transfer up to $38,000 per recipient in 2025.

To qualify for the annual exclusion, gifts must be of a “present interest,” meaning the recipient has an immediate right to the gifted property. Gifts to trusts are often “future interests” because beneficiaries may not have immediate access, which means they might not qualify for the annual exclusion. To address this, trusts sometimes incorporate “Crummey powers,” granting beneficiaries a temporary right to withdraw gifted funds. This withdrawal right converts the future interest into a present interest, allowing the gift to qualify for the annual exclusion.

If gifts to a trust exceed the annual exclusion, the donor must file IRS Form 709, the United States Gift Tax Return. Filing this form does not mean a gift tax is owed immediately, but it tracks the use of the donor’s lifetime exemption. The lifetime exemption, under Section 2505(a), is a unified credit that applies to gifts made during life and transfers at death. For 2024, this exemption is $13.61 million per individual, rising to $13.99 million for 2025. Any taxable gifts exceeding the annual exclusion reduce this lifetime exemption.

Estate Tax Considerations for Funded Trusts

Funding a trust can impact the grantor’s estate tax liability. Assets properly transferred to an irrevocable trust can be removed from the grantor’s taxable estate, reducing the amount subject to federal estate tax. This contrasts with assets in a revocable trust, which remain part of the grantor’s taxable estate.

Rules prevent individuals from transferring assets out of their estate shortly before death to avoid estate taxes. Section 2035 requires inclusion of gifts made within three years of death back into the gross estate if the property would have been included under Section 2036 (transfers with retained life estate). Any gift tax paid on gifts made within this three-year period is also added back to the gross estate.

Section 2036 stipulates that if a grantor transfers property into a trust but retains certain rights, such as possession or enjoyment of the property, or the right to income or to designate who enjoys it, the value may be included in their gross estate. This inclusion occurs if the retained right existed for their life, for a period not ascertainable without reference to their death, or for a period that did not in fact end before their death. The estate tax exemption, governed by Section 2010, is the same as the lifetime gift tax exemption. The $13.99 million exemption for 2025 applies to the total value of assets transferred during life and at death before estate tax is imposed.

Generation-Skipping Transfer Tax Considerations

Transfers to trusts may trigger the Generation-Skipping Transfer (GST) tax. This tax, outlined in Section 2601, is imposed on transfers to “skip persons,” beneficiaries at least two generations younger than the grantor. The GST tax aims to prevent multi-generational transfers that bypass estate taxes at each generational level. It applies to direct skips, taxable distributions, and taxable terminations.

Each individual has a GST tax exemption, which can be allocated to transfers made during their lifetime or at death. This exemption is tied to the basic exclusion amount under Section 2010, meaning it is also $13.99 million per individual for 2025. Allocating this exemption to assets transferred into a trust that benefits skip persons can reduce or eliminate the GST tax on those transfers. The allocation of the GST exemption is a strategic decision that can impact the long-term tax efficiency of a trust, especially for those designed to benefit multiple generations.