This memorandum has been prepared by the estate planning group at Pillsbury Madison & Sutro LLP and is part of the Pillsbury Madison & Sutro LLP Tax Page, a World Wide Web demonstration project. Comments are welcome on the design or content of this material.

Further information can be obtained from William J. Hoehler, a partner in the firm's San Francisco office.

This material is not intended, and cannot be considered, as legal advice or opinion.

Gifts to Minors

This memorandum describes several methods by which you may make lifetime gifts to minors (i.e., persons under age 18).

Generally, you are subject to U.S. gift tax whenever you give property to individuals. Three types of gifts are exempt from the gift tax: (1) gifts to a spouse, (2) gifts to other individuals of up to $10,000 in value per donee per year, and (3) direct payments for tuition or medical care for other individuals. Your gifts to minors do not generate any income tax deduction, but they can reduce your estate tax and they do avoid gift tax to you (if they do not exceed $10,000 in value per minor per year). Our separate memorandum Gift-Giving Tips describes these gift tax exemptions and certain special rules to follow in making gifts.

Gifts to minors may be made either outright to the minor or by one of three non-outright methods. An outright gift to a minor generally is unsatisfactory (except for nominal gifts), both because minors usually cannot transact financial business (other than handling a simple bank account) and because many minors lack the judgment and responsibility to manage their own financial affairs. The following are three common methods to make non-outright gifts to minors.

Custodianship

You may create a custodianship by designating an adult as custodian for the minor to receive the gift under the California Uniform Transfers to Minors Act ("CUTMA"). The custodian controls the management of the gifted property and determines whether to make distributions for the minor until the minor attains age 18 (or until age 21, if you specify another age at the time of creating the custodianship). At age 18 (or the later specified age), the minor must receive whatever property is held by the custodian. You may create a custodianship simply by transferring cash or other property to the adult as follows:

"[Adult's name] as custodian for [Minor's name] [Optional: until age 19 or 20 or 21] under the California Uniform Transfers to Minors Act."

For income tax purposes, the custodianship property belongs to the minor, and the minor must file income tax returns. No tax returns need be filed by the custodian.

2503(c) Trust

You may establish a trust that in effect terminates when the minor reaches age 21. At that age (or before), the trust must either terminate automatically or give the minor the right to withdraw all of the trust property from the trust during a 60-day "window." You may provide that, if the minor does not withdraw the trust property, the trust will continue for a further period specified in the trust instrument. This trust sometimes is called a "2503(c) trust" (the relevant Internal Revenue Code section). The trust offers the following advantages over a custodianship: (1) the trust's income is taxable to the trust rather than to the minor, which at least may be advantageous for minors under age 15, who are generally taxable at the parent's tax rates; and (2) the trust is "on track" to continue beyond the minor's 21st birthday unless the minor elects to withdraw the trust property.

For income tax purposes, the trust is a separate taxpayer with a taxpayer identification number (similar to a Social Security number), and the trust files its own income tax return each year.

Crummey Trust

A third method of making gifts to minors also involves a trust, sometimes referred to as a "Crummey trust" after the first taxpayer to use this trust successfully. (Use of a Crummey trust is not limited to minors and may be used for gifts in trust for a beneficiary of any age.) The unique characteristic of this trust is that, any time you give property to the trust, the minor (or the minor's guardian) must have the right to withdraw the contribution during a 30 or 60-day window; if the minor does not withdraw the trust property, the gift becomes final and is locked in the trust until the trust terminates at an age specified by you in the original instrument. The Crummey trust offers the following advantages: (1) although the minor has a right to withdraw any contribution, this right is rarely if ever exercised; and (2) unlike the custodianship and 2503(c) trust, the minor has no right at age 18 or 21 to receive the property, and the trust continues for as long as specified in the instrument (even for the minor's lifetime).

For income tax purposes, this trust is treated more like a custodianship than a 2503(c) trust. Although the trust is a separate taxpayer with a taxpayer identification number and files a simple "grantor" tax return, the trust's income tax consequences flow to the minor, who must file income tax returns.

Miscellaneous

No matter what the form of your gift, you should select someone other than you or your spouse to act as the custodian or trustee. You may establish a custodianship by simply designating a custodian as described above. To establish a 2503(c) trust or Crummey trust, you will need to sign a trust instrument.

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