Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
What Is A 2053(c) Trust?
• A 2503(c) Trust enables a grantor to make a gift to a
minor in trust and still obtain the gift tax annual
exclusion
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
When Is Use Of A 2053(c) Trust Appropriate?
• When a client wishes to make a gift to a minor and:
– Client’s income tax bracket is high and the minor’s is relatively
low
• Note: the trust is subject to “Kiddie Tax” rules
– Asset likely to appreciate substantially and client does not
want the appreciation includable in his gross estate
– Use of gift tax annual exclusion is desirable
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
What Are the Requirements?
• Gift to 2503(c) Trust considered gift of present
interest if
– Income and principal is available for distribution to or on
behalf of the beneficiary at any time prior to age 21
• Income and principal must be distributable to the
beneficiary at age 21
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
What Are the Requirements? (cont’d)
• No mandatory forced distribution at age 21
– Permissible to allow trust to continue beyond age 21, as long
as beneficiary can obtain the property
• If beneficiary dies prior to age 21
– Accumulated trust income and corpus must go to minor’s
estate or appointee pursuant to a general power of
appointment
• Transfer will not fail for lack of minor’s capacity to
exercise a power or execute a will
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
Disadvantages
• Expenses for drafting the trust
• Expenses for filing tax returns and estimated
quarterly payments
• Trust has only one beneficiary and cannot be
transferred from one child to another
• Assets must be made available for distribution to the
beneficiary at age 21
• The trust is irrevocable requiring the grantor to
relinquish total control
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
How Is It Done?
Example of Section 2053(c) Trust:
Jeff Mandell transfers stock in his closely held corporation
to three Section 2503(c) trusts for his three minor boys
– Transfer is irrevocable
– Transfer qualifies as gift of a present interest for annual
exclusion ($13,000 in 2011)
• Minimize or eliminate gift taxes
– Gifts reduce Jeff’s estate
– Gifts reduce Jeff’s income from dividends paid on the stock
• Income is taxed to the boys if distributed or to the trusts if
accumulated
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
Tax Implications of Section 2503(c) Trust
• Income distributed is taxed to the beneficiary
• Income accumulated in the trust is taxed to the trust
• Gifts constitute gifts of a present interest and qualify
for the annual gift tax exclusion
• Taxable gifts exceeding the annual exclusion amount
are added back in the estate tax computation as
“adjusted taxable gifts” valued as of the date of
transfer
– Appreciation on the gifts is out of the donor’s estate and not
included in the estate tax calculation
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
Tax Implications of 2503(c) Trust (cont’d)
• If grantor is trustee of the Section 2503(c) trust at
death, then the entire value of the trust will be
included in the grantor’s estate
– The trust value may also be includible in grantor’s estate if
income is used to satisfy grantor-parent’s duty to support the
beneficiary
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
Issues In Community Property States
• Gifts of community property to 2503(c) Trust are
considered as being ½ from each spouse as grantor
• Important that neither spouse be named trustee or
successor trustee, so trust not included in their
estates
• States may require written consent of non-donor
spouse for gift of community property to a 3rd party or
gift may be set aside
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
2503(c) Trust With S Corp Stock
• Section 2503(c) Trust is not eligible to hold S Corp
stock unless it also qualifies as a:
– Qualified subchapter S trust (QSST) or
– Grantor trust under IRC Section 678
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
2503(c) Trust With QSST Provision
• QSST defined as one that:
– Owns stock in one or more S corporations (and may hold
other assets)
– Can distribute income only to one individual (who must be a
US resident or citizen)
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
2503(c) Trust With QSST Provision (cont’d)
• QSST defined as one that (cont’d):
– Has trust terms requiring that:
• There can be only one beneficiary at any given time
• If corpus is distributed must be distributed only to current trust
income beneficiary
• If an income beneficiary dies, income interest itself will end at
death or upon earlier termination of the trust
