Gifts to minors which qualify as present interest gifts

Gifts in trust to minors until age 21 (Also, see continuation provisions)

IRC Section 2503(c) Trusts for Minors

IRC Section 2503(c) allows you to make a present interest gift for the benefit of a minor to a trust with the following characteristics:

1. The Trustee must have broad discretion to distribute any property from the trust to or for the benefit of the minor prior to age 21 (for example, “for support, care, education, comfort and welfare”)

2. The minor must have the right to receive the property outright at age 21

3. In the event of the minor’s death prior to age 21, the property must either pass to his/her estate or be subject to a general power of appointment in the minor’s Will.

The Trust may either contain continuation provisions allowing the extension of the term of the Trust by the minor at age 21 or require the minor to take an affirmative action to terminate the Trust at age 21. In the latter instance, if the minor does not act, the Trust can specify a later termination. For example, one third of the Trust assets could be distributed at age 25, another one third at age 30 and the balance at age 35.

Accordingly, this type of trust provides some additional flexibility by permitting, at the beneficiary’s one time election, continuing beyond age 21. For those that this is not iron clad enough, Crummey Trusts are the next level of incremental control.

IRC Section 2503(b) Trusts for Minors

IRC Section 2503(b) allows you to make a present interest gift for the benefit of a minor to a trust with the following characteristics:

1. The Trustee must distribute income currently to the beneficiary and may distribute principal in discretion while the beneficiary is still a minor but only to the income beneficiary

2. The Trust is not required to terminate at the beneficiary’s attaining age 21 or even required to pay principal to the income beneficiary at all

3. Property in the trust must be income producing for the income beneficiary’s interest to be ascertainable and therefore, qualify for the gift tax annual exclusion. Also the Trustee’s discretion to allocate receipts and expenditures must be narrowly drafted to avoid the appearance that the Trustee could skew income so that the amount would be unascertainable.

Gift Tax Consequences

The gift is eligible for the gift tax annual exclusion (currently $10k) on the income interest amount but not the remainder amount.

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