Using trusts to shift income to children.

AuthorYoung, Patrick L.

Shifting assets and the related income to minors on a regular and recurring basis can be an effective income and estate planning technique. Despite the tax benefits of transferring property to children, parents may be reluctant to give up control of a substantial amount of assets. Thus, parents normally do not make sizable outright gifts to their minor children because they do not want them to have unrestricted access to the property. Instead, both transfers in trust and custodial accounts are commonly used to accomplish the property transfer (and related income shifting), while allowing the parents to maintain control of the property (at least until the child reaches majority).

Using a Sec. 2503(c) trust

The Sec. 2503(c) trust (or minor's trust) should be considered as a possible tool in education planning. However, the practitioner should be aware that the compressed trust income tax rate structure (graduated rates beginning with a 10% rate on the first $2,600 of taxable income and increasing to a maximum rate of 37% on taxable income over $12,750 (for 2019)) not only curtails the overall tax savings but essentially penalizes trusts that accumulate income. As income accumulation is one of the features of a Sec. 2503(c) trust, the usefulness of the trust has been diminished. However, a transfer to a Sec. 2503(c) trust ensures that the child will not have access to trust assets until he or she is at least age 21.

A Sec. 2503(c) trust is a trust that complies with the requirements of Sec. 2503(c), which grants an exception to the general rule that only gifts of a present interest qualify for the annual $15,000 gift tax exclusion (for 2019) ($30,000 if gift-splitting is elected). Generally, a trust qualifies if (1) the trustee has the power to expend the trust property and income for the child's benefit until the child attains age 21; (2) the child must receive the trust properly at age 21; and (3) the trust property must go to the child's estate (or as the child appoints in a testamentary power) in the event of the child's death before age 21.

The Sec. 2503(c) trust is diagrammed as shown in "Sec. 2503(c) Minor's Trust."

Caution: The courts, regulations, and revenue rulings have interpreted and amplified the statutory requirements of a Sec. 2503(c) trust. For example, to qualify for the annual gift tax exclusion, the trustee's powers must not be substantially restricted (Regs. Sec. 25.2503-4(b) (l)).Thus, the trustee must be given broad...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT