Scranton Section 2503(c) Trusts Lawyer
Section 2503(c) trusts are called a Minor’s Trust, which is a separate legal entity that is established in order to hold gifts in trust for someone until they reach the age of 21. The name comes from the Internal Revenue Code that it is based upon. This type of trust is commonly used to donate money toward someone’s college education since you can make gifts to a minor in trust and still meet the annual exclusion for the federal gift tax and the exemption amount for generation-skipping transfer tax (GSTT). Contact our experienced Scranton estate planning lawyers at Haggerty Hinton & Cosgrove LLP for assistance with Section 2503(c) trusts.
Annual Exclusion Amount and Trust Requirements
Annual gifts given to the trust are usually in an amount that is equal to the allowed annual exclusion amount. For 2018, the annual exclusion amount is $15,000 per recipient per year. The trust will qualify for the exemption provided it meets several criteria, including:
- The trust has to allow the trustee to expend assets in the trust for the minor’s benefit with limited restrictions in regard to the trustee’s discretion when making the expenditures. This is usually applicable once the minor is attending college. The trustee can withdraw funds to cover tuition and related expenses, or distribute some directly to the minor.
- Principal and income in the trust has to be transferred to the beneficiary when they turn 21, or they must have the legal right to withdraw the assets from the trust.
- In the event the beneficiary passes away before he or she turns 21, the trustee is required to pay all the trust’s assets to the minor’s estate, or per the terms of the power of appointment.
What Happens when the Minor Turns 21?
Once the child turns 21, any gifts to the trust will no longer qualify for the tax exclusion. One option is to create a hybrid trust which merges into a Crummey trust. This type of hybrid trust acts as a 2503(c) trust until the child turns 21 then is converted to a Crummey trust. This will allow you to continue making gifts to the trust in order to keep qualifying for the gift tax exclusion even after the child is 21.
In situations where the beneficiary opts to keep the money in the trust after they turn 21, he or she is now the owner of the trust as far as taxes are concerned. He or she will need to start paying income tax on the trust’s earnings even if nothing is distributed.
Some creators opt to set various terms and conditions with the trust, like the right for the minor to withdraw assets is only temporary rather than permanent. This means the beneficiary is given a certain amount of time, maybe 30 or 60 days to withdraw some or all of the assets. In the event they don’t, the trust will continue until a later date, maybe their 30thbirthday.
Retaining a Pennsylvania Estate Planning Attorney
If you are considering a 2503(c) trust for your child, it’s important to speak with a knowledgeable Pennsylvania estate planning attorney. To learn more about this and other estate planning tools, let the team at Haggerty Hinton & Cosgrove LLP help. Contact our office at 570-344-9845 to schedule a consultation.