Children’s trusts for lifetime planning after the recent federal changes: estate tax, income tax basis, and advanced structures

A trust for a child is where most family wealth planning ends up. The revocable living trust at the center of an Arizona plan usually creates one at death, and the advanced tools in a high net worth estate plan, from spousal lifetime access trusts to dynasty trusts, usually feed one during life. This guide explains how lifetime children's trusts work after the 2025 federal tax law, for parents in Scottsdale and Paradise Valley and for the CPAs and financial advisors who work with them. For how we design and draft these plans, start with our page for Scottsdale estate planning attorneys.

Families are again reshaping lifetime transfers to children. The One Big Beautiful Bill Act, signed July 4, 2025, preserved and enlarged transfer tax capacity: the basic exclusion amount rose from $13,990,000 in 2025 to $15,000,000 per person in 2026, and the top estate tax rate remains 40 percent.^{[3, 5, 6, 14]} Income tax basis planning remains central, because much of the wealth families hold sits in low-basis assets and retirement accounts. This guide surveys the new landscape and then moves from fundamentals to advanced techniques practitioners can implement today. It focuses on trusts created during the parents' lifetimes for children and descendants, with an emphasis on estate tax efficiency and basis improvement after death. It also covers beneficiary deemed owner trusts under Section 678, including BDITs and BDOTs, and how they coordinate with powers of appointment, swap powers, community property, S corporation stock and retirement accounts. For the wider picture, see the nine purposes of an Arizona estate plan.

What is a children's trust?

Parents choose a trust over an outright gift or inheritance for four reasons. A minor cannot manage property, and a young adult may not be ready to. Property held in a properly drafted trust is far harder for a child's creditors or a divorcing spouse to reach.^{[1, 15]} And property that stays in a trust with GST exemption allocated to it can pass to grandchildren without being taxed again in the child's estate.^{[2, 16]}

Most plans use one of two shapes. A staged trust pays out at set ages, for example one third each at 25, 30 and 35. A lifetime trust never has to pay out. The child can become a co-trustee, with an independent trustee holding the sensitive powers, and limiting the child's own distribution power to health, education, maintenance and support keeps that power from being a general power of appointment for estate tax purposes.^[2]

Who uses lifetime children's trusts

• Business owners, whose company is usually the largest asset a children's trust will ever hold.
• Founders and owners approaching a sale or liquidity event, who fund trusts while values are still modest.
• Senior executives with concentrated stock and equity awards.
• Family office principals coordinating trusts across branches and generations.
• Multi-generational families building dynasty structures for grandchildren.
• Retirees updating older plans and beneficiary designations.
• Athletes and public figures who want privacy and protection for young heirs.

See everyone we serve.

What changed in 2025 and 2026, and what did not

The 2025 law settled the question that shaped estate planning for most of the prior decade: whether the exemption would be cut roughly in half in 2026. It was not. The sequence below is what matters for children's trusts. Our analysis of the $15 million exemption and our key takeaways from the One Big Beautiful Bill Act cover the law more broadly.

1. July 4, 2025

   The One Big Beautiful Bill Act (Pub. L. 119-21) is signed. Section 70106 sets the basic exclusion amount at $15,000,000 with no scheduled expiration, and Section 70204 creates Trump accounts for children.^{[4, 5, 9]}

2. October 2025

   The IRS publishes the 2026 figures in Rev. Proc. 2025-32: a $15,000,000 exclusion and GST exemption, and a $19,000 annual exclusion.^[3]

3. December 2025

   IRS Notice 2025-68 previews the Trump account regulations without addressing the gift tax treatment of contributions.^[17]

4. January 1, 2026

   The $15,000,000 exemption takes effect, and the annual limit on 529 plan distributions for K-12 costs rises to $20,000.^{[4, 10]}

5. July 4, 2026

   Trump accounts begin accepting contributions.^[9]

6. July 13, 2026

   Rev. Proc. 2026-25, published in the Internal Revenue Bulletin, gives certain donors a gift tax safe harbor for Trump account contributions.^[18]

7. September 17, 2026

   This guide was reviewed against the statutes, regulations and guidance in the sources below as of this date.

8. January 1, 2027

   The exemption begins annual inflation adjustments, rounded to the nearest $10,000.^[4]

The exemption and the rate

Section 70106 of the 2025 Act amended Section 2010(c)(3) to set the basic exclusion amount at $15,000,000 for 2026, up from $13,990,000 in 2025, with inflation adjustments beginning in 2027 and no scheduled expiration. The GST exemption equals the basic exclusion amount, so it is also $15,000,000. The estate tax rate schedule still tops out at 40 percent under Section 2001(c).^{[3, 4, 6, 14, 16]} For planning, the headline message is unchanged: use lifetime exemptions thoughtfully, and keep the focus on basis where families hold concentrated, appreciated positions.

The GST exemption for any year equals that year's basic exclusion amount under Section 2631(c). Combined figures assume neither spouse has used any exclusion. The 529 figure is five times the annual exclusion under Section 529(c)(2)(B).^{[3, 10, 14, 16]}

The step-up in basis remains

Section 1014 still gives property included in a decedent's gross estate a basis equal to its fair market value at death. The consistency rule of Section 1014(f) and the reporting regime of Section 6035 and Form 8971 still apply.^{[7, 19, 20]} Final regulations issued in September 2024 removed the proposed zero-basis rule for unreported property and eliminated subsequent-transfer reporting for every beneficiary except a trustee; the consistency requirement reaches property whose inclusion increased the estate tax.^[21] Revenue Ruling 2023-2 reiterates a critical limit: assets owned by a grantor trust that are not included in the grantor's gross estate do not receive a basis adjustment merely because the grantor is treated as their owner for income tax purposes.^[8] Inclusion drives basis, not grantor status.

