Current Issues Relating to Transfers to Minors

• Publication year: 2000
• Pages: 73
• Citation: Vol. 29 No. 10 Pg. 73

29 Colo.Law. 73 Colorado Lawyer 2000.

2000, October, Pg. 73. Current Issues Relating to Transfers to Minors

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73

Vol. 29, No. 10, Pg. 73

The Colorado Lawyer
October 2000
Vol. 29, No. 10 [Page 73]

Specialty Law Columns

Estate and Trust Forum
Current Issues Relating to Transfers to Minors
by Brandon Culter

Today, a variety of planning mechanisms are available for donors to use when making annual exclusion transfers of property to minors. However, determining the appropriate tools to use will depend on the goals of the donor. Each planning technique serves a different purpose and has advantages and disadvantages. The donor?s desired control control given to the minor, desired income, gift and estate tax benefits, and concerns about the minor?s ability to obtain financial aid are some of the factors that dictate how the transfer to the minor should be made. This article provides an overview of various planning techniques and the issues associated with them

UTMA

The Uniform Transfer to Minors Act ("UTMA")1 is probably the most common vehicle used to make transfers to minors because it is cheap and easy. For the transfer to be effective, UTMA only requires donors to name a custodian on an account or asset. A proper transfer incorporates the whole Act, and thus, requires no additional documentation. The account or asset can be only for the benefit of a single minor

Once made, a transfer under UTMA is irrevocable and vested in the minor.2 The transfer is a completed gift and is eligible for the gift tax exclusion under Internal Revenue Code ("Code") § 2503(c) and the generation-skipping transfer ("GST") tax exclusion under Code § 2642(c)(1). Additionally, the transferred assets are removed from the donor?s estate for estate tax purposes. All income produced by assets under UTMA is taxed to the minor. However, if the minor is under the age of 14, "kiddie tax" rules apply, thus defeating any strategy of gaining income tax benefits on the transfer.3

In Colorado, the UTMA account terminates when the minor reaches the age of 21 or upon the death of the minor.4 Because a minor cannot create a will, the assets pass under the terms of state law upon the minor?s death, which may cause the assets to fall back into the donor?s estate.5 If the donor/custodian dies before the minor is 21, the custodial property is included in the donor?s taxable estate.6 Non-donor parents who serve as custodians may face similar results.7 Thus, if estate tax is a concern, a donor or non-donor parent should never serve as custodian.

The 2503(c) Minor?s Trust

The terms of the 2503(c) Minor?s Trust are set out by an agreement formed between the donor and the trustee. However, the Code and accompanying regulations provide strict guidelines for these terms. One such guideline is that there can be no substantial restrictions on the trust assets (for example, the assets must be used for educational purposes only).8 Principal and income must be available for the minor?s benefit.

Any accumulated income is taxed at the trust?s income tax rate. All distributed income is taxed to the minor as under UTMA. The transfer is a completed gift and is eligible for the gift tax and GST tax exclusions. Assets contributed to the 2503(c) Minor?s Trust are excluded from the donor?s estate for estate tax purposes.

As with UTMA, all income and principal for the 2503(c) Minor?s Trust must be distributed to the minor when he or she reaches age 21. However, the trust may continue after the minor reaches age 21 if the agreement provides the minor, on turning 21, with a window of time to withdraw all assets in the trust.9 The agreement also must distribute all trust assets to the minor?s estate or be subject to a general power of appointment if the minor dies before the age of 21.

Unlike UTMA, the donor in a 2503(c) Minor?s Trust can direct the remaining distribution of the trust upon the minor?s death if the general power is not exercised. The trust cannot be used for multiple beneficiaries in sprinkle and spray situations. If multiple beneficiaries are desired, the trust must create separate shares for each beneficiary.

In choosing a trustee, consideration must be given to the potential estate tax consequences. If a donor is also a trustee, the assets may be included in the donor?s taxable estate.10 However, the donor may be able to serve as trustee if distributions are limited by ascertainable standards.11 Ultimately, the safest route is to use an independent trustee.

The 2503(b) Trust

The 2503(b) Trust is different from the 2503(c) Minor?s...