§ 2503(b) or mandatory income trust

  • Irrevocable trust generally setup for a minor

  • Gift of future interest but qualifies for the gift tax annual exclusion under § 2503

  • Trust must distribute income annually

  • Income may be distributed to UTMA/UGMA

  • May be subject to kiddie tax

  • No set date for the principal to be distributed to the beneficiary

  • Principal may be distributed to someone other than the beneficiary

  • Actuarial value of the minor child’s income interest subject to gift tax based on:

    • IRC § 7520

    • Beneficiary’s life expectancy

  • Low-income, high-growth type investments preferred

§ 2503(c) or minor’s trust

  • Irrevocable trust setup to hold assets for a minor until he or she turns age 21

  • Gift of future interest but qualifies for the gift tax annual exclusion under § 2503(c)

  • Trust pays tax on any income that is retained

  • Income may be distributed to the child or an UTMA/UGMA – taxed to the child (kiddie tax)

  • Trust must meet the following requirements:

  1. The trustee must have the power to use the trust assets (principal and income) for the child's benefit until the child reaches age 21

  2. The property must be distributed or be made available to the child at age 21

  3. The property must be included in the child's gross estate if the child dies before age 21

  • Negative impact on child’s eligibility for financial aid

  • Trust can only have one beneficiary