Introduction
There are many reasons why you might want to gift assets to minor children (children under the age of
21). For example, you may want to help the children build a college fund, or increase the children’s
future financial security. Or, you may have tax reasons for making gifts to minor children, such as
removing highly-appreciating assets from your gross estate to minimize estate taxes. However, gifting
assets directly to minor children can be problematic because:
• Minor children are generally too emotionally immature and financially inexperienced to manage
large sums of money or other assets on their own
• Most people (and institutions such as brokerage firms or banks) are reluctant to deal directly
with minor children because they can renounce or make void many legal transactions involving
their property
While a custodial account (discussed further below) could be used to solve these problems, a trust for
minors (i.e., an irrevocable trust specifically set up for the benefit of someone under the age of 21) can
also be used and has other benefits as well.
Assets in a trust can be held until the child is older and wiser, preventing the child from spending
foolishly. And, a trustee can manage and control the trust assets on behalf of the minor beneficiary.
Further, however, trusts can be individually designed to address your particular circumstances. For
example, a trust can provide that a fixed amount of principal and income be distributed to the minor
beneficiaries at specific intervals or a trust can provide that such matters be in the complete discretion
of the trustee. But, although trusts provide flexibility, they also require on-going administration, and
unless structured properly, gifts in trust do not qualify for the annual gift tax exclusion.
The federal annual gift tax exclusion problem
Most donors want their gifts to qualify for the federal annual gift tax exclusion, which allows you to gift
tax free $16,000 (in 2022) each year to an unlimited number of donees. Only gifts of “present interests”
qualify for the exclusion. A present interest gift allows the donee to immediately use, possess, or enjoy
the gifted property. Gifts to an irrevocable trust generally do not qualify for the exclusion because the
donee is unable to use, possess, or enjoy the gifted property until sometime in the future. But, gifts in
trusts for minor beneficiaries will be treated as present interest gifts that qualify for the exclusion as
long as the trust is structured properly.
2503(c) trust, 2503(b) trust, and Crummey trust
There are three types of trusts that are commonly used for the benefit of minors. Two of them are
named after the Internal Revenue Code sections that authorize them: the Section 2503(c) trust and the
Section 2503(b) trust. The Section 2503(c) trust may be created only for minors, while the Section
2503(b) trust can be used with both minor beneficiaries and older ones. The Crummey trust (named after the case of a now-famous taxpayer) may be useful in a variety of situations for both minor
beneficiaries and older ones.
Gifts can be made to any of these three types of trusts that qualify in whole or in part for the annual gift
tax exclusion. This is the significant, common feature among the three. The three types of trusts for
minors differ with respect to the nature of the interest the minor beneficiary has.
With a 2503(c) trust, the principal in the trust must be paid out to the minor beneficiary when he or she
reaches the age of 21. Until that time, there is no requirement that trust income be paid to the minor
beneficiary.
With a 2503(b) trust, by contrast, all income must be paid out to the minor beneficiary each year, but
there is no requirement as to when or if (or to whom) the principal must be paid out.
The defining feature of a Crummey trust is really just a single provision in the trust document that gives
the minor beneficiary at least a 30-day window of opportunity to immediately withdraw any gifts made
to the trust.
Alternative to trusts: Uniform Gifts to Minors Act and Uniform Transfers to
Minors Act
For smaller gifts to minor children, when the costs associated with a trusts is not justified, many people
take advantage of a custodial account that can be created under one of two similar laws found in every
state: the Uniform Gifts to Minors Act (UGMA), or the much more common Uniform Transfers to Minors
Act (UTMA). Under either one of these two acts, you make a gift to a custodial account for the benefit of
a minor child. The custodian, who makes the decisions regarding account investments and distributions,
can be any adult. These custodial accounts are much simpler and cheaper to use than a trust. You won’t
need to hire an attorney to set one up, unlike a trust, and gifts to a custodial account will qualify for the
annual gift tax exclusion. However, there are also many limitations on these accounts.
This article was prepared by Broadridge.
LPL Tracking #1-05139777