Anti-clawback remains in place

Treasury Decision 9884 and Treasury Regulation Section 20.2010-1(c) confirm that completed gifts sheltered by a higher exclusion amount are not penalized if the exclusion is lower at death.^{[22, 23]} Because the 2025 law removed the scheduled 2026 reduction, clawback now matters only if a future Congress lowers the exemption. The 2022 proposed anti-abuse rule, which would deny that protection for certain gifts that remain includible in the donor's gross estate, such as transfers with retained interests or powers, has not been finalized as of this review.^[24] Plans that rely on the special rule should still avoid retained strings that invite the exception.

What the 2025 law added for children

Two provisions matter directly to families with children. Section 70204 created Trump accounts, a new kind of individual retirement account for children under 18, and Sections 70413 and 70414 widened 529 plans to cover more K-12 and credentialing costs.^{[5, 9, 10]} Both are covered in gifts to a child in 2026.

Designing a lifetime trust for a child

Core goals and design choices

A lifetime trust for a child is usually drafted to achieve five goals: reduce transfer taxes; keep assets available for education, a first home or a business; protect against creditors and divorce; preserve or improve income tax basis; and give the trustee guidance that anticipates future tax and family changes. Each goal drives basic choices, among them discretionary or support-standard distributions, powers of appointment that preserve a future basis option, grantor or non-grantor income tax status, the trust's situs, and whether to use a directed trustee. Coordinate every choice with the parents' own plan and with the beneficiary designations on retirement accounts under the 2024 final required minimum distribution regulations.^[25]

We make the design decisions in this order:

1. Who the trust is for. One child, a single pot for all children, or descendants by branch.
2. When, if ever, it pays out. A lifetime trust, staged ages, or full discretion with a path for the child to become a trustee.
3. Who decides. An independent trustee, a family co-trustee, a distribution committee or a trust protector.
4. What standard applies. Health, education, maintenance and support, or broader discretion held only by an independent trustee.
5. How it is taxed. A grantor trust, a non-grantor trust, or a trust the child owns for income tax purposes.
6. What flexibility survives. Limited powers of appointment, decanting authority, and formula general powers that can create basis later.
7. Where it lives. Arizona situs or another state, and who serves as trustee there.

Estate tax basics that anchor every draft

Remember what causes inclusion: retained enjoyment or control under Sections 2036 and 2038, incidents of ownership in life insurance under Section 2042, a general power of appointment under Section 2041, and the three-year rule for certain transfers under Section 2035.^{[2, 26, 27, 28, 29]} If a child or parent holds a general power over trust assets at death, those assets are included in that person's estate and generally receive a basis adjustment at that death.^[7] This simple point drives most of the basis strategies below.

Basis rules that shape children's trusts

Section 1014(e) denies a step-up when appreciated property is given to someone who dies within one year and the property passes back to the donor or the donor's spouse. Under Section 1014(b)(6), community property can receive a full basis adjustment for both halves at the first spouse's death, which matters in Arizona.^{[7, 30]} The reporting rules apply when an estate tax return is required, and the consistency rule applies to property whose inclusion increased the estate tax.^{[19, 21]} Drafting must respect these hard-edged rules. Our guide to revocable trusts after the 2025 law shows how the community property step-up works for Arizona couples.

Arizona law that shapes a children's trust

Most of the tax rules in this guide are federal. The rules that decide who can reach a trust, how long it lasts and how it can change come from Arizona's trust code and community property statutes. An Arizona plan should account for each of these.

• No state death tax. Arizona imposes no estate, inheritance or gift tax, so a children's trust is designed around the federal exemption, income tax basis and family goals.^[11]
• A flat 2.5 percent trust income tax. A resident trust's taxable income is taxed at 2.5 percent.^{[12, 31]} A trust is an Arizona resident trust if at least one fiduciary is an Arizona resident, with a special rule for corporate fiduciaries that administer trusts across state lines.^[32]
• Trusts can last 500 years. Arizona's perpetuities statute validates an interest that vests or terminates within 500 years after it is created, which suits families planning for grandchildren and beyond.^[13]
• Spendthrift and discretionary protection, with limits. A spendthrift provision keeps a beneficiary's creditors from reaching the beneficiary's interest, or a distribution before the beneficiary receives it, and a creditor generally cannot compel a discretionary distribution.^{[1, 15]} The main statutory exception lets a beneficiary's child with a support order attach distributions, and that exception does not apply to a special needs trust.^[33]
• Inherited property is separate property, until it is mixed. Property a spouse acquires by gift or inheritance, and its increase, is that spouse's separate property.^{[34, 35]} Commingling can blur that line; assets that stay in your child's trust stay identifiable.
• No self-settled asset protection trust, with a tax reimbursement safe harbor. A settlor's creditors can reach whatever an irrevocable trust could pay the settlor, but a trustee's power to reimburse the settlor for income tax on trust income does not by itself let those creditors reach the trust.^[36]
• Custodial accounts end at 21. Property given under the Arizona Uniform Transfers to Minors Act must be delivered to the child at 21, or at 18 for certain transfers by a fiduciary or an obligor. A trust can hold property for as long as you choose.^[37]
• Small payments to a minor, without a court. A person who owes money to a minor can pay up to $10,000 a year to the adult caring for the minor, to the minor's guardian, or into an insured account in the minor's name, or directly to a married minor.^[38] Above that, the choices narrow to a court-appointed conservator, a custodial account that ends at 18 or 21, or a trust.
• Changing an irrevocable trust. A trustee with discretion over distributions can decant into a new trust without prior court approval when the statute's conditions are met, and interested persons can resolve many trust matters by nonjudicial settlement agreement.^{[39, 40]} See our trust planning and modification practice.
• Information rights. A trust can relax the trustee's default duty to keep beneficiaries informed, which many parents want while a child is young. It cannot eliminate the duty to respond when a qualified beneficiary of an irrevocable trust asks for reports and information reasonably related to the administration of the trust.^{[41, 42]}
• Directed trusts. When a trust makes its assets subject to someone else's direction, the directed trustee has no duty to review those directions and is not liable for following them unless it acts in bad faith or with reckless indifference.^[43] That lets a family adviser manage a closely held business interest while an independent trustee handles distributions. Our trust administration practice advises trustees on these duties.

