Gifts from Revocable Trusts

Custodianship - 2503(c) Trust - Crummey Trust

Gifts from Revocable Trusts:

If you hold assets as trustee of a revocable trust, you should not make gifts directly from your trust. Instead, these gifts require two separate steps. First, you should change title to the property (including cash) from the trustee’s name to your name individually. Second, you then may give the property to the donee. While cumbersome, this two-step process will minimize the risk that gifts made within three years of your death will be taxed in your estate.

Minors (persons under 18 years of age)

Generally, unless you give assets to the minor outright (you have an extremely responsible young person) you would utilize one of the following vehicles:

1. Custodianship: You may create a custodianship by designating an adult as custodian for the minor to receive the gift under the California Uniform Transfers to Minors Act ("CUTMA"). The custodian controls the management of the gifted property and determines whether to make distributions for the minor until the minor attains age 18, 21 or 25. At age 18, 21 or 25, the minor must receive whatever property is held by the custodian. You may create a custodianship simply by transferring cash or other property to the adult as follows:
   
   "Adult’s name, as custodian for Minor’s name, until age (18-25), under the California Uniform Transfers to Minor’s Act."
   
   For income tax purposes the custodianship property belongs to the minor, and the minor must file income tax returns. No tax returns need by filed by the custodian.
   
   
2. 2503(c) Trust: You may establish a trust that in effect terminates when the minor reaches age 21. At that age (or before), the trust must either terminate automatically or give the minor the right to withdraw all of the trust property from the trust during a 60-day "window". You may provide that, if the minor does not withdraw the trust property, the trust will continue for a further period specified in the trust instrument. This trust sometimes is called a "2503(c) trust" or a "Minor’s Trust". The trust offers the following advantages over a custodianship:
   
   a. The trust’s income is taxable to the trust rather than to the minor, which at least may be advantageous for minors under age 15, who are generally taxed at the parent’s tax rate; and
   
   b. The trust is "on track" to continue beyond the minor’s 21st birthday unless the minor elects to withdraw the property.
   
   (For income tax purposes, the trust is a separate taxpayer with a taxpayer identification number (like a social security number), and files its own income tax return each year.
   
   
3. Crummey Trust: A trust called a "Crummey Trust" after the first taxpayer to use this trust, is not limited to use by minors and may be used for gifts in trust for a beneficiary of any age. The unique characteristic of this trust is that, any time you give property to the trust, the minor (or minor’s guardian) must have the right to withdraw the contribution during a 30 - 60 day window; if the minor does not withdraw the trust property, the gift becomes final and is locked in the trust until the trust terminates at an age specified by you in the original instrument. The Crummey trust offers the following advantages:
   
   a. Although the minor has a right to withdraw any contribution, this right is rarely exercised; and
   
   b. Unlike the custodianship and 2503(c) trust, the minor has no right at age 18 or 21 to receive the property, and the trust continues for as long as specified in the instrument (even for the minor’s lifetime.)
   
   (For income tax purposes, this trust is treated more like a custodianship than a 2503(c) trust. Although the trust is a separate taxpayer with a taxpayer identification number and files a simple "grantor" tax return, the trust’s income tax consequences flow to the minor, who must file income tax returns.