As I'd mentioned in the discussion of the Rule Against Perpetuities, quite a few states have replaced or supplemented the Rule's complicated and counter-intuitive limit on the duration of a private trust with a fixed term of years. In Florida, for example, a contingent interest is valid if it vests (becomes certain) within 90 years, or within the traditional "life plus 21 years" period of the Rule. In Wyoming, they've replaced the Rule with a rather impressive fixed time limit. Regardless of when its contingent interests vest, a private trust governed by Wyoming law cannot last more than 1,000 years!
In some other states, of which Ohio is one, a trust can "opt out" of the Rule so long as the trustee has an unrestricted power to sell trust assets. (The power of sale means you don't have to worry about the problem that inspired the Rule in the first place: unresolved contingent interests interfering with the free transferability of property.) In other words, an Ohio trust can last, if you so desire, until the Second Coming, or until the sun swells up into a red giant, or until whatever other future event constitutes "the end of the world" in your personal belief system..
This has led to the development of what is commonly called a "dynasty trust." A dynasty trust is a trust for the benefit of one's descendants which has either a very long period (200 years or more) or no fixed termination date at all. The trustee has discretion to make distributions to any of the grantor's descendants from time to time in whatever amounts the trustee finds to be appropriate, and the trust may contain language further directing or restricting the trustee's exercise of discretion.
The trust is funded with an amount equal to what can be protected from the federal generation-skipping transfers tax by the use of the grantor's available GST exemption. It's possible for multiple grantors, such as a husband and wife or a group of siblings, to make contributions to the same trust and thus "pool" their GST exemptions. The grantor either uses up part of her unified credit, or pays the necessary gift or estate tax. The effect of the dynasty trust is to place the trust property beyond the reach of the federal wealth transfer tax system for as long as the trust lasts--the transfer subject to gift or estate tax occurs when the trust is created. Because we've used GST exemption to protect the assets of the trust from GST upon funding, it doesn't matter whether it's a "direct skip" right now or whether there are going to be "taxable distributions" and a "taxable termination" somewhere down the road.
This makes the dynasty trust a particularly good vehicle for protecting family business assets from future transfer taxes. Through the end of 2012, every individual has a $5 million GST exemption and a unified credit equal to the tax on $5 million, allowing for some spectacularly large dynasty trusts to be created--provided that you have assets in those amounts and can afford to give away that much.
Drafting a trust like this is an interesting exercise. The client will often want to give the trustee some guidance on what distributions would or would not be appropriate; my job is to put this down on paper in a way that accurately captures the client's intent while (we hope!) still being understandable to some future bank trust officer 500 years from now and being sufficiently flexible to allow that future trust officer to adapt to several centuries' worth of cultural and tax law changes.
Thursday, October 6, 2011
Monday, October 3, 2011
The Rule Against Perpetuities
The Rule Against Perpetuities is an old doctrine from the English common law which limits the duration of a private (noncharitable) trust. The most widely accepted statement of the Rule comes from Professor John Chipman Gray's classic 1886 treatise on the subject:
The Rule applies to contingent interests--that is, where the question of whether you get anything from the will or trust depends on some future event. An example would be a trust distribution where Alice receives the trust income for life, and when Alice dies, it goes to the children of Alice who are then living. We don't know if any particular one of Alice's children will get anything from the trust until either Alice or that child dies. Alice's children are therefore what we call "contingent beneficiaries." (Alice is a "vested beneficiary.")
To really, really, really (over)simplify it, the Rule requires that the interests of all contingent beneficiaries be resolved--that is, we know for sure if they'll get anything or not--before the end of a "measuring life"--the life of some person who was living when the trust was created--plus 21 years. In the example I gave in the previous paragraph, we have no problem. Alice could be our "measuring life," and when Alice dies we will know which of her children outlived her, and therefore who gets the trust property, well within the Rule's time limit. A trust with a more complex future distribution involving generations yet unborn could, however, very easily crash into the Rule. In order to avoid violating the Rule, a trust couldn't attempt to reach too far into the future.
The original purpose of the Rule was to allow for the free transfer of property. If a piece of land--which was the primary source of wealth back in the 1600s when the Rule got started--had too many contingent interests, it became impossible to transfer it because either you couldn't identify all the dozens of people who might have an interest in the land, or you couldn't find all of them, or you couldn't get them all to agree to sell the land, or you couldn't figure out how to split up the proceeds afterward, or some combination of all that.
