what is a 2053(c) trust?

Section 2503(b) and 2503(c) Trusts

Chapter 25Tools & Techniques of

Estate Planning

Copyright 2011, The National Underwriter Company 1

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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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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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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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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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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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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• 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

Tax Implications of Section 2503(c) Trust



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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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• 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

Issues In Community Property States



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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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• 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)

2503(c) Trust With QSST Provision



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• 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

2503(c) Trust With QSST Provision (cont’d)



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• 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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• 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 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 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 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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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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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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• 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 beneficiary-donee to the extent the value goes on to someone else (5 or 5 exception)

Holding Assets In Trust Past Age 21? (cont’d)



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• 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

Holding Assets In Trust Past Age 21? (cont’d)

what is a 2053(c) trust?

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