What is a Section 2503 trust?

A 2503(c) trust, or minor’s trust, is a trust established to hold gifts for one child until he or she attains age 21. A gift to this type of trust qualifies for the annual federal gift tax exclusion.

What are the differences between the 2503 C trust and the 2503 B trust?

The key difference between a 2503(c) trust and a 2503(b) trust is the distribution requirement. Parents who are concerned about providing a child or other beneficiary with access to trust funds at age 21 might be better off with a 2503(b), since there is no requirement for access at age 21.

How does a 2503 C trust work?

2503(c) trust has one beneficiary, and the assets in the trust are irrevocably his or hers (i.e., the assets cannot be redirected to another beneficiary); Because the trust is irrevocable, the grantor gives up total control of the assets; The trust income tax rates may penalize those trusts that accumulate income; and.

Is a 2503 C trust a grantor trust?

For income tax purposes, a 2503(c) trust may be taxed as a grantor trust or as a complex trust. If taxed as a grantor trust, the income is reported and taxed on the donor’s income tax return; in such event, the tax paid by the donor is an additional gift to the trust but is not treated as a gift for gift tax purposes.

Can a trust distribute to children?

However, where income is derived by a discretionary trust, the income can be distributed to various family members and “split” between them. Where there are children in the family, this would provide an opportunity for significant tax savings by distributing income of the trust to the children.

Can you distribute trust income to minors?

If a beneficiary is presently entitled to a share of the trust income and is under 18 years of age, the trustee is assessed and is liable to pay tax on that income as if it were the income of an individual.

Can a trust distribute income to a minor?

A Family Trust allows the distribution of discretionary income to a family group. Distributing income to minors (children under the age of 18) from a Family Trust has allowed a portion of Trust income to be treated as tax free due to the operation of the Low Income Tax Rebate together with Division 6AA.

Does money from a trust count as income?

Key Takeaways. Money taken from a trust is subject to different taxation than funds from ordinary investment accounts. Trust beneficiaries must pay taxes on income and other distributions that they receive from the trust. Trust beneficiaries don’t have to pay taxes on returned principal from the trust’s assets.

How do you avoid trust taxes?

For all practical purposes, the trust is invisible to the Internal Revenue Service (IRS). As long as the assets are sold at fair market value, there will be no reportable gain, loss or gift tax assessed on the sale. There will also be no income tax on any payments paid to the grantor from a sale.

Do trust distributions count as income?

Interest income the trust distributes is taxable to the beneficiary who gets it. The money given to the beneficiary is considered to be from the current-year income first, then from the accumulated principal. This is usually the original contribution with any subsequent deposits.

How much can a trust distribute to a child?

As a result, this increased the amount of net income of a trust that could effectively be distributed to a minor beneficiary tax-free from $416 to $3,333.