Most people with substantial assets are interested in benefiting those around them. The fruits of success are best when shared with those close to you.
Each person can give up to $12,000 per year to any other person without any gift taxation. It’s important to note that you can give $12,000 to each and every person you wish. With most friends and relatives, this is not much of a problem. However, gifting to minor children presents unique issues. Minors do not have the legal capacity to receive gifts. Perhaps more importantly, minors do not have the maturity to handle the money.
Let’s look at two common ways to give money for the benefit of minors:
- A Section 2503(c) trust
- A Crummey trust
With a “Section 2503(c) trust” (named after the part of the Internal Revenue Code allowing it), you make a gift to the trust for the benefit of the child. The trust has terms you specify, but it must be able to be used for the child’s needs while they are a minor. The child decides where any unused funds eventually go. Once the child reaches age 21, they must have the opportunity to withdraw the funds. Even if the child dies before reaching age 21, the funds must go to the child’s estate or as the child directs. The funds in the trust may only be used for the benefit of that particular child. So, each child needs a trust that is administered separately.
A “Crummey trust” (named after a legal case pioneering the method) is another strategy for gifting assets into a trust that takes advantage of the $12,000 annual gift tax exclusion. Unlike the Section 2503(c) trust, this trust can hold the assets long after the child has reached age 21. In fact, this trust can continue for the life of the child. This makes the trust a good choice for those who are concerned about the immaturity of 21-year olds. The downside to a Crummey trust is that the minor, or his or her guardian, must have the right to withdraw the funds when contributed. While this may seem like a significant downside, the withdrawal right may be limited to exercise in a thirty-day period. After that period, the withdrawal power can lapse. Further, if the power is exercised, you do not have to make another contribution in subsequent years. Another advantage to the Crummey trust is that you can use one trust for multiple beneficiaries. This can make the Crummey trust much less complicated. Further, it allows you to “pool” money for the use of whomever needs it. For example, if you put $12,000 in Section 2503(c) trusts for five beneficiaries, the trustees of each beneficiary’s trust may only expend up to $12,000 for that beneficiary’s welfare. If you used one Crummey trust for all five beneficiaries, you could gift 5 x $12,000 = $60,000. If the trustee concluded that one beneficiary needed the entire $60,000, it could be expended for that one beneficiary.
Clearly, gifting in trust for minors is a powerful, flexible way to get assets to minors and other beneficiaries. A qualified estate planning attorney can help you decide what kind of trust makes sense in your situation.