In a modern trust with contingent interests, this is not an issue because the trustee, the sole owner of all the trust's assets, will have the power to sell those assets at any time. Even though the problem the Rule was attempting to solve wasn't a problem any more, the Rule still applied to modern day trusts. In recent years, however, most state legislatures have overridden the Rule with a statute that either replaces the "life in being plus 21" period with a fixed time limit, or allows a trust to ignore the Rule completely. We'll talk about some planning arrangements that take advantage of that change in the next post.
If you'd like to learn more about the Rule Against Perpetuities and want to have some fun doing it, I recommend you read three delightful law review articles written by Professor W. Barton Leach (1900-1971): "Perpetuities in a Nutshell" (1938), "Perpetuities in the Atomic Age: The Sperm Bank and the Fertile Decedent" (1962), and "Perpetuities: the Nutshell Revisited" (1965).
No interest is good unless it must vest, if at all, not later than twenty-one years after the death of some life in being at the creation of the interest.If you're not quite sure what that means, don't feel bad. It took Professor Gray 496 pages to explain the Rule and its application to lawyers who were already familiar with the subtleties of property law. The complexities were such that the Supreme Court of California, in a 1961 case, ruled that it was not malpractice if a lawyer drafted a will that violated the Rule because the Rule Against Perpetuities was too difficult to master!
The Rule applies to contingent interests--that is, where the question of whether you get anything from the will or trust depends on some future event. An example would be a trust distribution where Alice receives the trust income for life, and when Alice dies, it goes to the children of Alice who are then living. We don't know if any particular one of Alice's children will get anything from the trust until either Alice or that child dies. Alice's children are therefore what we call "contingent beneficiaries." (Alice is a "vested beneficiary.")
To really, really, really (over)simplify it, the Rule requires that the interests of all contingent beneficiaries be resolved--that is, we know for sure if they'll get anything or not--before the end of a "measuring life"--the life of some person who was living when the trust was created--plus 21 years. In the example I gave in the previous paragraph, we have no problem. Alice could be our "measuring life," and when Alice dies we will know which of her children outlived her, and therefore who gets the trust property, well within the Rule's time limit. A trust with a more complex future distribution involving generations yet unborn could, however, very easily crash into the Rule. In order to avoid violating the Rule, a trust couldn't attempt to reach too far into the future.
The original purpose of the Rule was to allow for the free transfer of property. If a piece of land--which was the primary source of wealth back in the 1600s when the Rule got started--had too many contingent interests, it became impossible to transfer it because either you couldn't identify all the dozens of people who might have an interest in the land, or you couldn't find all of them, or you couldn't get them all to agree to sell the land, or you couldn't figure out how to split up the proceeds afterward, or some combination of all that.
In a modern trust with contingent interests, this is not an issue because the trustee, the sole owner of all the trust's assets, will have the power to sell those assets at any time. Even though the problem the Rule was attempting to solve wasn't a problem any more, the Rule still applied to modern day trusts. In recent years, however, most state legislatures have overridden the Rule with a statute that either replaces the "life in being plus 21" period with a fixed time limit, or allows a trust to ignore the Rule completely. We'll talk about some planning arrangements that take advantage of that change in the next post.
If you'd like to learn more about the Rule Against Perpetuities and want to have some fun doing it, I recommend you read three delightful law review articles written by Professor W. Barton Leach (1900-1971): "Perpetuities in a Nutshell" (1938), "Perpetuities in the Atomic Age: The Sperm Bank and the Fertile Decedent" (1962), and "Perpetuities: the Nutshell Revisited" (1965).
Friday, September 30, 2011
Federal Estate and Gift Taxes -- Generation Skipping Taxes and How They Affect Trust Design
In the previous post, we took a quick overview of the generation-skipping transfers tax, "affectionately" known as the "GST." This is the tax that's imposed, in addition to the federal estate or gift tax, on any "generation-skipping transfer." A "generation-skipping transfer" (sometimes called a "skip") is any transfer, at death or by gift, to a "skip person." To illustrate what a "skip person" is, let's use the family tree from the last post, with a slight modification:
Grandma
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Junior
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Skippy
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Skippy II
Grandma is the person who's going to be making the transfer. Assuming all of these people are living on the date of the transfer, Skippy and Skippy II would be "skip persons" and Junior would be a "non-skip person"--yes, that's the official term from the tax code. A gift to Skippy or Skippy II would be a "generation-skipping transfer," and will be subject to the GST unless the annual exclusion applies or Grandma has GST exemption she can allocate to the transfer. A transfer to Junior is not a skip, and will not be subject to the GST. (If Junior dies, and then Grandma makes a transfer to Skippy, that will not be a skip because there is no living person in the generation between them, and the GST won't apply--but transfers to Skippy II will still be skips subject to GST.)