Gifts to a child in 2026: custodial accounts, 529s, Trump accounts and trusts

Most families use more than one of these. The table compares them on the points that usually decide the choice. Only the trust options keep protection in place after the child is grown.

Sources: Arizona UTMA termination rules, Sections 2503, 529 and 530A, and Rev. Proc. 2026-25.^{[9, 10, 18, 37, 44, 45, 46]}

Section 2503(c) minor's trusts

For smaller annual funding, a trust that satisfies Section 2503(c) qualifies for the annual exclusion without Crummey notices. The property and its income must be available to be spent for the child before age 21, whatever is left must pass to the child at 21, and if the child dies first it must go to the child's estate or as the child appoints under a general power of appointment.^{[44, 45]} These trusts can be layered with a lifetime trust that holds the family's larger, longer-term gifts.

Crummey trusts and annual exclusion gifts

A gift to an ordinary trust is a gift of a future interest, which does not qualify for the annual exclusion. A Crummey power fixes that by giving the beneficiary a temporary right to withdraw each contribution, the approach the Ninth Circuit upheld in Crummey v. Commissioner.^{[44, 46]} The written notice of that right is the trust's proof that the right was real. Two cautions apply. A lapse of the power is treated as a release by the child to the extent it exceeds the greater of $5,000 or 5 percent of the assets that could satisfy it.^{[2, 47]} And a gift in trust for a grandchild qualifies for the GST annual exclusion only if the trust benefits that grandchild alone during the grandchild's life and would be included in the grandchild's estate; otherwise, GST exemption should be allocated, automatically or on a timely gift tax return.^{[48, 49]} Our irrevocable life insurance trust page explains how we run the annual notice cycle.

529 plans after the 2025 law

A contribution to a 529 plan is treated as a completed gift of a present interest, so it qualifies for the annual exclusion, and a donor can elect to spread a larger contribution over five years: up to $95,000 per beneficiary in 2026, or $190,000 from a married couple. The account is generally outside the donor's estate, except for the portion allocable to years after death when a donor dies during a five-year election period.^{[3, 10]} The 2025 law expanded qualified K-12 expenses beyond tuition to curriculum, books and instructional materials, online materials, outside tutoring, standardized and admissions test fees, dual-enrollment fees and educational therapies for students with disabilities, for distributions after July 4, 2025. It raised the annual K-12 limit from $10,000 to $20,000 beginning in 2026, and it added certain postsecondary credentialing expenses.^{[5, 10]}

Trump accounts

A Trump account is a traditional individual retirement account created for a child under 18. Contributions have been accepted since July 4, 2026, and are capped at $5,000 a year until the year the child turns 18, with inflation adjustments after 2027. They are not deductible, and until that year the account must be invested in mutual funds or exchange-traded funds that track the S&P 500 or a similar index of mostly U.S. companies, use no leverage and charge no more than 0.1 percent a year. Nothing can be withdrawn before the year the child turns 18.^[9] For a U.S. citizen child born in 2025 through 2028, the federal government deposits $1,000 when the taxpayer who claims the child makes the election, and an employer can contribute up to $2,500 a year per employee without the amount being taxed to the employee.^{[50, 51]}

The gift tax question is the one our clients ask first. Section 530A is silent on it, and IRS Notice 2025-68 did not resolve it.^[17] Rev. Proc. 2026-25 now provides a safe harbor: contributions are treated as completed gifts of a present interest that qualify for the annual exclusion, with no gift tax return, but only if the donor is an individual whose only taxable gifts that year are cash contributions to Trump accounts, total gifts to each child stay within $19,000, the contributions produce no gift or GST tax, and no gift tax return is required or filed for any other reason. A grandparent who also funds a trust, allocates GST exemption or files a return for any other purpose falls outside the safe harbor, and the IRS example says those contributions must then be reported as gifts of future interests.^[18] For families already filing gift tax returns, a 529 plan or a trust is usually the cleaner gift.

Direct tuition and medical payments

Tuition paid directly to a school, and medical care paid directly to a provider, are not treated as gifts at all under Section 2503(e). They do not use the annual exclusion or the lifetime exemption, and the same payments for a grandchild are also outside the GST tax.^{[44, 52]} The exclusion covers tuition itself, not books, supplies, room or board.^[53] Layered with a child's trust, direct payments reduce the cadence of Crummey notices and handle near-term costs cleanly.

Who pays the income tax: grantor, non-grantor or the child

Every children's trust has an income tax profile, and it is one of the most consequential choices in the document. A non-grantor trust pays tax on the income it keeps, and its brackets are compressed: in 2026 a trust reaches the 37 percent federal bracket at $16,000 of taxable income, and the 3.8 percent net investment income tax applies to undistributed investment income above the same threshold.^{[3, 54]} Income a trust distributes is generally taxed to the beneficiary instead.^[55] In a grantor trust, the parent pays the tax, and the IRS has ruled that paying it is not an additional gift, which lets the trust grow faster while the parent's estate shrinks.^{[56, 57]}

Sources: the grantor trust rules, Section 678, the S corporation trust rules and the ESBT rate rule.^{[56, 58, 59, 60]} For how non-grantor trusts multiply a founder's Section 1202 exclusion, see our guide to QSBS stacking with trusts.

Two further points. The kiddie tax generally applies to children under 19 and to full-time students under 24, subject to an earned income test, and in 2026 a child's unearned income above $2,700, twice the $1,350 figure in Rev. Proc. 2025-32, is generally taxed at the parents' rate.^{[3, 61]} Distributing trust income to a young child therefore saves less tax than it appears. And for Arizona purposes, a resident non-grantor trust pays the flat 2.5 percent on the taxable income it keeps.^{[31, 32]}

Grantor trust tools that improve basis

Swap powers under Section 675(4)(C)

Most parent-created grantor trusts include a power of substitution that lets the grantor exchange personal assets for trust assets of equivalent value.^[62] Revenue Ruling 2008-22 holds that such a power, held in a nonfiduciary capacity and properly limited, does not by itself cause inclusion under Section 2036 or 2038, and Revenue Ruling 2011-28 holds that it is not an incident of ownership over a life insurance policy the trust owns.^{[63, 64]} In practice, the power lets a parent take low-basis assets back into the parent's own name shortly before death to obtain a step-up, leaving the trust with cash or high-basis assets. Trustees must still police equivalent value and fiduciary fairness whenever the power is exercised.

