New York Estate Planning & Elder Law Blog
In 2022, the annual exclusion for federal Gift Taxes was increased to $16,000 per individual annually. Even though a near-universal acceptance exists that gift-giving can play an important role in estate planning, a person should consider various issues before making gifts.
The way that gifts are made can have a substantial impact on beneficiaries. This is especially true if the party who receives a gift is below the age of 21. Direct gifts made to young people can have their own challenges which include exposure to creditors and limited control over how gifts are made. Consequently, it’s a wise idea in these situations to consider placing gifts in a trust.
The Danger Behind Direct Gifts
Gifting assets to a beneficiary leave a gift vulnerable to various dangers. Direct gifts are subject to any creditors attempting to collect money from a beneficiary and can be at increased risk in case of a divorce. If a beneficiary passes away and has an insufficient estate plan, unexpected beneficiaries could receive these assets or other challenges could arise.
The Use of Custodial Accounts
When the person receiving a gift is a minor, a custodial account can provide some help in structure. The degree of flexibility provided by custodial accounts, however, has its shortcomings. For example, many times when the subject of a custodial account reaches the age of 18 or turns 21, all assets in a custodial account are directly passed on to the recipient, which includes all investment and management choices. After this happens, nothing prevents a recipient from squandering the custodial account or making unwise investment choices. Another potential challenge is that changes in custodians following death or incapacity before a beneficiary reaches the age of 21.
Considering a Trust to Pass On Gifts
Trust choices should be considered rather than outright gifts, transfers to 529 plans, or transfers to custodial accounts. Trust choices can include irrevocable trusts, which let assets be utilized for a wide range of needs including medical costs or the purchase of real estate which are not permitted with 529 plans. These trusts also provide greater structure than custodial accounts and a trustee can manage assets past the age of 21 if the trust is properly structured.
Minor trusts can be utilized for annual exclusion gifts passed to a recipient below the age of 21. These trusts are named after the Internal Revenue Regulation Section 2503(c), which necessitates that trust assets be applied for minors who are beneficiaries of trusts with limited exceptions. Trusts can only have one beneficiary who is below the age of 21. After a beneficiary turns 21, the beneficiary must be afforded a chance to withdraw assets from the trust. Any assets not withdrawn can be kept in the trust and the trust can then be converted to another type of irrevocable trust that permits continued annual exclusion gifts be made to a beneficiary.