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Options Available When Gifting to Minors

The following outlines different methods of transferring assets to minors:

A direct transfer, i.e., the transfer of assets into the minor’s name or establishing a bank account in the minor’s name, is the simplest but most problematic way of making a gift. A court-appointed conservator and court approval may be required if it becomes necessary to sell the stocks or use the bank account. Conservators must file annual accountings with the court. Another major drawback is that after the minor reaches majority at age 18, he or she is entitled to full control of the property

Creating investment or bank accounts in the owner’s name “in trust for”‘ a minor is another way of making a deferred gift. This is not a completed gift until the registered owner dies, at which point the money in the account is payable to the minor. The registered owner has to pay taxes on the income earned on the money at her own tax rate (not the minor’s, which is generally lower than the owner’s rate).

A simple, inexpensive way of making gifts to minors is by transferring the cash, securities, or other property to a custodian for the minor under the Uniform Transfers To Minors Act (UTMA). UTMA gifts qualify for the $17,000 per donor annual exclusion and $17,000 per donor annual generation skipping transfer (GST) tax exclusion. UTMA accounts terminate when the minor reaches age 21.

Another simple, inexpensive way of making gifts to minors to fund education costs is to transfer cash to a 529 plan you create and control. These gifts also qualify for the annual exclusion and allow the donor to treat the contribution as made over a five calendar year period. This allows the donor to utilize as much as $85,000 in annual contributions for one beneficiary in any one year.

The trust mechanism offers flexibility and is often the best way to make gifts to minors. Trusts can be set up for the benefit of only one beneficiary or for the benefit of two or more beneficiaries, sometimes described as a sprinkling trust.” Gifts to trusts for the benefit of minors qualify for the annual exclusion of up to $18,000 ($34,000 if gift splitting by husband and wife) if the trust either terminates at age 21 (a Section 2503(c) trust) or the beneficiary is given a “Crummey” power allowing the beneficiary to demand withdrawals from the trust during a specified period of time (a Crummey trust). Broad discretion is given to the trustee to use any part or all of the income and principal for the beneficiary or beneficiaries. The remaining trust assets are to be paid out to the beneficiary or beneficiaries at age 21 under a Section 2503(c) trust or at the prescribed ages set forth in the trust agreement under a Crummey trust. Gifts up to $17,000 ($34,000 if gift splitting by husband and wife) to either trust also are exempt from GST tax.

An individual may make tuition payments or unreimbursed medical expense payments directly to an institution for the benefit of any person and not be subject to gift tax. These gifts are in addition to the annual exclusion of up to $17,000.

A single person or couple interested in providing for their children and grandchildren but also for later generations can create a trust of up to $12,920,000 ($25,840,000 for a couple) for the benefit of their descendants without becoming subject to the GST tax.

For a list of questions to ask yourself or your clients to determine the need for a business succession plan contact Jeffrey M. Manley at: jmanley@maypotenza.com or at 602.774.3505.

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Jeffrey M. Manley