Formula powers of appointment and the Delaware tax trap

A trust can grant a testamentary general power of appointment that springs only to the extent an older or tax-favored powerholder has unused exclusion. A formula can limit the power so it produces no estate tax while still causing inclusion that yields a basis adjustment.^{[2, 7]} The same result can sometimes be reached by deliberately triggering the Delaware tax trap: Sections 2041(a)(3) and 2514(d) treat the exercise of a nongeneral power as a taxable transfer when it creates another power that, under local law, can postpone vesting for a period measured without regard to when the first power was created.^{[2, 47]} This remains a sophisticated move. It must be drafted with attention to creditor exposure and to state perpetuities law, and Arizona's statute has to be read together with the instrument.^[13]

Upstream basis planning

An upstream power of appointment trust places appreciated assets in the estate of an older family member, often a grandparent, who will not owe estate tax, typically through a formula-limited general power of appointment. The technique can erase large built-in gains while keeping the property in trust for the family.^{[2, 7]} Where the property could come back to benefit the person who funded the trust, the one-year rule of Section 1014(e) and the self-settled trust rules require careful design: avoid a direct round trip to the original donor, and use independent trustees and valuation discipline.^{[7, 36]}

Section 678 trusts: BDITs and BDOTs

The beneficiary deemed owner framework

Section 678(a) treats a person other than the grantor as the owner of any portion of a trust over which that person has a power, exercisable alone, to vest the corpus or income in himself or herself, or has released or modified such a power while keeping control that would make a grantor the owner. Section 678(b) gives way to grantor trust status: a power over income does not shift ownership when the grantor is already treated as the owner.^[58] The result can be powerful. Family assets can be sold to or held in a trust without income tax friction between the child and the trust, and the assets can still stay outside the child's estate if the design avoids Section 2041 exposure.^[2] Our guide to BDITs and BDOTs covers the mechanics in depth.

BDITs in practice

A beneficiary defective inheritor's trust is created by a parent, grandparent or other third party and is typically funded with a modest seed gift, often $5,000. The child holds a withdrawal right over that gift that lapses within the five-and-five limit of Sections 2041(b)(2) and 2514(e).^{[2, 47]} Under Section 678, the child is then treated as the owner for income tax purposes, both while the power exists and after it lapses, if the child keeps powers that would make a grantor the owner.^[58] That status lets the child sell personal assets to the trust for a note without recognizing gain, much as transactions between a grantor and a wholly owned grantor trust are disregarded, while the trust's growth stays outside the child's estate if the instrument avoids retained interests and general powers in the child.^[65] Because the child is both seller and beneficiary, the sale must be for full value, or the sold assets risk inclusion in the child's estate under Section 2036.^[26] Drafting often includes a distribution committee, an independent trustee, and a narrow testamentary power, or none, in the child.

BDOTs in practice

A beneficiary deemed owner trust relies on Section 678(a)(1) without a temporary right to withdraw the whole contribution. Instead, the child holds a continuing power to withdraw the trust's taxable income each year, which makes the child the income tax owner of the income subject to the power.^[58] That withdrawal right is a general power of appointment over whatever it reaches, so the draft manages each year's lapse within the five-and-five limit, or uses a hanging power, to keep accumulated growth outside the child's estate.^{[2, 47]} BDOTs suit families who want the child to bear the tax on trust investments while principal stays protected for later generations.

Comparing BDITs and BDOTs

Both structures place the ongoing income tax on the child rather than on a separate trust taxpayer. Either can be layered with powers of appointment that allow basis optimization at a future death without inviting current inclusion, and in either one the draft must avoid inadvertently creating a general power.

Basis consequences inside Section 678 trusts

Section 678 status is an income tax concept and does not itself cause a basis adjustment at anyone's death. A step-up follows estate inclusion under Section 1014, often achieved with a narrow testamentary general power or a Delaware tax trap clause that springs when the math favors inclusion. Without inclusion there is no step-up at the child's death, and Revenue Ruling 2023-2 makes the same point for grantor trusts.^{[7, 8]}

Retirement accounts, S corporation stock and life insurance

Retirement accounts payable to children's trusts

Final regulations issued in July 2024, which apply to required minimum distributions for 2025 and later years, settle how the ten-year rule works for trusts.^{[25, 66]} Three rules matter most for children's trusts. First, a child reaches the age of majority on the child's 21st birthday. Second, if the account owner's own child under that age is a beneficiary, the account is treated as having an eligible designated beneficiary even if other beneficiaries are not eligible; annual distributions are required, and the account need not be fully distributed until ten years after the youngest such child turns 21.^{[67, 68]} Third, if the owner died on or after the required beginning date, annual distributions continue during the ten-year period.^{[25, 68]} The minor-child rule does not reach grandchildren. The regulations also decide which trust beneficiaries are counted and which can be disregarded, so conduit or accumulation language matters.^[67] Review every beneficiary designation and every trust against these rules, and see our work on planning in retirement.

S corporation stock in a child's trust

When a child will own S corporation shares inside a trust, choose between a qualified subchapter S trust and an electing small business trust. A QSST treats its one income beneficiary as the owner of the S stock and must distribute all of its income to that beneficiary. An ESBT can have several beneficiaries and accumulate income, and it pays tax on its S corporation income at the highest trust rate.^{[59, 60]} Both require careful drafting and a timely election: a QSST election must generally be made within the 16-day-and-2-month period that begins when the stock is transferred to the trust, and the ESBT election follows the same timing.^[69] Confirm that the trust terms meet the single-beneficiary and income distribution requirements for QSST status, and that the trustee knows the deadline. For owners of Arizona companies, this is often the first design question.

