The Latin word inter vivos means “between the living” or “from one living person to another.” An inter vivos gift is a freely given gift from the owner of the property to another without charge to the receiver, with the intent that the gift will not return to the giver, and with the intention on the receiver’s part to keep the gift without reclaiming it. In this article, we will examine what an inter vivos trust is, and how an inter vivos gift policy works.
What is Inter Vivos Trust?
An Inter Vivos Trust is one created by a living person for the benefit of another person. Also known as a living trust, this trust has a duration that is determined at the trust’s creation and can entail the distribution of assets to the beneficiary during or after the trustor’s lifetime. A parent who sets up an education fund for a child’s college education is an example of an Inter Vivos Trust.
The opposite of an Inter Vivos Trust is a testamentary trust, which goes into effect upon the death of the trustor.
How an Inter-Vivos Trust Works
Typically, a trust is established to hold assets for the benefit of the trust beneficiaries. A trustee is usually in charge of managing those assets and ensuring that the trust agreement is implemented, which includes ensuring that the assets are paid to the stated beneficiaries.
An inter-vivos trust, on the other hand, is a living trust because it allows the owner or trustor to utilize the assets and reap the benefits of the trust during his or her lifetime. When the trustor dies, the assets are dispersed to the beneficiaries by the trustee. The trustor, or trustors in the case of a married couple, can serve as trustee while they are still alive, administering the assets until they are no longer able to do so, at which point a named backup trustee takes over. A living trust might fall into one of two categories: revocable or irrevocable trusts.
Inter-Vivos Trust Advantages
An inter-vivos trust is a useful estate-planning tool since it avoids probate, which is the court-supervised process of dispersing a deceased person’s assets. The probate process can be time-consuming and expensive, and it exposes a family’s private financial concerns by making them public. A properly created trust aids in the timely and secret distribution of assets to their designated recipients. As a result, the assets are distributed to the surviving family members in a seamless manner, with no interruption in their use.
The trustor can also be the trustee in a living revocable trust, which implies the assets are under the owner’s control. However, because the assets are in the trustor’s name, estate taxes may apply if the assets’ value exceeds the estate-tax exemption when the trustor dies.
If the trustor creates a living irrevocable trust, the value of the estate is effectively reduced (because all rights to the assets have been renounced), and so the estate’s taxes are reduced.
A living trust is usually established as a revocable trust, but following the trustor’s death, it becomes an irreversible trust.
Setting up an Inter-Vivos Trust
The grantor names the trust parties, who include the grantors, usually the spouse; the beneficiaries; and the trustee, when forming a trust. The spouses are sometimes named as trustees. In the event that both spouses die, a contingent trustee should be chosen.
A trust can possess almost any type of asset. Real estate, investments, and company interests can all be re-titled into the trust’s name. Some assets, such as life insurance and retirement plans, are not need to be listed since they pass to a designated beneficiary.
A trust might include instructions for the trustee to control the timing of distribution and management of the assets while they are still held by the trust, in addition to assigning assets to specific beneficiaries.
To carry out the trust, you’ll need a will. A trust effectively becomes the primary beneficiary of a will. A will also serves as a “catch-all” mechanism, determining the distribution of assets that may have been left out of the trust. It is also through the will that guardianship for minor children is established.
What Is Inter Vivos Gift?
A gift inter vivos, which is Latin for “gift between the living,” is a legal term for a transfer or gift made during the grantor’s lifetime. Because they are not part of the donor’s estate at death, inter vivos gifts, which include property related to an estate, are not subject to probate taxes. A transfer made during the grantor’s lifetime is known as an inter vivos transfer.
If you give more than $15,000 per year to someone who isn’t your spouse or a qualified charity, you’ll have to pay gift taxes. At the time of the transfer, the actual value of the gifted property is determined. The person who receives the gift does not have to report it to the IRS or pay income tax on it, but if it exceeds the $15,000 threshold, the giver must pay gift taxes.
Inter Vivos Gift Explained
A gift inter vivos is a useful estate planning strategy for several reasons. In addition to avoiding probate taxes, if given as a donation to a charitable foundation, the person making the gift can use the value amount as a tax credit on their tax return.
Also, many people give inter vivos gifts simply because they want to oversee the gift during their lifetime, unlike gifts that are bequeathed through a will or a trust. Many people are interested in having the freedom to share the property as they see fit. There are also minimal reporting requirements, allowing the grantor’s property and dealings to remain private.
Making an Inter Vivos Gift
When making a gift, the donor must have legal capacity and be at least 18 years old. The intention to make a gift should be confirmed in writing, and the title or right of ownership must be transferred in a present and irreversible manner. It is impossible for a donor to intend for his gift to be transferred after his death. When the gift involves the transfer of property or something that is practically impractical to give, delivery should be immediate, either literally or symbolically.
Following the gift, the gift relinquishes all rights to the property and is unable to reclaim it without the agreement of the party who received the gift. Any attempt to gain control of the transferred property or draw a benefit from it may violate the gift’s tax-exempt status, placing the transfer’s legal standing in jeopardy and rendering it taxable.
