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Written by Fiona Gu
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This 2503(c) Minor’s Trust Savings Option is ideal for families that want to secure their children’s future financial status!
This trust is a legal entity that holds gifts for a child until the he or she becomes 21 years old. It also allows certain future interest gifts’ to be eligible for the gift tax exclusion. The gift tax exclusion is $13,000 annually.
How it works:
| Trustee can spend the money in the trust for the child’s college expenses. The trustee has the authority to make allocations for the child or directly to the child until he/she becomes 21 year old. |
| Throughout the years, the income can accumulate in the trust or be given to the child. |
| All unallocated properties and income have to be given to the child on his or her 21st birthday. The trust restricts the right to the money on the 30th, 60th, or 90th day after the child turns 21. If the child dies before 21, the trust will be in the child’s possession. |
| If the child does not want to have the right to the money before the 21st birthday, the money can stay in the trust until a specified date in the document. |
| After the child becomes 21, gifts to the trust can no longer be eligible for the gift tax exclusion. However, this trust can be combined with the Crummey Trusts to allow the gift tax exclusion to continue after the child turns 21 years old. |
| If the child leaves the properties in the trust after his or her 21sst birthday (for income tax purposes), then he or she is the owner of the trust. |
| Income from the trust is taxed at trust rates. However, if the income is given to the child, then it would be taxed at the child’s rate. The child must pay the income tax on the trust’s gains even though it is not physically given to him or her. |
| Gifts to the trust are unchangeable. |
Disadvantages:
- High setup and administration costs (an attorney is needed to write the trust document).
- When applying for financial aid (See FAFSA article here) the trust is considered as an asset of the student. This is a relatively big disadvantage because it would affect the student’s eligibility for need-based financial aid.
- Taxed at trust rates. If the donor is the trustee, then the trust would be in the donor’s gross taxable possession.
- If the trust’s income pays life insurance premium on a policy where the donor or the donor’s spouse are insured, then the donor will have to pay taxes on the income.
- If the trust’s income is used to pay for parental obligations or other legal obligations of the donor, the donor would need to pay taxes on the income.
- If the donor has the right to receive income from the trust, then he or she must pay taxes on the income.
Tip: The trustee should not be the donor or the donor’s spouse.
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Last Updated on Thursday, 29 July 2010 16:14 |
