Grandchildren's Trust

What Is a 2642(c) Grandchildren's Trust?

A 2642(c) trust — named after Section 2642(c) of the Internal Revenue Code — is a trust specifically designed for gifts to grandchildren (or other "skip persons") that qualify for both the annual gift tax exclusion and an automatic exemption from the generation-skipping transfer tax (GST tax). Without proper planning, gifts that skip a generation can trigger an additional layer of tax on top of the regular gift and estate tax. A 2642(c) trust avoids that.

To qualify under Section 2642(c), the trust must meet specific requirements: it must benefit only one beneficiary (a single grandchild), the trust assets must be includable in that beneficiary's gross estate if they die before the trust terminates, and no distributions can be made to anyone other than that one beneficiary during the trust term.

Why Does the GST Tax Matter?

The generation-skipping transfer tax is a separate tax that applies when you transfer wealth to someone more than one generation below you — like a grandchild. It exists to prevent families from avoiding estate tax at each generational level by simply skipping a generation. The GST tax rate is steep, and without proper planning, it applies on top of any gift or estate tax.

A 2642(c) trust solves this problem for annual exclusion gifts. Each year, you can contribute up to the annual exclusion amount to a separate 2642(c) trust for each grandchild, and those contributions are automatically exempt from the GST tax — without using any of your lifetime GST exemption. Over time, this can transfer significant wealth to your grandchildren in a highly tax-efficient way.

How Is a 2642(c) Trust Different From a 2503(c) Trust?

Both trusts facilitate tax-advantaged gifts to younger generations, but they serve different purposes. A 2503(c) trust is designed for gifts to your own children (minors under 21) and focuses on qualifying for the gift tax annual exclusion. A 2642(c) trust adds the additional benefit of GST tax exemption for gifts to grandchildren.

The 2642(c) trust also has stricter requirements — most notably, it can only have one beneficiary. You can't create a single trust for all your grandchildren and have it qualify. Each grandchild needs their own trust. The trust must also ensure that if the grandchild dies before the trust terminates, the assets are included in their estate — typically through a general power of appointment.

The Taormina Firm's Approach

Vince helps grandparents in the St. Louis area structure 2642(c) trusts that maximize the tax benefits while protecting assets for the next generation. He'll walk you through the single-beneficiary requirement, explain how trust income and principal distributions work, and coordinate the trust with your broader estate plan. If you're looking for a smart, tax-efficient way to provide for your grandchildren, a 2642(c) trust is one of the best tools available.