There is an old saying that it is better to give than to receive. While the validity of this statement is debatable on several levels, there is no doubt that a financial gift to a minor (which, in South Carolina, is a person under 21 who is unmarried and not legally emancipated) has benefits for both the giver and the recipient.
The donors often see a financial benefit, because gifts of this nature are typically tax-deductible. There is usually an intangible benefit as well – the good feeling that comes from providing something for people who cannot provide for themselves – that sometimes well eclipses the economic benefit. And, if children are excited over the prospect of a new video game or iPad, imagine their excitement over a trust fund or college tuition allowance.
48 states, including South Carolina, use either the Uniform Transfer to Minors Act or the somewhat older Uniform Gift to Minors Act. Both have essentially the same purpose and function. UGMA transfers are popular among many donors because they are less complicated than trusts; however, there are some significant differences between gifts and trusts.
Under the UGMA, the donor designates a “Custodian,” who is somewhat like a trustee; often, the donor and custodian are the same person. The funds or other property, like real estate, are held for a minor beneficiary.
Like a trustee, the custodian essentially has a limited fiduciary duty to manage the UGMA funds and/or property “as the custodian deems advisable for the support, maintenance, education and benefit of the minor in the manner, at the same time or times, and to the extent that the custodian in his discretion deems suitable and proper.” So, even though the custodian has some discretion in operation, any decisions must finally benefit the minor beneficiary. Some other features of UGMA transfers are:
- Irrevocable: The donor cannot place any strings or conditions on the gift and can never remove property from the corpus (body) of the gift, even if the donor otherwise has a legal right to make such changes.
- Accountings: Children as young as 14 may petition the court through almost any adult and receive periodic accountings from the custodian.
- Income and Taxation: Before 2006, almost all income that minors earned was immune from income tax. But under current law,
- The first $1,000 of annual income is tax-free,
- The next $1,000 is taxed as if the child was an adult, and
- Taxes on any greater amount are assessed at the parent’s rate.
- Absolute Right to Distribution: On the day that UGMA beneficiaries turn 21, they automatically receive the full amount of all UGMA gifts made for their benefit, unless they are legally incapacitated. Donors have no input as to when the transfer is made or how the money is used.
As a general rule, UGMA transfers are ideal for small gifts or for specific-purpose gifts, like life insurance policies. But for larger gifts, like college tuition funds, UGMA gifts may be a mistake.
As mentioned earlier, these transfers are very simple, because any writing that identifies the parties and invokes the name of the Uniform Gift to Minors Act is normally sufficient. But since the gifts are irrevocable and transfer automatically, there could be problems. Assume that Dan and Darlene Donors desire to prepay Belinda Beneficiary’s college tuition, and they set up a UGMA transfer with a local bank. If Dan and Darlene experience any financial hardship or have an emotional falling-out with Belinda, they cannot touch the money. Moreover, once Belinda turns 21, the UGMA funds are hers to spend as she pleases, and she is under no obligation to use the money for any purpose that Dan and Darlene designated, even if it is in writing.
If the gift is larger, or if the donor has concerns about the way the money will be spent, a minor trust is often a better option. Being a trustee is more work than being a UGMA custodian, mostly because trustees must file annual income tax returns. But if the donor (which is called the “settlor” in trusts) wants or needs more control, a trust is often the solution.
- Event Trust: Most minor trusts fall into this category. The settlor designates an event, such as turning 25, starting college, graduating from college, or getting married, that triggers property transfer. If the event is a marriage or something that might not ever happen, there should probably be a fallback event; if the event is a certain birthday and the child dies, the corpus (property in the trust) automatically reverts to the child’s estate.
- Special Needs Trust: These vehicles are ideal for disabled individuals, because the funds are at the beneficiary’s disposal but they do not count against SSI or Medicaid eligibility.
- Spendthrift Trust: If the minor has an addiction or is simply not good with money, a spendthrift trust gives the beneficiary access to income while denying access to the principal.
- 2053(c) Trust: The $14,000 gift tax exemption applies to some minor trust gifts that meet certain qualifications; for example, the beneficiary must take title to the entire gift at age 21.
These trusts, and others like them, can be established with the will or as inter vivos trusts.
There are important pros and cons to both UGMA transfers and minor trusts. For a free consultation with an experienced Greenville probate lawyer, contact the Anderson Law Firm. After-hours appointments are available.