Annual Exclusion Increase and Gifts to Minors

The gift tax annual exclusion increased to $12,000 from $11,000 as of January 1, 2006.  David A. Berek (Credit Suisse Family Wealth Management) has recently published his article entitled Higher Exclusion Limit Presents New Opportunities for Gifts to Minors, 94 Ill. B. J. 94 (2006).

Here is the conclusion of his article:

Gifting for minors can be accomplished by any number of methods, and as long as the gifts are under $12,000 per person there are no adverse gift tax results. Outright gifts are the easiest method, but not the most practical because the minor or child has complete control over the funds upon receipt. Custodial accounts are useful, although they can become impractical if the balance grows too large, since the minor is entitled to the balance at age 18.

A practical compromise for parents deciding between a custodial account and a child’s trust is to start with a custodial account and -“ when the balance grows large enough -“ convert the custodial account to a 2503(c) trust. The 2503(c) trust allows distribution for a brief window at age 21 but otherwise allows retention of the principal indefinitely pursuant to the terms of the trust.