How to Make Gifts of Money or Property to Minors
Many folks wait until the end of the year to make their gifts – both gifts to charities and gifts to individuals. This year the annual exclusion from the gift tax is $13,000. (On January 1, 2013 it rises to $14,000.) A person may give up to $13,000 to as many recipients as he or she wishes. This is a great way to reduce your estate. The gifts are not income to the recipients, and there are no gift tax ramifications. The donor doesn’t even have to file a gift tax return. If you have 2 children and 8 grandchildren, you could make ten $13,000 gifts totaling $130,000. That $130,000 is completely gift tax and estate tax free.
If you are married, you and your spouse could each give the ten $13,000 gifts so the spouse could also get $130,000 out of his or her estate.
But, you say, $13,000 is a lot of money to give to a child, not to mention $26,000. You are right. There is a big difference between giving your 16-year old grandson $50 and giving him $13,000, or $26,000. Small amounts can be used for spending money, or maybe your grandson will save part of it in a bank account. But you don’t want to give your 16-year old grandson $13,000. Further, if you are serious about reducing your estate, you should be taking advantage of this annual gift tax exclusion by making gifts every year, and these amounts add up. (As Everett Dirkson may have said, “A billion here, a billion there, pretty soon, you’re talking real money.” )
A parent does not have control over a minor child’s money. The law treats the minor as a separate person in his own right, and the control of the minor’s property is governed by laws to protect the minor. In Pennsylvania, anyone under the age of eighteen (18) is a minor, and there are several mechanisms for legal supervision and protection of a minor’s property. For minor children who come into property by gift or inheritance, or, perhaps, as a damage settlement in a law suit, the law provides alternatives for handling the money. One alternative is a court appointed guardian of the minor child. This approach is expensive and cumbersome.
The Pennsylvania Uniform Transfers to Minors Act (UTMA) is a mechanism under which property can be transferred to a minor, by gift or otherwise, without requiring a court appointed guardian for the minor. It satisfies the IRS requirement for the $13,000 annual gift tax exclusion and is easy to create and administer.
The Pennsylvania UTMA allows the donor of the gift to transfer title to a custodian who will manage and invest the property until the minor reaches age 21 (there are a couple of exceptions which may require distribution at 18, or at 25). Until the minor attains age 21, the custodian holds the assets and may make payments for the benefit of the minor out of the custodial property. (Note that the age of majority in PA is 18, but gifts can be held in an UTMA account until age 21.) If the transfer to a minor is from a will or trust, the document can authorize the UTMA custodian to hold the funds until the minor attains age 25.
The donor selects the custodian when the UTMA transfer is made. Any adult can be a custodian. The donor should not name himself or herself as custodian, because the donor will not get the property out of his or her estate because of retained control over the distribution of the custodial funds. The UTMA account uses the minor’s social security number.
Any property in the custodianship legally belongs to the minor. It can’t be given back to the donor or given to the minor’s parent. The custodian is responsible for safeguarding the property, investing it, delivering it to the minor when he or she attains age 21, and making distributions from it before age 21 in accordance with the law.
A custodian may pay to the minor or expend for the minor’s benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to (1) the duty or ability of the custodian, personally, or of any other person to support the minor, or (2) any other income or property of the minor which may be applicable or available for that purpose.
When the child attains age 21, he may be convinced to contribute the balance remaining in his or her UTMA account to a trust.
Any income earned on the custodial property is income to the minor and reportable on the minor’s income tax return. For a child 18 or under (23 or under if a full time student), the tax is owed by the child, but the rate of tax is determined with reference to the parents’ tax bracket if the child received more than $1,900 of unearned income. This is referred to as the “kiddie tax.”
How do you open an UTMA account? Any bank account, stock certificate, mutual fund account, or other property may be titled John Q. Public as Custodian under the Pennsylvania Uniform Transfer to Minors Act (PUTMA) for the benefit of Suzy Q. Public. Remember to use the child’s social security number on the account.