There are several ways to make gifts to minors. One often-used method is a 2503(c) trust. This type of trust is sanctioned under 2503(c) of the Internal Revenue Code. This provision allows, under certain circumstances, to transfer the annual exclusion amount, currently $15,000, into a trust and not be required to use gift tax exemption or generation-skipping tax exemption.
What the 2503(c) Trust Involves
Often called a Minor’s Trust, it is a very attractive gifting tool as the property transferred into it can remain in trust until the minor beneficiary of the trust attains the age of 21.
The statute sets forth three specific requirements for a trust to qualify as a 2503(c) trust:
- The principal and income must be available for distribution for the benefit of the donee before they attain the age of 21 years
- When the donee attains the age of 21, all of the accumulated income and principal must be distributed to him or her.
- If the donee dies before attaining the age of 21, all of the income and principal must be paid to the donee’s estate or as the donee may appoint under a general power of appointment.
At the age of 21, the beneficiary has the right to demand the principal and undistributed income or can choose to extend the terms of the trust. Under revenue ruling 74-43, a trust continues to qualify under the terms of 2503(c) if it provides that there is either (1) a continuing right to compel immediate distribution of the trust corpus by giving written notice to the trustee or to permit the trust to continue by its own terms, or (2) a right during a limited period to compel immediate distribution of the trust corpus to the beneficiary, which, if not exercised, will permit the trust to continue by its own terms.
Please note that the donee having a termination power in their trust at age 21 means that the donee is treated as the owner of the trust. Also, the general power of appointment afforded to the donee under the terms of a qualified 2503(c) trust means that the trust property is considered part of the donee’s gross estate.
There are substantial transfer tax savings potential with using a 2503(c) trust. Interested in learning more? Contact the experienced attorneys of Morris Law Group.