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E. Trusts for minors

E. Trusts for minors under tax code §2503(b) and §2503(c)

These Trusts can serve Crummey Trust purposes in many situations. Gifts to these Trusts – by law – qualify in whole or part for the annual gift tax exclusion. The rules are plainly written in the federal statute books -not in a web of written court opinions. Therefore, there are no Crummey compliance worries. These Trusts are irrevocable, yet permit some control over the timing of wealth transfer to the next generation.

In the §2503(c) Trust, annual income may be accumulated and not paid out, but the Trust must provide that, if necessary, both income and the entire principal can be used for the minor’s benefit. The law states that if the Trust is worded that way, gifts to the Trust will qualify for the $12,000 annual exclusion from gift tax. There is one serious drawback to the §2503(c) Trust: When the beneficiary turns 21, he or she must be given the right to receive all §2503(c) Trust assets in an outright distribution. The beneficiary can, however, elect to allow the Trust to continue.

In the §2503(b) Trust, annual income cannot be accumulated (must be paid to the beneficiary each year), but the Trust principal need not be made available for distribution upon the beneficiary’s 21st birthday. Unlike the §2503(c) Trust, the §2503(b) Trust principal is not required to ever be distributed to the income beneficiary; it can go to somebody else.

Since the beneficiary has no immediate (if any) right to the Trust principal, the beneficiary’s only present interest in the §2503(b) Trust is an income interest, the right to receive annual income payments from Trust investments. Therefore, the amount of each gift that qualifies as a present gift is the present value of the series of income payments that the gift will produce over the years. A financial calculation is necessary.

Both types of §2503 Trusts can be receptacles for annual gifts, including gifts used by the Trustee to pay life insurance premiums. If the insured (or spouse) is the Grantor, Trust income should not be used to pay premiums, or the Grantor will incur income tax liability on the income so used, and might be considered the owner of the policy for estate tax purposes. This is an often overlooked point. So consider using Trust principal or yearly gifts to pay premiums. (Or use another Grantor.)

Potentially significant income tax savings are possible once the irrevocable Trust beneficiary reaches age 14. Trust income is then taxed at the child’s rate, which is presumably lower than the parents’. Before age 14, any investment income below a fairly low level (adjusted annually), will be taxed at the child’s low rate. Beyond that amount, however, §2503 Trust investment income will be taxed at the parents’ (higher) rate. (This is called the “kiddie tax.”)

Property (e. g., a mutual fund account) expected to increase greatly in value over time makes an ideal gift into a §2503 Trust. Decades of price appreciation can be excluded from one’s estate if it occurs after that property is irrevocably placed in Trust. This is terrific – as long as the donor does not decide later that giving away the property was a mistake.

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