The gift must also be accepted by the recipient. The law presumes that the recipient will accept the gift if it is of true value. To avoid any misunderstanding and to legally conclude the transaction, it is usual for the individual receiving the gift to declare their acceptance in writing.
Example of An Inter Vivos Gift
Emilia wishes for her kid, Jake, to grow up in her family’s home. Jake is recently married and is expecting a child. On the other hand, Emilia is considering relocating to her second house in Florida to avoid the harsh winters. Emilia has recently retired and is in good health. She knows Jake could use the property, or the proceeds from its sale, to help support his growing family. So, rather than make Jake wait until she dies to inherit her property, she makes Jake an inter vivos gift of the home, after which he has full ownership and can do with it as he pleases. Since Julia will no longer own the home at the time of her death, it will not pass through probate. And it will not be subject to estate tax.
Inter Vivos Gift Policy
In the financial world a gift inter vivos policy relates to an insurance policy used to cover the inheritance tax liability that can arise when your client makes a gift to another person whilst they are alive and, absent of any other exemption, potentially liable to inheritance tax for the next 7 years.
Everyone has a personal inheritance tax allowance, known as the nil rate band. This is the amount of their estate that is completely exempt from any liability to inheritance tax. And it is currently £325,000. However, some people will have a higher allowance depending on their circumstances. Whatever assets you pass on above the nil rate band are currently taxed at the inheritance tax rate of 40%. Fortunately, in addition to the nil-rate band, there are special rules relating to these lifetime gifts. These rules help to limit or reduce liability.
Gifts made to anyone from your client’s estate are exempt from inheritance tax. This is provided that they survive for a period of 7 years after the date that the gift is made. These lifetime gifts are known as potentially exempt transfers (also known as PETs) and are not restricted in value. If your client dies within this 7-year period, there is still the possibility of inheritance tax liability. This decreases over time in some cases. Taper relief is the term for this reduction in liability. In years one through three, your client is fully liable for 40%. However, this drops to 32% in year four, 24% in five, 16% in year six, and 8% in year seven.
Setting Up an Inter Vivos Gift Policy
Setting up life assurance policies to cover the reduced liability is the most common way to protect the beneficiaries of these gifts from the potential tax liability. ‘Gift inter vivos’ policies are what they’re called. As taper relief takes effect, this insurance has a fixed 7-year term. This is in addition to coverage decreasing in steps to reflect the reduced liability. Despite the fact that the coverage decreases, the premium is usually set for the entire 7-year period.
However, before establishing a gift inter vivos policy, it is necessary to determine whether taper relief will be applicable. When your clients make lifetime gifts, they are first applied to their nil rate band. This means that any gift, or subsequent gifts, will effectively diminish your client’s nil rate band for the 7-year term. Thus, increasing the obligation on the residual estate during that time. The taper reduction is also applied to the tax rate, not the gift value. As a result, if a gift falls inside the nil rate zone, the tax rate is zero. And thus, taper relief is ineffective.
Example
Assume your customer has decided to make a £450,000 gift. They have made no other lifetime gifts in the last seven years and have taken advantage of the £3,000 annual exemption. Taper relief will only apply to the rate of tax payable on this amount, not the entire gift. This is because the value of this gift exceeds their zero rate band by £125,000. As a result, a gift inter vivos policy for the tax liability on this amount is a viable option. In this case, a policy with a starting limit of £50,000 and a reduction of £10,000 each year beyond year three would be recommended.
Special Consideration
In addition to establishing the gift inter vivos policy, you should examine the remaining burden on your client’s estate. Because the nil rate band has been used up, the beneficiaries of the remaining estate have a higher liability. This is until the gift goes outside of the estate and the whole nil rate band becomes available again after seven years. Unless the balance of their estate is exempt from inheritance tax, your client should consider covering this debt with a level term guarantee. The amount of insurance necessary is £130,000, which is equal to the 40% tax liability on the zero rate band. The policy period should also be set at seven years.
Similarly, where donations are made that are below the nil rate range, the liability that remains should be considered. For example, if your client has decided to make a £250,000 gift. They have made no other lifetime gifts in the previous seven years. Taper relief will not apply because the amount of this gift does not reach their zero-rate range. A gift inter vivos policy is not an appropriate answer in this circumstance. Instead, they could consider covering the additional liability on their residual estate with a 7-year level term assurance policy for £100,000. This is equal to the 40% tax liability on the portion of the nil rate band that was used.
In Conclusion
In contrast to a testamentary trust, an inter vivos trust is created during the trustor’s lifetime. While the trustor is still living, this trust allows trustee access to the property.
Inter Vivos FAQs
What is the difference between a testamentary trust and an inter vivos trust?
An inter vivos trust is a trust created while an individual is still alive. A testamentary trust is that established upon the death of the individual.
What assets cannot be placed in a trust?
- Real estate.
- Financial accounts.
- Retirement accounts.
- Medical savings accounts.
- Life insurance.
- Questionable assets.
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- PROPERTY PROTECTION TRUST: Detailed Guide to the Cost & Processes
- HOW TO SET UP A TRUST: Cost of Trust for a Child in the UK.
- DISCRETIONARY TRUST WILL: Definition And How It Works
