Bill sets up two trusts in 2011. The first is for his son, John, to which he contributes $200,000 during the current year. (The income interest is valued at $100,000 and the remainder interest's value is $100,000.) Bill plans to continue contributing money to the trust each year but John can withdraw only the lesser of $13,000 or the amount transferred to the trust each year. The trustee can pay the amount annually until John receives the trust assets at age 40. The second trust is for his 10-year old son, Tim. Bill contributes $50,000 this year. (The income interest is equal to $10,000 and the remainder interest is equal to $40,000.) The trustee may distribute the income or principal to Tim until he reaches age 21, at which time the assets will be transferred to Tim. In 2012, Bill contributes $10,000 to John's trust and $15,000 to Tim's trust. What types of trusts are these and what are Bill's gift tax consequences in 2011 and 2012?

Question

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The Answer is John's trust is a Crummy trust and Tim's trust is a 2503(c) minor trust. In 2011, Bill makes a taxable gift of $187,000 ($100,000 income interest - $13,000 exclusion + $100,000 remainder interest) to John. He makes a $40,000 taxable gift to Tim as his $13,000 exclusion can only offset the $10,000 value of the current income interest. It cannot offset any of the remainder interest. His total taxable gifts in 2011 are $227,000.
In 2012, his only taxable gift is the $2,000 transferred to Tim's trust ($15,000 - $13,000 exclusion). The $10,000 transferred to John's trust does not exceed the annual exclusion.

Bill Sets Up Two Trusts in 2011