Life insurance inside children's trusts

An irrevocable life insurance trust for a child should avoid incidents of ownership and inclusion under Section 2042, and the three-year rule of Section 2035 applies when an existing policy is transferred to the trust.^{[28, 29]} The substitution power authorities above confirm that a properly drafted swap clause does not itself create an incident of ownership over a policy the trust owns.^[64] Coordinate premium gifts with annual exclusion mechanics, and with GST allocations when the trust is meant to last for generations. See our page on irrevocable life insurance trusts in Scottsdale.

Estate tax structures that feed children's trusts

SLATs for parents while funding trusts for children

Spousal lifetime access trusts remain useful for moving appreciating assets out of both parents' estates while the household keeps indirect access through the beneficiary spouse. When each spouse creates one, the two trusts must differ enough to avoid the reciprocal trust doctrine.^[70] Higher exclusion amounts make SLATs attractive for wealth shifts that later fund or supplement trusts for children. Coordinate SLAT drafting with the downstream children's trusts so powers of appointment and decanting provisions line up. See our guide to spousal lifetime access trusts.

IDGT sales to a GST-exempt dynasty trust

An installment sale to an intentionally defective grantor trust remains a workhorse for parents who want to freeze their estates and push growth into a GST-exempt trust for descendants. Because the trust is a grantor trust, the sale is generally disregarded for income tax purposes, and the trust takes the parents' basis in what it buys, so use the swap power to curate basis late in life.^{[62, 65]} If the plan contemplates toggling grantor status or retaining powers that could cause inclusion, confirm the result under the anti-clawback rules and the pending anti-abuse proposal.^{[22, 24]} Our guide to dynasty trusts explains the long-horizon design.

GRATs and QPRTs

Grantor retained annuity trusts and qualified personal residence trusts can still load value into children's trusts. A GRAT works best when its assets outperform the Section 7520 rate used to value the retained annuity, and a GRAT remainder keeps the grantor's basis unless the assets are later included in an estate. A QPRT can move a residence, such as a Paradise Valley home, to children at a reduced gift tax value. Section 2702 sets the design constraints for both.^{[7, 71, 72]} They sit outside the core of this guide but belong on the menu when a family's concentrated positions or homes create the right facts.

Charitable lead and remainder trusts

For a child who will take over a family charity, a charitable lead trust can send investment income to charity during the child's career years and then pour the remainder into the child's dynasty trust. A charitable remainder trust is generally exempt from income tax, so it can sell concentrated, low-basis assets without immediate tax at the trust level.^[73] Its remainder passes to charity, so heirs are usually made whole from other assets, such as a life insurance trust. Both appear in our high net worth planning toolkit.

Making step-up planning work inside children's trusts

When to seek inclusion for basis

With the exclusion at $15,000,000 per person and indexed, more families can tolerate targeted inclusion to improve basis. Three patterns are common: a formula testamentary general power over selected low-basis assets inside a child's trust, held by a parent or grandparent with ample unused exclusion; a Delaware tax trap exercise by an older relative who holds a limited power; and a swap of low-basis assets out of a grantor trust into the parent's name, passing under a will or revocable trust that uses the marital and charitable deductions if needed. The objective is predictable inclusion with little or no estate tax, paired with a clean basis adjustment under Section 1014.^{[2, 7, 62]}

When to avoid inclusion

Avoid step-down traps: Section 1014 also reduces basis on assets worth less than their basis at death. Avoid the one-year gift-and-return pattern that Section 1014(e) bars. Avoid giving a true general power of appointment to a beneficiary with creditor or spending problems. In a community property state such as Arizona, consider community property status for appreciated joint assets so both halves receive a basis adjustment at the first death.^{[7, 30, 34]} Document these choices in the client memo so successors understand why the plan chose inclusion or exclusion at each stage.

Distributions in kind and beneficiary basis

When a trustee distributes appreciated property in kind, the child generally takes the trust's basis unless the trust elects under Section 643(e) to recognize gain at the trust level.^[74] Model the trust-level and beneficiary-level results before making the election, update the trust's basis schedules, and deliver basis information with every in-kind distribution.

Decanting and directed trust regimes

Many modern statutes and trust protector clauses let an independent fiduciary change administrative and tax provisions later, which can include adding a formula general power of appointment or a Delaware tax trap trigger when the math favors inclusion for basis. Arizona's decanting statute requires, among other conditions, that the exercise not adversely affect the tax treatment of the trust, the trustee, the settlor or the beneficiaries, and that it respect the perpetuities limits.^[39] Memorialize the tax analysis, and confirm that any change in governing law preserves the intended perpetuities and creditor results.

Worked example: the estate tax a gift saves, and the basis it gives up

A Paradise Valley couple's estate is well above both exemptions. In 2026 one spouse gives $15,000,000 of marketable securities, with a basis equal to their value, to a GST-exempt grantor trust for the children. The table follows the same assets twenty years later under three outcomes.

Illustration only. Assumes 6 percent annual growth for 20 years, all as appreciation, with no income or distributions; the gift uses the donor's full $15,000,000 exemption, and the rest of the estate is taxable at the 40 percent top rate, with no inflation adjustment to the exemption. Assets kept, or swapped back at equal value for the parent's cash before death, receive a full step-up under Section 1014; gifted assets not swapped keep their $15,000,000 basis. The sale rate is the 20 percent maximum capital gains rate plus the 3.8 percent net investment income tax. Arizona income tax on the gain, at most 2.5 percent, and the parent's payment of income tax on trust income, which would shrink the taxable estate further, are ignored.^{[4, 6, 7, 8, 54, 57, 61, 63]}

The gift saves 40 percent of the growth in estate tax. Without a basis plan, it gives up a step-up worth 23.8 percent of the same growth. In this example the trade still favors the gift by about $5.4 million, and a swap before death keeps the full $13.2 million. The same logic drives the formula general power and upstream strategies above. Our high net worth planning page works through a larger two-spouse example.