• If the trust ends before the income beneficiary dies, all assets
of the trust must be distributed to the income beneficiary
– Requires an election to be made by the income beneficiary
to have trust qualify as QSST
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
2503(c) Trust With QSST Provision (cont’d)
• Advantages of QSST
– Gift of S Corp stock can be made to minor without incurring
disadvantages of outright ownership
– Split income among family members and also eliminate the
gift from inclusion in grantor’s estate
– QSST can last beyond age 21 for as long as grantor directed
it to last
– Trust may continue if minor dies and pass to successive
income beneficiaries
• No forced distribution to estate of deceased income beneficiary
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
2503(c) Trust With QSST Provision (cont’d)
• Gift Tax Implications
– Gift to trust considered a completed gift
– Gift can qualify for gift tax annual exclusion by meeting
2503(c) requirements
• Estate Tax Implications
– If beneficiary given only income rights, the remaining assets
in trust will not be includable in the beneficiary’s estate
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
Section 678 Trust For S Corp Stock
• Beneficiary must have unrestricted power exercisable
solely by himself to vest the corpus or the income
– Beneficiary has right to take income and principal whenever
desired
– Beneficiary taxed on income from S Corp held by trust
– No restrictions on beneficiary’s right to exercise withdrawal power
• Or, beneficiary has not exercised Crummey Power to
withdraw and has retained certain powers
– Beneficiary is trustee
– Trustee has discretionary power to distribute income either alone
or with adverse party
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
Section 678 Trust For S Corp Stock (cont’d)
• Gift Tax Implications
– Gift to trust considered a completed gift
– Gift can qualify for gift tax annual exclusion by meeting
2503(c) requirements or including a Crummey withdrawal
power
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
Section 678 Trust For S Corp Stock (cont’d)
• Estate Tax Implications
– Depends on how the trust became qualified under Section
678
• General Power of Appointment (power of withdrawal) over all
or part of the trust, that portion over which beneficiary had
power at death will be includable in the beneficiary’s estate
• If beneficiary exercised or released the power and retained
an interest in the trust (e.g. life estate), the property is
includable in the powerholder’s estate
• Lapse of a Crummey withdrawal power is not treated as a
release if the lapse does not exceed $5,000 or 5% of the
property subject to the power
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
What Is A 2053(b) Trust?
• Requires mandatory distribution of trust income to the
beneficiary or beneficiaries at least annually
• Gifts qualify as gifts of present interest and are
eligible for the gift tax annual exclusion
– Trust must deny right of trustee to invest in non-income
producing assets
– Gifts are divided into two portions:
• Income, eligible for the annual exclusion ($13,000 in 2011) and
• Principal (the remainder), considered a gift of a future interest
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
What Is A 2053(b) Trust? (cont’d)
• Does not require distribution of corpus at age 21
• Trust can last for lifetime of beneficiary
• Trust principal does not need to go to income
beneficiary
– Principal can go to different beneficiary specified in the trust
or
– A person specified by the income beneficiary
• Income is taxed to the beneficiary, unless used to
discharge legal obligation of grantor-parent
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
Holding Assets In Trust Past Age 21? (cont’d)
• Crummey Power
– Donee has immediate, unfettered and ascertainable legal right
at the time the gift is made to take out the amount of the
current gift
– Qualifies gift as gift of a present interest for gift tax annual
exclusion
Note: Failing to exercise the power to take the gift out of the trust
(where trust goes on to someone else) is a gift by the beneficiarydonee to the extent the value goes on to someone else (5 or 5
exception)
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Section 2503(b) and 2503(c)
Trusts
Chapter 25
Tools & Techniques of
Estate Planning
Holding Assets In Trust Past Age 21? (cont’d)
• Crummey Power (cont’d)
Exception: Gift tax consequence of donee ignored where power to
appoint to oneself is no more than the greater of $5,000 or 5% of
the trust corpus
– Remember the $5,000 limit is less than the annual exclusion
amount
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