Each year, the IRS excludes from the gift tax certain gifts, including:
- Gifts to a U.S. citizen spouse;
- Gifts up to $14,000 annually to any individual; and
- Direct payments to an educational provider for tuition or to a medical provider for medical care
When it comes to your minor children, grandchildren, or other important minors in your life, a few considerations must be addressed. They may not possess the legal capacity to receive gifts quite yet and few have the maturity to handle the money. There are a few ways to provide these gifts so that the gifts benefit and protect the minor child while also serving as the tax benefit you intended.
A Crummey trust requires a present interest. This means that the beneficiary (in this case a minor) must be granted the right to use and benefit from the gift in order for the gift to qualify for the “present interest” annual exclusion. First, this trust provides that when property is given to the trust, the beneficiary must have the right to withdraw the gift for at least 30 days. If the 30 days pass and the beneficiary has not withdrawn the gifted property, it then remains in the trust under the original terms of the agreement.
If, however, the beneficiary does not heed your wishes and opts to withdraw the funds, you can stipulate that you’ll never make another deposit. Often, this is enough to ensure a withdrawal is not made and, of course, it’s legal.
You may also add more than one beneficiary to the Crummey Trust. For example; if you have three beneficiaries, you can add the allowable maximum of $14,000 for each for a trust total of $42,000. If one of the beneficiaries has a need for the entire balance, the money can be used specifically for that one beneficiary. Remember the amount which can be gifted under the annual exclusion is adjusted for inflation and may change from the current $14,000.
Another option is to establish a Section 2503(c) Trust. With this trust, a gift is made to the trust for the benefit of the child. You specify the terms, provided a portion of the gift is available for use for the child while still a minor. Any unused funds can be used in any way the individual sees fit. Typically, the minor has the right to withdraw the funds upon reaching the age of 21.
If the minor dies before reaching legal age, the trust goes to the individual’s estate or otherwise dispersed per that individual’s direction. Unlike the Crummey Trust, the Section 2503(c) Trust is set up for just one person.
With a bit of guidance, gifting efforts for the children and grandchildren in your life offers flexibility for both you and the recipient. A qualified estate planning attorney can provide guidance as you go about determining which trusts best suit your needs and help accomplish your goals.
Mr. Ronald “Chip” Morrison, Jr. is a Board-Certified Specialist in Estate Planning and Administration by Louisiana Board of Legal Specialization and a member of the American Academy of Estate Planning Attorneys. He has been engaged in Louisiana trusts and estate law for the last 16 years and can prepare an estate plan for you that achieves your goals of passing your assets to whom you wish. For more information or to attend an upcoming seminar, please call our office at (504) 831-2348 or contact us through our website.