The Gift Tax Exclusion and Minors: Some Tips

In 2022, the annual exclusion for Federal Gift Taxes increased to $16,000 per person per year. While gifting is widely recognized as important for wealth transfer, several considerations should precede any gift, particularly when minors are involved.

Issues with Direct Gifts to Minors

Outright gifting to minors carries significant drawbacks. Assets become exposed to creditors, divorce proceedings, and litigation. Additionally, the giver loses control over how funds are used.

A custodial account (UTMA) provides basic structure but creates problems upon maturity. Consider this scenario: a $16,000 annual exclusion gift placed in a custodial account when a child is nine years old will accumulate to $160,000 by age eighteen – with no restrictions on access.

If the custodian changes before the minor reaches legal age, naming a successor is possible but becomes burdensome and expensive if undocumented.

Better Alternatives

Trust Options and 529 Plans: These provide substantially greater control. Trustees can manage accounts long after beneficiaries reach adulthood. While 529 plans limit distributions to educational expenses, trusts permit broader asset use.

Section 2503(c) Minors Trust: Designed for annual exclusion gifts to minors under age 21, these trusts require that assets benefit the single beneficiary. At twenty-one, beneficiaries gain withdrawal rights, but remaining assets can remain in trust or convert to another irrevocable form.

Irrevocable Gift Trust (IGT): This option provides maximum control. The creator appoints trustees and designates alternates. Unlike 2503(c) trusts, IGTs need not terminate or grant unrestricted access to income or principal.

Recommendation

For assistance with these complex matters, The Stegall Law Firm encourages you to schedule a consultation regarding elder law and estate planning strategies. We can help you structure gifts to minors in a way that protects both the assets and the young beneficiaries.