As an alternative to establishing a UTMA or UGMA account for gifting assets to children, there are several types of trusts which can be considered. Two of these trusts are named for the Internal Revenue Code Sections; Section 2503 (b) and 2503 (c) Trusts.
Features of a Section 2503 (b) Trust
This irrevocable trust, also known as an "income only" trust, allows you to make an annual gift of up to $10,000 per minor, ($20,000 can be gifted from married couples), and qualify for the annual federal exclusion from paying gift taxes.
The provisions of this trust state that:
-all income from investments earned by the trust must be paid out annually to the trust beneficiary;
-the trust principal does not need to be paid to the beneficiary or be subject to withdrawal when he reaches age 21;
-income can be distributed to a UGMA/UTMA account without jeopardizing the benefits of the annual exclusion;
-the trust assets must be invested in income-producing vehicles, such as stocks, bonds, and CD's.
Features of a Section 2503 (c) Trust
This irrevocable trust, also allows you to make annual gifts of up to $10,000 per minor, ($20,000 can be gifted from married couples), and qualify for the annual federal exclusion from paying gift taxes.
Among this trust's provisions:
-the trust must be set up to benefit a minor child;
-only one beneficiary is allowed;
-the trustee must have the ability to use the income for the minor's benefit without any restrictions;
-the trust assets must be invested in income-producing vehicles, such as stocks, bonds, and CD's;
-if the child dies before age 21, his assets must be distributed to his estate;
-the assets must be distributed when the minor reaches age 21, unless it provides for a limited withdrawal period on his 21st birthday. After this time period, any amounts which are not withdrawn can still be held in trust.
Because of the ability to withdraw principal at age 21, the 2503 (c) trust is not commonly used.
There is however, a third trust that can provide an alternative to the principal distribution dilemma.
Crummey Power Trust
This irrevocable trust is the more "typical" trust for children, because it accumulates income and makes distributions at the trustee's discretion. Principal distribution is usually made in three installments; typically at ages 25, 30, and 35.
When you give a gift to this trust, you can qualify for the annual federal gift tax exclusion by including a provision known as a "Crummey power". Each year the child is give the right to withdraw funds for a certain period of time, usually 30 to 60 days. After the withdrawal period has passed, the terms of the trust spell out whether there will be any distribution to the beneficiaries.
Go To Page: 1 2
