Motivated by the desire to protect their estates from unnecessary federal estate and gift taxation, many individuals with large estates transfer assets to their children. Often, however, children are not old or wise enough to handle money management responsibilities. Trusts provide a means of accomplishing the transfer with provision for responsible management. Irrevocable in form, these trusts come in two primary types, named for the provisions of the IRS Code that govern them:
- 2503 (b)
- 2503 (c)
Each trust is established for the benefit of one child. Generally, in order to avoid gift and estate tax complications, annual gifts to these trusts do not exceed $11,000 per donor (a figure slated to be indexed for inflation) and may be much smaller depending on what other gifts the donor has already made to the child in a given year.
In its simplest form the 2503 (c) trust (perhaps, the more frequently used of the two) features the accumulation of income and mandatory termination when the child attains the age of 21. In contrast the (b) trust requires the annual distribution of income but permits the trust to remain in effect indefinitely. Without these features, gifts to a 2503 (b) or (c) trust are taxed under the federal gift and estate tax rules.
The provisions of these trusts can become much more complex, depending on the needs and and wishes of the family.