So far, I've been talking about outright gifts. If the gifts are made to a trust, the question of whether they're skips or not is determined by looking at the beneficiaries of the trust. A gift to a trust for the benefit of Skippy will be a skip because Skippy is a skip person. A trust for the benefit of Skippy and Skippy II--same result, because all of the beneficiaries are skip persons. All of these transfers are called "direct skips," and if there's any GST to be paid, it's paid when the transfer is made.
Now for the tricky part: what about a trust for the benefit of Junior, Skippy, and Skippy II? Let's assume for purposes of the example that the trustee can make distributions to any one or more of these three people in its discretion. A trust like this might be seen where Junior is the "gray sheep" of the family.
In this case, when Grandma puts assets into the trust, we don't know if the transfer is a skip yet because we don't know if any particular property in the trust will be distributed out to a skip person (Skippy and Skippy II) or a non-skip person (Junior). If the trust makes any distribution to Junior, those are not skips, and there's no GST. Any distributions to Skippy or Skippy II are "taxable distributions" on which a GST will have to be paid at the time of distribution unless Grandma allocated GST exemption to the trust back when she created it.
What happens when Junior dies? As of that moment, we know for a certainty that all future distributions will be to the skip persons. Junior's death is therefore a "taxable termination"--it's called that because the interests of all non-skip persons in the trust have terminated--and is the occasion for assessing the GST against all of the remaining trust property--again, unless Grandma allocated GST exemption to the trust back when she created it.
In other words, a transfer to one of your children which is held in trust for life, with final distribution to your grandchildren, may subject the trust property to the GST. Therefore, it's necessary to allocate GST exemption to the trust when the trust is created; this is done on the relevant estate tax or gift tax return. If you don't have enough GST exemption to cover the entire transfer, the trust has to be designed so that the non-exempt part is included in your child's estate so that it's taxed there instead of being hammered by the GST.
Monday, September 26, 2011
Federal Estate and Gift Taxes -- the Generation Skipping Transfers Tax
The generation-skipping transfers tax, or "GST" for short, is perhaps the hardest-hitting element of the federal wealth transfer tax system. For purposes of illustration, let's use a very simple family tree:
To begin, imagine that it's before 1976, when the first version of the GST was enacted. (It was replaced in 1986 with the arrangement we have today.) By virtue of his place in the family business and/or earlier gifts from Grandma, Junior is independently wealthy. Anything that Grandma leaves to him at death will simply get added to Junior's gross estate and taxed again at Junior's passing. What people in Grandma's position often did was to create a trust for Skippy and the other grandkids, and perhaps also later generations, and thus "skip" taxation in Junior's generation. The trust usually could reach no farther than the grandchildren's generation because of something called the Rule Against Perpetuities, which we'll discuss another time.
As we've noted in earlier posts, one of the baseline policies of the gift and estate tax system is to tax accumulated wealth once per generation, and generation skipping transfers like these cut that down to once every other generation. Because most people would only do this if Junior was well provided-for, these "generation-skipping trusts" were a strategy only a very very high net worth family could make use of--so that the estate and gift taxes actually fell harder on those who were wealthy enough to pay estate taxes, but not wealthy enough to play at generation skipping.
To redress this flaw and discourage generation skipping transfers, Congress enacted the GST. The GST is imposed, in addition to the estate or gift tax, on any transfer to a "skip person." There's a complex definition of a "skip person" in the tax code, but what it boils down to is that, in the example above, Skippy is a "skip person" if Junior is living on the date of the transfer. If Junior dies, and then Grandma makes the transfer to Skippy, it's not a generation skipping transfer and the GST does not apply.
What makes the GST hit so hard is the rate of tax: it's equal to the highest estate tax rate then in effect. In 1986, when the modern version of the GST entered the tax code, that top rate was 55%--so it was possible for a generation-skipping transfer to be taxed at a combined 110% (up to 55% estate/gift tax + 55% GST). The purpose of this was not to collect a 110% tax so much as it was to make large generation-skipping transfers so uneconomical that no one would want to do them.
