Gifts to Minors Using Custodial Accounts

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, September 14, 1997

Copyright 1997 Robert L. Sommers, all rights reserved.

Gifts to Minors Using Custodial Accounts

The easiest way to give a child property, while retaining a measure of control over the gift, is under the Uniform Transfers to Minor’s Act. These "custodial" arrangements are accounts in the name of a custodian who holds property for the benefit of a minor subject to state custodianship statutes. A custodianship may also have favorable tax consequences.

If you have property that you would like to gift to your minor child, you can designate yourself (with some exceptions), another adult, or a trust company to serve as custodian for the property. The custodian manages and invests the property, and has broad discretion to use the property and income for the child’s benefit, without court approval. When the child reaches age 21, the principal and all accumulated income must be paid to the child, or the child’s estate, if the child dies before age 21.

You are entitled to use your annual gift tax exclusion of $10,000 per year per beneficiary if: (1) the property may be expended for the benefit of the child before the age of 21 years; and (2) the property and income not spent for the minor’s benefit will pass to the minor when he reaches age 21, or, if the minor dies before age 21, the property is payable to his estate (or as he may appoint under a general power of appointment).

In California, custodial property is transferred to the child at age 18, unless the donor specifies in the transfer instrument a delay in the custodianship termination period up to the age of 21.


Income Tax Consequences

Because a custodial transfer is considered a completed gift, income generated by custodial property is generally taxable to the minor. However, the income will be taxed to you to the extent that the custodian uses the income to satisfy your legal support obligations. Generally, unearned income over $1,300 is taxed to the child (the first $650 is not taxed and the next $650 is taxed at 15%), under the "kiddie tax" provisions, at the parent’s tax brackets as long as the child is under age 14.

For example, a gift transfer to a child under age 14 of $10,000 which earns 6.5% annually will not be taxed. A transfer of $20,000 earning 6.5% annually ($1,300 in income) will produce just a $97.50 tax (15% of $650) to the child. If the same income were taxed to a parent in the 31% tax bracket, the tax would be $403.


Estate Tax Issues

Custodial property will be included in your estate if you are serving as the custodian. If you want to serve as custodian, but avoid inclusion of the property in your gross estate, you must waive the right as custodian to make support payments.


Naming a Custodian

You can designate yourself, another adult, or a trust company to serve as custodian. If you name yourself as custodian, you save the expense of paying someone to manage the custodial property; however, your actions may be more closely scrutinized to ensure that the arrangement is a legitimate custodianship. Be careful not to deal with custodial property in a manner inconsistent with your custodial duties, such as commingling custodial property with your own funds, or exercising dominion over the gifts.


Transferring Assets to a Custodian

For example, if your brother will serve as guardian, deliver the money to a bank or brokerage account in the name of your brother, followed by the words "as custodian for (your child’s name) under the California Uniform Transfers to Minors Act" ("designation"). To transfer the real property, deliver a gift deed to you brother in his name, followed by the designation.


Custodial Gifts that Take Effect in the Future

You can make a revocable nomination of a custodian to receive property for a minor upon your death by will, trust, or certain other methods. You may extend the custodianship period to age 25 for transfers: (1) on the occurrence of a future event; (2) by the exercise of a power of appointment; or (3) from a personal representative or trustee when there is no will or trust authorizing a transfer under the Act.

However, a revocable nomination is not a completed gift and will probably be included in your estate for estate tax purposes. The property is not custodial property until the occurrence of the specified event. The transfer then becomes irrevocable.




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