2642(c) Trust

By: Elliott Stapleton

Why Would You Need This Type of Trust?

To make transfers to grandchildren without using your Generation-Skipping Transfer (GST) Tax exemption. A 2642(c) Trust is used when you have:

  • Only one beneficiary;
  • Who is a skip person (for example, grandchild); and
  • Assets must be included in beneficiary’s estate if the trust is not fully distributed upon death.

Is It Irrevocable or Revocable?

The 2642(c) Trust is irrevocable, meaning once it is created it cannot be changed.

Is a Separate Tax Identification Required?

The 2642(c) Trust does require a separate Tax Identification Number.

Is a Gift Tax Return Required?

Yes, if there are contributions beyond the annual exclusion amount. If there are contributions, you will generally provide a Crummy power to them, which they will typically decline if they want future contributions to be made to the Trust.

How does this type of Trust work?

A 2642(c) Trust is established by an individual who wishes to give gifts to a trust solely for the benefit of a single person who is typically a grandchild. The purpose of this trust is to enable the settlor to make yearly contributions to the trust that qualifies for the generation-skipping transfer (GST) tax annual exclusion under Section 2642(c) of the Internal Revenue Code for the federal gift tax annual exclusion.

To achieve this, the beneficiary is given Crummey withdrawal rights over the contributions to the trust and a general power of appointment over the trust assets in the event of the settlor’s death. This approach also usually removes the trust assets from the settlor’s total estate for federal estate tax purposes.

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