Checklists, drafting tips and practice pointers

Drafting checklist for lifetime children's trusts

• Income tax profile. Decide whether the trust will be a grantor trust as to the parent, a non-grantor trust, or a beneficiary deemed owner trust as to the child under Section 678. Build in a future toggle only if the tax and state law consequences are fully vetted.^[58]
• Basis flexibility. Add a carefully limited testamentary general power of appointment or a Delaware tax trap clause that creates inclusion for basis when, and only to the extent, it helps. Consider independent trustee or trust protector control over any formula trigger.^[2]
• Swap power. Include a Section 675(4)(C) substitution power, but require fiduciary oversight and equivalent value. Put valuation mechanics and procedures in the instrument, and cite the revenue rulings in the internal memo to the trustee.^{[62, 63, 64]}
• S corporation stock. If S corporation stock is possible, add QSST-compliant terms or allow ESBT status, and describe the required elections in the trustee's instructions.^{[59, 69]}
• GST coordination. Coordinate GST allocations, and consider reverse QTIP elections for marital trusts that will pour into children's trusts.^{[49, 75]}
• Retirement accounts. If the trust may be a retirement account beneficiary, add language that complies with the final regulations, state whether the trust is a conduit or an accumulation trust, and identify who counts as a beneficiary.^{[25, 67]}
• Arizona terms. State the trust's situs, the trustee succession plan, and whether the trust relaxes the default duty to inform young beneficiaries.^{[41, 42]}
• Tax reimbursement. In a grantor trust, add a discretionary power to reimburse the grantor's income tax. Arizona law provides that the power alone does not let the grantor's creditors reach the trust, which supports the favorable estate tax result described in Revenue Ruling 2004-64.^{[36, 57]}

Basis planning playbook inside the family

• Upstream. Grant a formula-limited general power of appointment to an older relative with unused exclusion to obtain a step-up on selected assets.^[2]
• Swap. Move low-basis assets into the parent's estate shortly before death and move cash or high-basis assets back to the trust. Document the appraisal process.^[63]
• One-year rule. Recognize and avoid Section 1014(e). Do not design a gift that returns within a year to the donor or the donor's spouse.^[7]
• Community property. Confirm title so assets are community property when the basis math favors a full adjustment at the first death.^{[30, 34]}

Workflows and diligence

• Basis schedules. Trustees should keep basis and holding period schedules and deliver updates to beneficiaries and accountants after each in-kind distribution. The Section 1014(f) consistency rule and Section 6035 reporting apply when an estate tax return is required.^{[7, 19]}
• Elections calendar. Track QSST and ESBT deadlines, GST allocations, any reverse QTIP election on the estate tax return, and Section 643(e) elections for in-kind distributions.^{[69, 74, 75]}
• Retirement account audits. Under the 2024 final regulations, audit the beneficiary forms and trust provisions of every client with significant retirement assets who names a children's trust.^[25]
• Gift logs. Record each 529 and Trump account contribution by donor and child, and test the Rev. Proc. 2026-25 conditions before year end.^[18]
• Crummey notices. Send each withdrawal notice promptly and keep proof of delivery.^[46]

We coordinate these calendars with the family's CPA and wealth advisor; see how we work with financial advisors.

Practice examples

Example A: a child sells appreciated S corporation stock to a BDIT

Facts. An adult child owns appreciated S corporation shares in the family company. The child's aunt creates a trust for the child with a $5,000 seed gift, and the child holds a withdrawal right over that gift that lapses within the five-and-five limit, so Section 678 treats the child as the trust's owner. The child sells the shares to the trust for a note at appraised value. Because the child is treated as owning the entire trust under the grantor trust rules, it is an eligible S corporation shareholder, and a QSST or ESBT election becomes necessary only if that status ends. Separately, the child's parents funded a SLAT years earlier with low-basis securities, and as the grantor's health declines, the grantor uses the SLAT's substitution power to take the securities back in exchange for cash of equal value.^{[47, 58, 59, 62]}

Results. Growth on the shares above the note is shifted outside the child's estate, the child pays the income tax on the trust's income, and the swap captures a step-up on the securities at the grantor's death.^{[7, 63]}

Example B: basis optimization with a formula general power of appointment

Facts. A child's non-grantor discretionary trust holds a portfolio with wide basis disparities. The instrument authorizes an independent trustee to grant the surviving parent a testamentary general power of appointment limited by formula to the parent's remaining exclusion, applied first to the lowest-basis assets.^[2]

Results. At the parent's death, the selected assets are included in the parent's estate up to the remaining exclusion and receive a basis adjustment. No estate tax is due, and the rest of the trust stays outside the estate.^[7] Because inclusion makes the parent the transferor again for GST purposes, the parent's executor may need to allocate GST exemption to the included assets.^[75]

Example C: a retirement account payable to a trust for minor children

Facts. An account owner dies after the required beginning date. The IRA names an accumulation trust, which qualifies as a see-through trust, for the owner's two children, ages 8 and 12.^[67]

Results. Because the beneficiaries include the owner's own children under 21, the account is treated as having an eligible designated beneficiary. Annual distributions are required, and the account must be fully distributed by the end of the tenth year after the younger child turns 21. If the same trust instead benefited grandchildren, the minor-child rule would not apply, and the account would generally have to be emptied by the end of the tenth year after the owner's death, with annual distributions in the meantime.^{[25, 68]}

Risk management and ethics

Fiduciary duties and swap powers

Trustees must confirm equivalent value in every substitution. Include appraisal procedures, indemnities and authority to hire valuation professionals. Revenue ruling guidance does not eliminate fiduciary risk, so train fiduciaries to document the process.^[63]

Avoid inadvertent general powers

Monitor any power that lets a beneficiary appoint property to himself or herself, the beneficiary's estate, or the creditors of either. A small drafting mistake can move an entire trust into a beneficiary's estate. Use narrow limited powers, clear savings clauses and ascertainable standards, and require independent trustee consent for significant powers.^[2]

Basis reporting and penalties

When the consistency rules apply, a beneficiary's basis must match the value finally determined for estate tax purposes, and the 2024 final regulations define when that is. Inconsistent reporting can draw an accuracy-related penalty.^{[7, 21, 76]} Confirm that the return preparer and the investment custodian understand consistency reporting before closing the estate or trust administration.

