Ask a Lawyer : Chapter 22 - Tax Planning

Minors’ Trusts

Q. Can you provide a brief rundown of trusts that we can use to benefit our children and save on taxes?

A. Some people find it appropriate to establish lifetime minors’ trusts for their children and other loved ones. One form of trust is the 2503(c) trust. This trust is designed to qualify for the annual gift tax exclusion under the rules of Internal Revenue Code Section 2503(c). With such trusts, parents can gradually transfer part of their estate to their children during their lifetimes in a fashion that will reduce potential estate taxes at little or no gift tax cost. These trusts allow parents to keep assets out of a child’s control until age 21, and even longer of the child so agrees.

Section 2503(b) trusts allow parents to control assets until the child has attained adulthood and then some. This trust is required to pay out its income every year. Such income may be paid to a custodial account or directly to the child.

Crummey trusts are another commonly used method of gifting assets to children and other minors. These trust allow multiple beneficiaries and permit “control” of assets well beyond age 21 under the terms of the trust. There are certain procedures that must be followed with these trusts, but they are not burdensome.

Section 529 Plans are anoption that parents and other loved ones have to gift to children. These plans are designed to fund education and have many tax benefits. UTMA and UGMA accounts can be converted to restricted 529 Plan accounts

Answer by Lena Barnett, Attorney at Law, Silver Spring , Maryland