Your Estate Matters
How to give gifts to minors and not suffer because of it
MANY parents or grandparents may want to make gifts now for the future benefit of little ones.
Under current tax law, each of us can give up to $12,000 a year per person to those we want to gift -- without gift-tax concerns -- provided that the gift is immediately accessible to the recipient.
But there are special and practical concerns. First, minors lack the legal capacity to receive gifts. Second, minors often lack the maturity to manage money.
Here are three common ways to give money for the benefit of minors so that the gifts will qualify for the $12,000 yearly gift-tax exclusion:
» Gift under the state Transfer to Minors Act.
Under this act, you can make a gift to the custodian to hold the assets for the benefit of the minor until age 21.
At that time, the gift vests and the funds belong to the minor whether or not the minor is mature enough to handle the money wisely.
This is a fairly simple way to make a gift to a minor, but you need to consider that the recipient has total control of the funds at age 21.
» Gift under the a Section 2503(c) trust
With a Section 2503(c) trust (named after the part of the Internal Revenue Code allowing it), a gift is made to a trust for the benefit of one child only.
The funds in the trust must be available for the child's needs while the child is still a minor.
Once the recipient reaches age 21, he or she must have an opportunity to withdraw the funds. This opportunity may be for a short time, and then the trust can continue, if the child does not withdraw the funds.
» Gift under a Crummey trust
A Crummey trust (named after a legal case pioneering the method) is another way to gift assets into a trust so that the $12,000 annual gift-tax exclusion will apply.
A major advantage of a trust of this type is that it can continue for the life of the child and even longer.
This trust is a good option for immature young people.
For the $12,000 exclusion to apply to a Crummey trust, the beneficiary, or his or her guardian, if the beneficiary is a minor, must have the right to withdraw the funds when contributed.
The withdrawal right may be limited to 30 days.
Another advantage of the Crummey trust is that it can have multiple beneficiaries. This allows you to "pool" money for the use of any beneficiary.
For example, if you used one Crummey trust for four beneficiaries, you could gift 4 X $12,000 = $48,000. If the trustee concluded that one beneficiary needed the entire $48,000, the funds could be used for that one beneficiary.
IF YOU want to make gifts to the minors in your family, think carefully about when you want them to be able to have unrestricted access to the funds. Young people can differ in their maturity and ability to handle money.
You may also have reasons for gifting differently to one or more children.
Before you give, have a frank discussion with your attorney. Gifting to minors using a trust may be the best solution and a powerful, flexible way to transfer assets to minors.
Attorneys Judith Lee Sterling and Michelle H. Tucker, of Sterling & Tucker, can be reached through www.sterlingandtucker.com
or by calling (808) 531-5391.