A 2642(c) trust is a special type of irrevocable trust that allows a donor to make annual‑exclusion gifts to a skip person (usually a grandchild) without using any GST lifetime exemption, as long as the trust meets the strict requirements of IRC § 2642(c).
A 2642(c) trust qualifies for the GST annual exclusion only if there is exactly one skip‑person beneficiary and the trust assets are included in that beneficiary’s estate if not fully distributed.
Why Use a 2642(c) Trust?
This trust is used when the donor wants to:
- Make annual exclusion gifts to a grandchild or other skip person
- Avoid using GST exemption
- Keep assets in trust rather than giving outright
- Maintain estate‑tax efficiency
- Ensure assets are protected but still qualify for GST annual exclusion
It is especially common for grandchildren’s trusts and ILITs intended for skip persons.
When done correctly, the grantor avoids gift tax, avoids GST exemption usage, and avoids estate tax inclusion.
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