A child trust fund can be established to set aside funds for college tuition, living expenses, healthcare costs, and to pass along family inheritance. Since there are various types of trusts it is recommended to consult with a lawyer to discuss overall goals and tax advantages.
Prior to arranging a child trust fund to fund college expenses it's important to become familiar with the gift tax exclusion for educational tuition. To qualify for the exclusion tuition has to be paid directly to the school.
Furthermore, the school must be recognized as a qualified education organization. This encompasses both private and public institutions that offer formal education. Most often trust funds are arranged to cover college tuition, but can also include private schools, preparatory schools, and trade schools.
In 2013, the gift-tax limits allowed by the IRS for individuals have risen from $13,000 to $14,000. Furthermore, there is no limit to the amount of tax-free gifts individuals can receive if funds qualify as gifts for tuition or medical expenses.
Donors must adhere to specific guidelines set forth by Title 26 of the Internal Revenue Code. It's best to consult with a tax attorney to ensure financial donations meet gift-tax exclusion requirements.
In addition to education savings trusts, other types of children's trust funds include Section 2503(b) Trust, Section 2503(c) Trust, and Testamentary Trust.
Section 2503(b) is also known as a Qualifying Minor's Trust or Mandatory Income Trust. This is an irrevocable trust which requires distribution of income on an annual basis. Most often, distributed funds are placed into a custodial bank account until the child reaches legal age.
Section 2504(c) is another form of Minor's Trust and is intended to safeguard property and cash until children reach age 21. Funds qualify for the gift-tax exclusion until age 21, at which time income will become taxable at trust rates. Additionally, funds can be transferred to a Crummey Trust which allows annual gifts to qualify for the exclusion after the age of 21.
Testamentary trusts are created by means of the last Will and go into effect after a person dies. Parents, grandparents, or other relatives can leave funds to minor children which are managed by a Trustee until children reach legal age. This type of trust is best suited to provide financial security to minor children in the event parents die prematurely.
While children's trusts are a good way to provide educational funds and financial security, there can be tax consequences if they are not setup in the proper manner. Working with an experienced family law firm, such as Craton and Switzer, will ensure parents select the best type of trust for their personal situation.
Our team of lawyers is dedicated to helping clients understand the different kinds of children's trusts and the pros and cons of each. We are committed to devising financial plans that provide the highest level of benefits to beneficiaries while minimizing taxes.
Visit our blog to learn more about the different child trust funds, estate planning strategies, and retirement planning. If you need further information or are ready to setup trusts call the Law Office of Craton and Switzer at 562.628.5533.
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Published on June 17, 2013 | Comments: 0