What a children's trust costs at Boland Law Group

We publish our fees. Trusts for children are part of every core estate plan, and lifetime gift trusts are priced by instrument on our advanced schedule. The 2026 minimums below are taken directly from our core estate planning fee schedule and our advanced planning fee schedule.

Published minimums only. Advanced figures include the first $7.5 million funded, apply at the standard 90-day runway before the schedule's risk and timing loadings, and fundings above $50 million are individually quoted. The final fee for every engagement is fixed in a written engagement letter before work begins. See rates and billing practices, build a written range with the fee estimator, or compare the market in our 2026 guide to estate planning costs in Arizona.

Who drafts your children's trust

A partner designs and drafts every plan. Grant M. Boland holds an LL.M. in estate planning and elder law, and Robert W. Boland, Jr. holds an LL.M. in taxation. Both are admitted to the United States Tax Court, and the firm also handles tax controversy and litigation, so the lawyers who draft a trust are prepared to defend its tax positions. Read more about our attorneys and our credentials.

Where we meet families

Our office is in the Scottsdale Airpark at 15100 N. 78th Way, Suite 203, Scottsdale, Arizona 85260. It is open Monday through Thursday from 9 a.m. to 5 p.m. Arizona time and on Saturdays by appointment, and every visit is by appointment. See all locations and appointment options.

• Scottsdale

  Within about 25 minutes of most of the city.

• North Scottsdale

  About 12 minutes to DC Ranch and Silverleaf, and about 32 minutes to Desert Mountain.

• Paradise Valley

  About 17 minutes, off-peak, from the center of town, with in-home meetings in Paradise Valley.

• Carefree

  About 29 minutes from the Carefree Sundial, and serving Cave Creek.

• In your home

  Across the East Valley, and in Prescott, Prescott Valley, Sedona, Clarkdale and Jerome.

• Anywhere in Arizona

  Secure video and telephone consultations.

Conclusion

Lifetime children's trusts are in another period of opportunity. The 2025 law removed the scheduled sunset from a very large exclusion and left the centrality of basis at death untouched. The tools described here let families move wealth to children while keeping the option to harvest basis adjustments later. The common pattern is simple to state: use tax capacity early to remove growth, keep swap powers and formula appointment clauses available, and when the family's facts change, decide deliberately whether inclusion now or later will save more tax. The technical rules remain exacting. With careful drafting and disciplined administration, these trusts can deliver both estate tax efficiency and income tax basis improvement for children and the generations after them.

Frequently asked questions

What is a children's trust, and how is it different from leaving money outright?

A children's trust holds property for a child under terms the parents write, with a trustee who manages the assets and decides on distributions. Money left outright belongs to the child at once, or at 18 or 21 if a custodian holds it, and is exposed to the child's creditors, a divorcing spouse and the child's own estate tax. A properly drafted lifetime trust can protect the same money for the child's whole life, and with GST exemption allocated to it, pass what remains to grandchildren without another estate tax.

How much can we put in a trust for our children in 2026 without paying gift tax?

Each parent can give $15,000,000 in 2026 without gift tax, so a married couple can transfer $30,000,000, and the same amounts apply to the GST tax exemption. Separately, each parent can give $19,000 per child each year under the annual exclusion, or $38,000 per child as a couple, if the gift is a present interest, which for most trusts means using Crummey withdrawal powers. Transfers above the exemption are taxed at 40 percent.

Is the $15 million exemption permanent, or should we still make gifts now?

Under current law the $15,000,000 exemption has no scheduled end date and is adjusted for inflation beginning in 2027, although Congress can always change it. The stronger reason to give during life is growth: assets given today move their future appreciation out of your estate. The trade-off is income tax basis, because gifted assets generally do not get a step-up at your death unless the plan provides a way to bring them back, such as a swap power.

At what age should a child's trust pay out in Arizona?

There is no required age. Arizona custodial accounts must be turned over at 21, but a trust can hold property for as long as you choose, up to 500 years under Arizona's perpetuities statute. Many Scottsdale families now prefer a lifetime trust that never has to pay out, with the child becoming a co-trustee at a set age, over a trust that distributes one third each at 25, 30 and 35. A lifetime trust keeps creditor, divorce and estate tax protection in place after the child is grown.

Does a lifetime trust protect our child's inheritance in an Arizona divorce?

It helps a great deal. Arizona treats property a spouse receives by gift or inheritance, and its increase, as that spouse's separate property, but separate property that is commingled or retitled can become hard to trace. Assets that stay in a trust for your child stay identifiable, and a spendthrift clause keeps a spouse or creditor from reaching distributions before your child receives them. Once money is paid out, it is your child's to protect.

Can our child's creditors reach a children's trust in Arizona?

Generally not before a distribution is made. Arizona enforces spendthrift provisions, and a creditor generally cannot force a trustee to make a discretionary distribution. The main exception is child support: a beneficiary's child with a support order can ask a court to attach distributions, although that exception does not apply to a special needs trust. Property already paid to your child has no trust protection, which is why many families keep assets in the trust and let the trustee pay for things directly.

Will assets in our children's trust get a step-up in basis when we die?

Usually not. Assets given to an irrevocable trust that is outside your estate keep your original basis, even if the trust is a grantor trust, as the IRS confirmed in Revenue Ruling 2023-2. A step-up generally requires estate inclusion. Plans recover basis with a swap power that lets you take back low-basis assets before death, a formula general power of appointment, or upstream planning with an older relative.

Who pays the income tax on a children's trust, and at what rate?

It depends on the design. In a grantor trust the parent pays the tax, which lets the trust grow faster and further reduces the parent's estate. A non-grantor trust pays tax on the income it keeps and reaches the 37 percent federal bracket at $16,000 of taxable income in 2026, plus the 3.8 percent net investment income tax, and an Arizona resident trust also pays Arizona's flat 2.5 percent. Income distributed to a child is generally taxed to the child, often at the parents' rate under the kiddie tax.

