Summary:
Article describes four ways to make gifts to or for a minor.

If you give your grandson money, he will buy a second-hand jalopy. Your granddaughter will buy clothes. But you want them to save it.

Here are four ways to make gifts to minors and, generally, the legal and tax consequences:

Outright gift: This is an expedient way to make a small gift. But if it's large or the child will own life insurance, real estate or securities, a court-appointed guardian may be necessary.

Uniform Transfer to Minors Act: This law, adopted by Tennessee and more than 40 other states, allows gifts without the need for a trust or court-appointed guardian. The custodian, an adult, trust or bank, manages the assets without a court intervening. Make the gift by using the title "Jane Doe as custodian for Danny Doe under the Tennessee Uniform Transfer to Minors Act." The state in the title must be where the donor, custodian or minor lives. This arrangement ends when the child reaches maturity. Ages vary depending on the state. A bank, brokerage or mutual fund company can help you set up an account.

2503(c) Trust: A trust requires a document that names the donor, the trustee and the minor and directs the trustee on managing and distributing assets. Under the UTMA, however, state law sets out the directions to the guardian. This trust's major restriction is that it ends when the beneficiary reaches age 21, and the trustee distributes the assets to the beneficiary. The trust will continue, however, if the document gives the beneficiary certain rights at age 21.

Crummey Trust: This trust is more flexible than the 2503(c), as it can end at any age or ages. For example, the beneficiary could get one-third of the trust at ages 25, 30 and 35. Its major disadvantage is that it may be subject to gift tax unless beneficiaries or their guardians have the right to withdraw each contribution for a limited time after it's made, often 30 days. Although they have this right, the grantor assumes they will not exercise it. If they would withdraw, but surely they won't, you wouldn't put any more money in the trust.

The general federal tax effect of the four types of gifts follow:

As to estate taxes, usually, the gift moves the asset from your taxable estate to the child's if you don't retain control.

As to gift taxes, the transfer has no effect if its value is $11,000 or less per donee per year. As far as this amount exceeds $11,000, it will reduce your lifetime estate tax exclusion. Assume that this year you give $111,000 to your daughter or one of the above trusts for her. You won't owe any federal gift tax, but this would reduce your present estate tax exclusion from $1 million to $900,000. Once the exclusion is used, gifts of more than $11,000 will be taxed.

As to income taxes, the trust will pay on income not distributed. The child will pay if the income is distributed and under the non-trust examples. If the child is under age 14, the income will be taxed to the child at the parent's top bracket.

Comment: Before you make a substantial gift, because these are general principles, check with a competent advisor for specific tax, legal and state law rules.

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THE MORAL: It is better to give and save taxes, than to receive.