It's The Law
Minor's Trust May Fund Tuition
I want to set up a trust for my child's college education without incurring gift tax or using any part of my lifetime gift tax exclusion. Is that possible?
What you are proposing is an annual gift to your child of the maximum annual gift tax exclusion amount over a period of time, but with strings attached. If successful, you will be allowed to give up to $14,000.00 per year to your child without gift tax or reduction in your lifetime gift tax exemption amount.
The gift you propose must generally be made to the trustee of an irrevocable trust. It must be irrevocable so you cannot alter, amend or control. If you retain the ability to control, the gift will be incomplete. That means, it will not take advantage of the annual gift tax exclusion and any income in the trust will probably be taxed to you at your maximum income tax rate.
In addition to giving up control of the gift, the gift must also transfer a present interest in the funds to the beneficiary. To accomplish both goals, you will have to pick someone else to be trustee and decide how much of a present interest to grant your child.
One option would be to establish a Crummey Trust. A Crummey Trust is not defined as a bad trust. It is named after Clifford Crummey, who was the first taxpayer to create a trust and provide the beneficiary with right to withdraw contributions for a limited period of time, after which the right to withdraw ends. That means, the beneficiary has a present interest, but for a limited time. In your case, you would fund the trust on an annual basis with notice to your child and terms of the trust would give your child thirty days within which to withdraw part or all of the contribution for which notice was provided. The right to withdraw creates a present interest.
Although most children would be smart enough to leave the money in the trust, some might be tempted to take it. For parents who are concerned a child might take the money and run, a parent could make a gift to the child through a Uniform Gift to Minors Act account. The child does not have the right to withdraw funds from that account at the time the gift is made, but when the child turns 18, the child gains access to all of the funds in the account. Some parents think 18 is too young and, if the funds are set aside for college education, most children are only starting college at age 18.
Fortunately, there is still another option. You can create a trust for minors under Section 2053(b) & (c) of the Internal Revenue Code. Under those code sections, you can create a trust and make contributions for the benefit of your child as long as the trust meets these criteria: 1) the assets of the trust may be expended only by or for the benefit of your child until he or she obtains 21 years of age, 2) any remaining assets in the trust pass to your child when he or she obtains 21 years of age, and 3) your child has right to designate a beneficiary or beneficiaries for assets remaining in the trust when they die through their Last Will and Testament.
If you think that 21 is too young for full distribution of the assets from the trust, you could also include a provision that would convert the trust at age 21 to a Crummey Trust. If your child does not exercise right to withdraw all of the funds within a set time after being notified of the right to withdraw, the funds could remain in the trust under the sole control of the trustee for an additional period of time, normally between 3 and 10 years.
The options referenced in this article are illustrative and may not be exclusive. There may be other alternatives that are better suited to your situation and intent. For that reason, you should consult with an experienced attorney before making any final decision and especially before creating any irrevocable trust.
By: William G. Morris, Esquire
William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.
Questions for this column can be sent to: William G. Morris, e-mail: firstname.lastname@example.org or by fax, (239) 642-0722 or
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