‘Tis the season to think of giving and some of those gifts may be given to minors, which is someone younger than 18 years old. Gifts to minors may be more complicated than you think.
Did you know that a minor is considered an “infant” under the law? With some exceptions, legal infancy ends at age 18. But until the minor reaches the age of “majority” his or her infancy is a legal disability that impacts many aspects of the minor’s life, including the ownership of property and control of gifts. Here then are some considerations when making gifts to a minor.
CONTROL and MANAGEMENT
Unless the child is receiving needs-based benefits from the government, there is likely to be little to no impact if you give a minor a modest amount of cash (say up to $100), although it may be spent unwisely. If more money is given, or if the goal is saving the money, then someone will need oversee the money until the child reaches the age of majority.
Who will this person be? What restrictions, if any, will be put on how the money can be spent on the minor’s behalf until the minor is old enough to receive the money outright? How old is “old enough?” What options are available to the minor if the money is misspent by the person who is managing the money?
If the gift is targeted for college/post-secondary education expenses, then you may wish to establish or contribute to an existing Virginia529 plan (or set up one yourself and possibly get a tax break!). The money in the plan can be used to pay for plan-approved educational expenses for the named beneficiary or another family member.
If the gift is for general savings, then an adult family member may open a custodial financial account in the child’s name and deposit the money into it. Once the child turns 18, she can withdrawal all of the money in the account and use it as she wishes.
If additional investment options are desired, then an UTMA (Uniform Transfers to Minors Act) account may be used. An UTMA account is irrevocable and held in the name of a custodian (which can be a brokerage company) on behalf of the child. Once the child turns 18, he can withdrawal all the funds. The access age can be increased to 21 by adding (21) to the title of the account so instead of an UTMA account, it is an UTMA(21) account.
If the minor has a disability that makes maintaining eligibility for needs-based benefits prudent, then the gift may be made to a third-party Special Needs Trust (SNT) for the minor. If all of the money deposited into the SNT belonged to people other than the trust beneficiary, then there is no Medicaid payback requirement at the beneficiary’s death. Another option is an ABLE (Achieving a Better Life Experience) account, which is a special account for individuals with a qualifying disability that arose before the age of 26; it has numerous requirements—and a payback requirement regardless of the funding source, but it can be a good option depending on the beneficiary’s circumstances.
INCIDENTAL/ACCIDENTAL GIFTS v. PLANNED/INTENTIONAL GIFTS
Do you plan to include your minor relatives in your estate plan (Will or Trust)? If so, then the Control and Management considerations in the preceding paragraph should be a part of your discussion with your estate planning attorney. You should also discuss how to use (or avoid!) beneficiary designations so that the gift can be directed as you intended with a minimum of delay and cost.
Sometimes minors receive gifts incidentally or accidentally because they were not the intended recipient, but something intervened (usually the death of the intended recipient) to cause the gift to be redirected to a minor, either through language in the Will or Trust (per stirpes, is a common phrase that operates this way) or by operation of law (Virginia law will seek to keep gifts to certain relatives in the blood line) or by operation of contract (a life insurance policy or retirement benefits may have its own hierarchy of recipients if no beneficiary survives or is named). When an incidental or accidental gift is directed to a minor, oftentimes court involvement and ongoing paid oversight is required before an adult can receive and manage the assets on the minor’s behalf until the minor becomes a legal adult.
A minor’s ownership interest in real estate can pose a particular (and costly and time-consuming) challenge in part because Virginia law really, really, really favors real estate and considers it more important than, say, an equivalent sum of cash. Before real estate that is owned (or partially owned) by a minor can be sold, it is common for a supervising court to appoint Guardian ad litem to ensure that the minor’s interests are protected and that the sale is in the minor’s best interest. Rather than have a minor own an interest in real estate, one may consider providing cash or other assets of equivalent value or that the real estate be held in a trust with the trustee given sufficient powers to administer the real estate in the trustee’s judgment.
A substantial (more than $15,000 in 2018 and 2019) gift to anyone, including a minor, requires the filing of a gift tax return with the following year’s income tax return. The amount reported is the excess value of the gift above the annual exclusion limit unless one has given the lifetime maximum gift tax free amount already (currently slightly more than $11 million), in which case the entire amount is reportable and a gift tax payment may be due.
In conclusion, gifts to minors can be made, but like all estate planning, should be done thoughtfully and intentionally to avoid unanticipated and negative outcomes.
Contact Us for Advice on Gifts to Minors
Promise Law can assist you in developing a giving plan that meets your needs. Call (757) 279-8127 or click here to contact us to schedule a consultation to discuss your gifting plans for the minors in your life.