Gifting Strategies

Section 2503 (c) Trust

A Section 2503(c) trust allows you to fully use your $12,000 annual gift tax exclusion to transfer property in trust for the future benefit of a child.  (This is an exception to the rule that only gifts of a present interest qualify for the annual gift tax exclusion.)  With a Section 2503(c) trust, the property and associated income must be available for distribution before the child attains age 21, and, generally, any remaining balance must be distributed to the child at age 21.

There are two advantages of the Section 2503(c) trust over an UGMA or UTMA account.  First, Section 2503(c) trust assets can remain in trust until the child reaches age 21, even if the age of majority in your state is less than 21.  Second, the child can also be given the power to extend the term of the trust.  The power may be a continuing right or a right for a limited period of time (e.g., 30 days after the 21st birthday) to force distribution by giving written notice.  If the child does not exercise the power, the trust will continue in accordance with the terms of the trust agreement.

A Section 2503(c) trust is commonly used to provide for the education of a child, which may result in substantial depletion of the trust before the child reaches age 21.  Thus, only a modest fund may be available for mandatory distribution.