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Elder Law and Estate Planning Blog - Lancaster, PA

Friday, July 12, 2013

Making Gifts to Minors

On January 1, 2013, the annual exclusion from the gift tax rose to $14,000.  This means that a person may give up to $14,000 to as many recipients as he or she wishes, meaning if you have 2 children and 8 grandchildren, you can make ten tax-free gifts of $14,000.  If you’re married, both you and your spouse can make a gift of $14,000.  The reason for most people making these gifts is to reduce the size of their estate.
But what if you want to give this gift money to a child.  A single gift of $14,000 is a lot to give a child, not to mention $28,000.  It’s too much to be used as spending money, and you don’t want this money to be left in the hands of your 16 year old grandson.  And this money would belong to your grandson; his parents have no control over it.  The law treats the minor as a separate person, and control of his or her property is governed by laws to protect the minor.  One way to handle this money is to create a Trust and appoint a Trustee, but there is another way.
Pennsylvania’s Uniform Transfers to Minors Act (UTMA) allows individuals to give property to a minor while restricting the minor’s access to that property until a certain age (usually 21, but there are exceptions which require distribution at 18 or 25).  With an UTMA account, the donor appoints a custodian to manage and invest the property until the minor reaches majority age.  The minor’s access to the account is restricted, but the custodian may use the property for the minor’s benefit, similar to the duties and authority of a trustee.  Unlike a trustee, the custodian does not need to provide regular accountings to the court of all activity, but he or she still must maintain accurate records of account activity.
Any adult can be a custodian, but the donor should not name himself or herself as custodian.  Additionally, any earned income on the custodial property is reportable on the minor’s income tax return.  While the tax is owed by the child, the rate of tax is determined by the parents’ tax bracket if the child received more than $1,900 or unearned income (this is known as the “kiddie tax”).
So how do you open an UTMA account?  All you have to do is transfer any type of property to an individual “as custodian for (the minor) under the Pennsylvania Uniform Transfers to Minors Act.”  Once the account is created using this language, the property belongs to the minor and cannot be revoked.  And remember to use the child’s social security number on the account.

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