A “minor’s trust” is a trust that leaves property to a young person, but in the care of a trustee, until the young person reaches a designated age—often age 18, 21, or 25. This type of trust is often created through a will and called a “testamentary trust” because it takes effect on the death of the will maker. A “2053(c) trust” is a type of minor’s trust that aims to avoid gift taxes. But to get the tax benefit, a 2053(c) trust must end—and the young person must receive all trust property—at age 21.
How a Minor's Trust Works
Trusts for minors are usually set up by parents or relatives who want to leave property to a young person, but also want to name a trusted adult to care for the property until the child is old enough to be financially responsible. This kind of trust can be set up within a will or living trust. In the document, you leave the property to the young person, but you also include a provision that says if that person is still a minor when you die, that you leave the property to a trustee who must care for the property until the child reaches an age you state.
The end-date for the trust can be any age you want, however it is not wise to have child’s trusts last too long. Age 18 is a minimum, because children younger than age 18 can’t legally control their own property. A maximum is probably early- to mid-30’s. By then, a person may be as mature as they are going to get. If you want to create a permanent or indefinite trust for a beneficiary of your will or living trust, this is a red flag that you don’t want the beneficiary to ever have the property outright and you might consider making a special needs trust or a spendthrift trust instead. See a lawyer for help with this.
When the maker of the will or trust dies, the minor’s trust is created according to the terms of the document. The trustee receives the property and cares for it until the young person reaches the age stated by the trust. When that time comes, the trustee will transfer property from the minor’s trust to the beneficiary outright—including any income the trust has produced.
A 2053(c) trust is a minor’s trust that aims to avoid gift taxes.
The federal government charges a gift tax, but provides an exemption for gifts valued at $14,000 or less, per year per recipient. Normally, this exemption only extends to gifts that are actually received by the recipient, so a gift that is not distributed until a person reaches a certain age wouldn’t qualify for the exemption. However the IRS allows an exception (though IRS Code §2053(c)) that allows the $14,000 exemption to apply to gifts to trusts for minors if the trust provides that:
- The minor is the only beneficiary of the trust. However, the trust can state that if the child dies before turning 21, unless the child gave away the trust assets in the will, then the trust assets can be paid to or held in trust for others, such as the child's brothers and sisters.
- Any income the trust makes and the original assets transferred to the trust are given to the child at age 21.
- That child has the right to give away the trust assets in the event that he or she dies before 21, that is, the child can make his will and state that the trust is to go to his sister, for example, if he dies before he's 21.
The law’s requirement that the trust assets must be transferred to the minor when they become 21 years old is a concern and limitation for parents who do not believe that their child or loved one should inherit all of the trust property at that age. However, there are ways to extend the duration of the trust and there are even ways to retain the tax benefits of the trust until a later age (combined with a Crummy trust).
If you’re interested in avoiding gift taxes by using a 2503(c), see an experienced estate planning attorney or tax attorney for help.
Questions for Your Attorney
- Can my wife and I each give money to my child’s 2503(c) trust? If so, how much can we give?
- I have land that is worth far more than $14,000. How can I give that to a minor’s trust but still take advantage of the IRC § 2503 gift exemption?
- Can I give money to my grandchild's minor’s trust? If so, how much can I give?