Well, maybe not all generation-skipping transfers. Not wanting tax policy to interfere too much with the time-honored tradition of doting on grandchildren, Congress also provided that the GST does not apply to most annual exclusion gifts, and gave every person a $1 million GST exemption. The exemption let each person transfer a total of $1 million to the grandkids (and other skip persons) before the GST kicked in. (There was also a $2 million-per-grandchild temporary exemption which expired in 1989--named the "Gallo provision" in honor of the high net-worth family which "suggested" it to their Congressional representatives.)
Under the 2001 tax act ("the Bush tax cuts"), the GST exemption increased in parallel with the exemption equivalent provided by the estate and gift tax unified credit, so that it reached $3.5 million in 2009. During the "estate tax holiday" in 2010, there was (so we thought) no GST at all. The 2010 tax act reinstated the GST retroactive to January 1, 2010, but at a 0% rate--so if you made a generation-skipping transfer before the tax was retroactively re-imposed, you didn't get hit with a surprise tax assessment. For 2011 and 2012, the GST exemption is $5 million. Unless Congress acts before the end of next year, the GST exemption will "snap back" to $1 million on January 1, 2013, as part of what the media calls the "expiration" of the "Bush tax cuts."
You may think that the GST is a problem only for the super wealthy, but it can affect people of relatively modest means. A trust for your "gray sheep" child which holds the assets for the child's life, then distributes to that child's offspring afterward, is a generation-skipping transfer that is subject to the tax unless there is sufficient GST exemption to cover it. We'll talk about how the GST affects trust design, and some of the "work-arounds" that have been developed to counter it, in future postings.
Grandma
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Junior
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Skippy
To begin, imagine that it's before 1976, when the first version of the GST was enacted. (It was replaced in 1986 with the arrangement we have today.) By virtue of his place in the family business and/or earlier gifts from Grandma, Junior is independently wealthy. Anything that Grandma leaves to him at death will simply get added to Junior's gross estate and taxed again at Junior's passing. What people in Grandma's position often did was to create a trust for Skippy and the other grandkids, and perhaps also later generations, and thus "skip" taxation in Junior's generation. The trust usually could reach no farther than the grandchildren's generation because of something called the Rule Against Perpetuities, which we'll discuss another time.
As we've noted in earlier posts, one of the baseline policies of the gift and estate tax system is to tax accumulated wealth once per generation, and generation skipping transfers like these cut that down to once every other generation. Because most people would only do this if Junior was well provided-for, these "generation-skipping trusts" were a strategy only a very very high net worth family could make use of--so that the estate and gift taxes actually fell harder on those who were wealthy enough to pay estate taxes, but not wealthy enough to play at generation skipping.
To redress this flaw and discourage generation skipping transfers, Congress enacted the GST. The GST is imposed, in addition to the estate or gift tax, on any transfer to a "skip person." There's a complex definition of a "skip person" in the tax code, but what it boils down to is that, in the example above, Skippy is a "skip person" if Junior is living on the date of the transfer. If Junior dies, and then Grandma makes the transfer to Skippy, it's not a generation skipping transfer and the GST does not apply.
What makes the GST hit so hard is the rate of tax: it's equal to the highest estate tax rate then in effect. In 1986, when the modern version of the GST entered the tax code, that top rate was 55%--so it was possible for a generation-skipping transfer to be taxed at a combined 110% (up to 55% estate/gift tax + 55% GST). The purpose of this was not to collect a 110% tax so much as it was to make large generation-skipping transfers so uneconomical that no one would want to do them.
Well, maybe not all generation-skipping transfers. Not wanting tax policy to interfere too much with the time-honored tradition of doting on grandchildren, Congress also provided that the GST does not apply to most annual exclusion gifts, and gave every person a $1 million GST exemption. The exemption let each person transfer a total of $1 million to the grandkids (and other skip persons) before the GST kicked in. (There was also a $2 million-per-grandchild temporary exemption which expired in 1989--named the "Gallo provision" in honor of the high net-worth family which "suggested" it to their Congressional representatives.)
Under the 2001 tax act ("the Bush tax cuts"), the GST exemption increased in parallel with the exemption equivalent provided by the estate and gift tax unified credit, so that it reached $3.5 million in 2009. During the "estate tax holiday" in 2010, there was (so we thought) no GST at all. The 2010 tax act reinstated the GST retroactive to January 1, 2010, but at a 0% rate--so if you made a generation-skipping transfer before the tax was retroactively re-imposed, you didn't get hit with a surprise tax assessment. For 2011 and 2012, the GST exemption is $5 million. Unless Congress acts before the end of next year, the GST exemption will "snap back" to $1 million on January 1, 2013, as part of what the media calls the "expiration" of the "Bush tax cuts."
