Lifetime and Testamentary Gifting Strategies

When a gift is made to a minor, defined as an individual under eighteen (18) years of age, there are unique issues to consider.

Since a minor lacks legal capacity to own assets, the Uniform Transfer to Minors Act (UTMA) was created to protect assets that are gifted to minors. The Act details when minors can receive outright control and ownership of assets managed by one or more custodians on behalf of the minor child. 

One of the primary advantages of establishing a UTMA account is that funds deposited and invested in the account are exempt from having to prepare and file a federal gift tax return for transfers by gift of up to $17,000 per child for 2023, and up to $34,000 per year for split gifts made by parents to their child. 

This gift may be in the form of cash, stocks, bonds, or other financial assets. Both income and capital gains earned on assets transferred to a UTMA is taxed at the minor’s rate. Since a minor’s income tax rate each year is usually lower than the donor’s income tax rate, this often results in income tax savings for the family. 

However, please consider that using a UTMA account for a child can make the recipient of a gift less eligible for needs based scholarship opportunities and upon the attainment of the age of majority, the assets on the account must be transferred to the recipient.

While the custodian of a UTMA account must distribute the balance of funds held in the account to the minor upon the child’s attainment of the age of majority, lifetime gifts and testamentary bequests that involve substantial assets are often best distributed using a trust-based estate plan, instead of a UTMA, which mandates the distribution of all assets held in the account, in order to protect the assets from being spent or dissipated soon after the child attains the age of majority. 

For example, a trust distribution schedule may provide as follows: 20% of the trust corpus is distributed to the beneficiary at age 30; one-half of the remaining balance is distributed at age 35; and the remainder of assets invested in the trust is distributed to the beneficiary upon the attainment of 40 years of age. The theory here is that the recipient of the gift would come into their gifted or inherited assets over a period of time, instead of in one lump sum. This would allow the child to achieve greater financial maturity, knowledge, and experience about managing, investing, and spending assets which are often transferred to them by their parents and grandparents.  

It is important to note that during the time period when assets are invested in a trust, the trustee has the full legal authority to make distributions to or for the benefit of the beneficiary of the trust for their health, education, maintenance and support. 

Please also note that trusts established for minors may contain specific provisions to protect and insulate both lifetime gifts and inheritances from divorces, lawsuits and bankruptcy creditors of a child throughout the life of a child.

Asset Protection Trusts can also be designed so that upon the passing of a beneficiary, the assets invested in the trust can distribute to the children of a beneficiary, ensuring a blood-line distribution of inherited assets trust assets, and to siblings of a beneficiary if the beneficiary passes away with no lineal descendants.