What is the difference between a BDIT and a BDOT for our child?

Both are trusts created by someone other than the child, usually a parent or grandparent, that make the child the owner for income tax purposes under Section 678 while keeping the assets out of the child's estate. A BDIT uses a small seed gift with a withdrawal right that lapses, and it is often used for a full-value sale of the child's own assets to the trust for a note. A BDOT gives the child an ongoing right to withdraw the trust's taxable income, so the child pays the tax on investment returns that stay protected in the trust.

Should grandparents fund a Trump account, a 529 plan or a trust in 2026?

For education, a 529 plan is usually the simplest gift: contributions qualify for the annual exclusion, and a grandparent can front-load up to $95,000 per grandchild in 2026 with a five-year election. A Trump account is capped at $5,000 a year and locked until the year the child turns 18, and it gets annual exclusion treatment only under the Rev. Proc. 2026-25 safe harbor, which is unavailable if the grandparent files a gift tax return for any reason that year. For larger or longer-term gifts, a GST-exempt trust gives the most control and protection.

Can a children's trust be the beneficiary of our IRA or 401(k)?

Yes, and it is often the right choice for a minor, but the trust must be drafted for the 2024 final regulations. If the beneficiaries include your own children under 21, annual distributions are required, and the account need not be emptied until ten years after the youngest turns 21. For grandchildren and adult children, the ten-year rule generally runs from your death, with annual distributions if you had reached your required beginning date. Conduit or accumulation language decides who counts as a beneficiary and how much income is taxed at trust rates.

Can a children's trust own stock in our Scottsdale S corporation?

Yes, if the trust is an eligible S corporation shareholder. The usual routes are a qualified subchapter S trust, which must distribute all of its income to one beneficiary who is taxed on the S corporation income, and an electing small business trust, which can have several beneficiaries and accumulate income but pays tax on that income at the top trust rate. The election generally must be made within two months and 16 days after the stock is transferred to the trust, and a missed election can jeopardize the company's S status.

How long can a trust for our children and grandchildren last in Arizona?

Up to 500 years. Arizona's perpetuities statute validates an interest that vests or terminates within 500 years after it is created, and a separate provision addresses trusts with no fixed end when the trustee can sell trust assets and a person living when the trust was created holds an unlimited power to terminate. That makes Arizona a strong home for a dynasty trust that holds GST-exempt wealth for grandchildren and later generations, outside each generation's taxable estate.

Can we change a children's trust after it is signed?

Often, within limits. A revocable trust can be amended at any time. For an irrevocable trust, Arizona lets a trustee with discretion over distributions decant into a new trust without prior court approval when the statute's conditions are met, interested persons can resolve many matters by nonjudicial settlement agreement, and courts can modify trusts in some circumstances. A trust protector clause written in from the start adds flexibility for future changes in the tax law.

Can we keep the trust confidential until our child is older?

Partly. Arizona lets the trust instrument relax the trustee's default duty to keep beneficiaries informed, which many parents use while a child is young. The instrument cannot remove the trustee's duty to respond when a qualified beneficiary of an irrevocable trust asks for reports and information reasonably related to the administration of the trust, so we draft the notice terms with that line in mind.

Are Crummey notices really required every year?

If the trust relies on withdrawal powers to qualify gifts for the annual exclusion, treat them as required. The withdrawal right is what turns a gift to a trust into a present interest, and a written notice to each powerholder is the standard proof that the right was real and could be used. Without that proof, the gifts risk being treated as future interests that use lifetime exemption. Our published fee for Crummey administration is $1,500 a year for up to four powerholders.

What does a children's trust cost at Boland Law Group?

Age-gated trust shares for children and grandchildren are included in every core estate plan, which starts at $5,000 for one person and $5,500 for a married couple for estates up to $5 million, and a continuing lifetime trust for a descendant adds $600 per trust. Lifetime gift trusts are priced by instrument: a standalone GST or dynasty trust starts at $40,000 and a BDIT or BDOT at $15,000, each including the first $7.5 million funded. Every figure is a published 2026 minimum, and the engagement letter controls.

Do we need a children's trust if our estate is below the $15 million exemption?

Usually, yes, if you have minor or young adult children. Most of what a children's trust does has nothing to do with estate tax: it names who manages money for a minor instead of leaving that to a court-appointed conservator, sets the age or conditions for control, and protects an inheritance from creditors and divorce. For most Arizona families the trust is written into a revocable living trust and has nothing to administer until it is funded at death.

Should the trustee of our children's trust be a family member or a professional?

Often both. A family member knows the child and the family's values, while a professional or corporate trustee brings investment discipline, recordkeeping and independence, which matters for tax-sensitive powers. Arizona permits directed trusts, so investment decisions can sit with an adviser while an independent trustee handles distributions. Name successors, and give someone the power to remove and replace a trustee.

Do you meet families in Paradise Valley and North Scottsdale?

Yes. Our only office is in the Scottsdale Airpark, about 17 minutes off-peak from the center of Paradise Valley and about 12 minutes from DC Ranch and Silverleaf. We also meet clients at home in Paradise Valley and across the East Valley, and we hold secure video and telephone consultations anywhere in Arizona. Office visits are by appointment, Monday through Thursday, with Saturdays available by appointment.

Related reading

• Revocable trusts after the 2025 law: estate tax, basis step-up and wealth transfer
• Dynasty trusts: basis, estate tax and GST planning
• Spousal lifetime access trusts: estate tax and basis planning
• BDITs and BDOTs in estate planning
• QSBS stacking with trusts under IRC 1202
• QSBS trust stacking under Treasury scrutiny (2026)
• QSBS after the OBBBA: 2025 and 2026 planning
• Estate tax exemption now $15 million: what it means
• One Big Beautiful Bill Act: key tax takeaways
• Purpose of estate planning in Arizona: nine goals for 2026
• Estate planning costs in Arizona, 2026

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