You may think that the GST is a problem only for the super wealthy, but it can affect people of relatively modest means. A trust for your "gray sheep" child which holds the assets for the child's life, then distributes to that child's offspring afterward, is a generation-skipping transfer that is subject to the tax unless there is sufficient GST exemption to cover it. We'll talk about how the GST affects trust design, and some of the "work-arounds" that have been developed to counter it, in future postings.
Thursday, September 22, 2011
E-Mail and Attorney-Client Confidentiality
I plan to do a future post on attorney-client privilege and confidentiality issues in estate planning. While you're waiting for that, I'll refer you to an interesting article on confidentiality issues with the use of electronic mail published at lawyerist.com.
Wednesday, September 21, 2011
The Gray Sheep
What's a "gray sheep?"
You all know what a "black sheep" is, in the metaphorical sense: the black sheep is the child or grandchild who has turned out wrong, done something stupid or illegal or immoral (or some combination thereof) that has brought shame and disgrace to the family. When it comes time to do the estate planning, the black sheep is the one who doesn't get anything--or, at best, gets some token distribution on the condition that they don't contest the will or the trust.
A gray sheep is a beneficiary who isn't quite bad enough to be a black sheep. He may have done something stupid or illegal or immoral (or some combination thereof), but whatever it was it wasn't quite bad enough to justify cutting him out completely. There's a second breed of gray sheep, the one who has a chemical dependency problem, massive debts, a spouse that can't be trusted, or a simple lack of good sense. The client I'm drafting the documents for still wants to give something to the gray sheep, but not directly, not in a way that puts them in control of the wealth.
As you might have guessed, gifts to gray sheep are going to be held in trust. The exact terms will vary based on the circumstances, including the amount of money or property at stake, and how gray (metaphorically) the gray sheep is and how she got that way. Some of the terms used in gray sheep trusts include:
You all know what a "black sheep" is, in the metaphorical sense: the black sheep is the child or grandchild who has turned out wrong, done something stupid or illegal or immoral (or some combination thereof) that has brought shame and disgrace to the family. When it comes time to do the estate planning, the black sheep is the one who doesn't get anything--or, at best, gets some token distribution on the condition that they don't contest the will or the trust.
A gray sheep is a beneficiary who isn't quite bad enough to be a black sheep. He may have done something stupid or illegal or immoral (or some combination thereof), but whatever it was it wasn't quite bad enough to justify cutting him out completely. There's a second breed of gray sheep, the one who has a chemical dependency problem, massive debts, a spouse that can't be trusted, or a simple lack of good sense. The client I'm drafting the documents for still wants to give something to the gray sheep, but not directly, not in a way that puts them in control of the wealth.
As you might have guessed, gifts to gray sheep are going to be held in trust. The exact terms will vary based on the circumstances, including the amount of money or property at stake, and how gray (metaphorically) the gray sheep is and how she got that way. Some of the terms used in gray sheep trusts include:
- Holding the principal in trust until some advanced age (50, 55, 60, 65 even) or for the gray sheep's life. (A lifetime trust with remainder to grandchildren presents some issues with the generation-skipping transfers tax that we will go into in a future installment).
- Making distributions out of the trust discretionary subject to an "ascertainable standard" such as "health, maintenance, education, and support."
- Making distributions "wholly discretionary." Under the Ohio Trust Code, a "wholly discretionary" trust is not subject to the claims of the gray sheep's creditors-making wholly discretionary trusts extremely useful for gray sheep with creditor problems.
- The discretionary distributions may be further subject to the approval of a trust advisor.
- The distributions, even though they may be discretionary or even wholly discretionary, may be capped off at a certain amount per year, or limited to expenditures for certain purposes only.
- If the gray sheep's problem is one of motivation, the trustee could be directed to make distributions in an amount determined with reference to the gray sheep's earned income. The harder you work, the more the trust gives you.
- Distributions could be made contingent on certain accomplishments, or on refraining from certain specified bad behavior. I have drafted at least two trusts where the beneficiary's right to further distributions was contingent upon passing random drug tests. If the beneficiary failed, the trustee was restricted to making distributions only to pay for rehab treatment.
