IRS Rules of Gifts to Children and Gift Tax

By | March 5, 2015

The general income and estate and gift tax rules apply to gifts to minors as well as to adults under the eyes of the IRS. However, additional issues arise when minors are involved. An issue can arise as to whether there has been a valid gift.


What is Considered a Gift for IRS Purposes?

There can be a question of whether the gift resulted in an irrevocable transfer to the minor of title and dominion and control of the property. The donor might hesitate to give a meaningful amount of cash or property to a minor without limiting the child’s access. As a result, gifts to minors are often made through statutory custodians or through a trust.


Uniform Gifts to Minors Act or the Uniform Transfer to Minors Act

Gifts to minors are subject to the general tax rules for gifts. However, the Uniform Gifts to Minors Act or the Uniform Transfer to Minors Act, adopted by most states, provide special rules for gifts of some property to minors.A gift to a trust for the benefit of a minor provides a flexible alternative to gifts under state custodial statutes. Since the owner of property must generally report any income from the property, a donor’s gift of income-producing property transfers the tax liability on the property’s income.


How does the IRS treat gifts to minors?

Generally, a gift of property to a minor does not result in income to the donor or the recipient.However, a gift of property may have gift tax consequences for the donor if the amount of the gift is more than the annual gift tax exclusion and the donor has made a substantial amount of other gifts during his or her lifetime.


IRS Tax Treatment of Gift

The treatment of a gift of property is different from the treatment of income generated by the property. Any income produced by property that is transferred to a minor is taxed to the minor after the transfer. This is the case as long as the proceeds cannot be used to satisfy the obligations of the donor. Thus, the value of stock transferred to a minor by gift is not income to the minor, but any subsequent dividends on the stock is taxable as income to the minor. Income taxable to the minor may be subject to the “kiddie tax” . The income from an attempted “gift” of property is taxable to the donor if the donor continues to exercise control over the property and the income it generates.


What is Annual Gift Tax Exclusion?

Annual gifts that are excludable for gift tax purposes provide donors with a useful tool to reduce the donor’s overall estate. For 2013 through 2015, the maximum gift tax exclusion is $14,000 ($28,000 for married couples).  For 2015 and 2016, gifts of $134000 or less ($28,000 for married couples) do not have gift tax consequences.


What is the Uniform Gifts to Minors Act?

Gifts of property under the Uniform Gifts to Minors Act are generally not income to the donor or the minor. However, income from custodial property is generally taxable to the minor. Most states, reacting to apprehension about gifts to minors, have adopted either the Uniform Gifts to Minors Act or the Uniform Transfer to Minors Act. These uniform acts provide for gifts of some property to minors through a custodian. Many states have expanded the types of property that can be transferred to minors under the acts. Generally, the state custodial statutes allow for gifts of money, securities, life insurance policies, and annuities. In some cases, state law allows gifts of real property and other personal property.


State Law Affects Gifts to Minors

Under the state custodial statutes, gifts are made to minors by registering the property or fund in the name of an adult or company. The adult, usually the donor or a relative of the minor, is the custodian for the minor.  If the donor complies with the statute, the gift is irrevocable and title to the property is vested in the minor.  This treatment is different from a trust vehicle, where the beneficiary does not receive ownership of the property in the trust.


Tax Consequences of Custodian Accounts

The custodian is the fiduciary of the minor. Custodians are held to the “prudent person” standard—that is, a custodian must act as a prudent person would under the circumstances.  The custodian is generally authorized to use the property for the support, education, or general benefit of the minor. The custodian is required to distribute all of the custodial property to the minor when he or she attains the age prescribed by the statute. Generally, the prescribed age is 21. If the minor dies before the custodial property is distributed, the property becomes part of the minor’s estate.