A minor’s trust is often called an educational trust because that typically is its primary role and as such it competes with 529 plans. It uses the annual gift tax exclusion in order to build up a fund for child’s benefit over a period of time. Normally, a gift into a trust is not entitled to the annual gift tax exclusion because it considered a gift of a future interest, and the annual exclusion is available only for present interest gifts. An exception to this future interest rule is available in a different context for the so called Crummey trusts.
Section 2503(c) of the IRC additionally provides an important exception for gifts to minors if the following is adhered to: The donor is entitled to the annual gift tax exclusion for any gift or trust if the trustee has the discretion to distribute income and principal to the donee before age 21, irrespective of whether any income or principal is in fact distributed. The donor must distribute the entire trust principal and any accumulated income to the donee when the donor reaches age 21, and must distribute the trust to the donee’s estate should the donee die before reaching age 21, or pursuant to the terms of a general power of appointment granted to the donee in the trust.
As mentioned, regular gifts into the trust can accumulate a sizeable educational fund for the minor beneficiary. The income earned from the investments is taxed to the trust and not to the settlor. For most families, however, a 529 plan may be a more straightforward solution for college savings. See Comparison of Minor’s Trust and 529 Plan
Related:
The California’s 529 college savings plan and estate planning