Monday, September 19, 2011
Federal Estate and Gift Taxes -- the Annual Exclusion
The purpose of the gift tax is to prevent people from "sneaking" around the estate tax by giving away assets before death. There's no official definition of a gift, but the general understanding is that a gift is any transfer of property that makes your estate smaller. The gift tax part of the Internal Revenue Code expressly says that it is not a "gift" to pay someone's medical or educational expenses. There's no exemption for everyday living expenses, but as far as I know the IRS has never tried to characterize basic consumption, such as the cost of feeding and housing your kids, as a taxable gift.
Even with those exceptions, every Christmas present and birthday card would still be a taxable gift, and only the most miserly among us would not be required to file Form 709 every year. To avoid the resulting absurdity, Congress wrote in something called the "annual exclusion." It's presently $13,000 per recipient per year, and that number adjusts for inflation every so often. Put simply, the first $13,000 in gifts you make to a person in any one year are "freebies," ignored for gift tax purposes. If you have two children, you can give each of then $13,000 and not owe any gift taxes. A married couple can combine their exclusions (something called "gift splitting") and give $26,000 per year to each recipient tax free--it's considered to come equally from both, no matter who wrote the check or made the transfer.
Now here's the tricky part: the annual exclusion only applies to a "present interest" gift; that is, something that the recipient can enjoy immediately. A gift of a right to receive something in the future, or a gift in trust that won't be distributed immediately, is not a present interest, and doesn't get the benefit of the annual exclusion.
It's often not a good idea to make a substantial gift outright to a young person, or an adult with maturity or creditor problems. You'd want to hold the property in trust so the beneficiary can't mishandle it--and, in the case of a minor, so you don't have to establish a guardianship to hold the property. Section 2503(c) of the IRC sets out a specific exception for gifts in trust to a minor, but section 2503 trusts have to terminate when the beneficiary reaches age 21. 21 is the traditional age of majority, but not always a comfortable age to be distributing substantial wealth to someone.
So does that mean that if you want to make a gift in trust to, say, age 30 you can't use the annual exclusion? No; there's a work-around called a "Crummey power," named after the United States Tax Court case which validated the tactic. The trust will give the beneficiary a legal right to withdraw property as soon as it's added to the trust, but that right expires one month after the date the beneficiary (or, if a minor, her parent or guardian) is advised that a contribution has been made. That's a present enough present interest to qualify the gift for the annual exclusion. As you might expect, this is something we use a lot in my business.
Even with those exceptions, every Christmas present and birthday card would still be a taxable gift, and only the most miserly among us would not be required to file Form 709 every year. To avoid the resulting absurdity, Congress wrote in something called the "annual exclusion." It's presently $13,000 per recipient per year, and that number adjusts for inflation every so often. Put simply, the first $13,000 in gifts you make to a person in any one year are "freebies," ignored for gift tax purposes. If you have two children, you can give each of then $13,000 and not owe any gift taxes. A married couple can combine their exclusions (something called "gift splitting") and give $26,000 per year to each recipient tax free--it's considered to come equally from both, no matter who wrote the check or made the transfer.
Now here's the tricky part: the annual exclusion only applies to a "present interest" gift; that is, something that the recipient can enjoy immediately. A gift of a right to receive something in the future, or a gift in trust that won't be distributed immediately, is not a present interest, and doesn't get the benefit of the annual exclusion.
It's often not a good idea to make a substantial gift outright to a young person, or an adult with maturity or creditor problems. You'd want to hold the property in trust so the beneficiary can't mishandle it--and, in the case of a minor, so you don't have to establish a guardianship to hold the property. Section 2503(c) of the IRC sets out a specific exception for gifts in trust to a minor, but section 2503 trusts have to terminate when the beneficiary reaches age 21. 21 is the traditional age of majority, but not always a comfortable age to be distributing substantial wealth to someone.
So does that mean that if you want to make a gift in trust to, say, age 30 you can't use the annual exclusion? No; there's a work-around called a "Crummey power," named after the United States Tax Court case which validated the tactic. The trust will give the beneficiary a legal right to withdraw property as soon as it's added to the trust, but that right expires one month after the date the beneficiary (or, if a minor, her parent or guardian) is advised that a contribution has been made. That's a present enough present interest to qualify the gift for the annual exclusion. As you might expect, this is something we use a lot in my business.
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