Gifts to Minor Beneficiaries

Clients often wonder how best to transfer assets to minor family members.  The current large federal estate and gift tax exemption ($15 million per person in 2026, or $30 million for a married couple) has curtailed the need to reduce one’s taxable estate by giving assets away, but many still wish to make lifetime gifts to set aside assets for young family members.

Several strategies are available, and each serves a different purpose. The appropriate choice depends on how the donor wants the money used, how long the donor wants it protected, and how much control the donor is willing to surrender.

UTMA Accounts: Simple, Flexible and Irrevocable
A New Jersey Uniform Transfers to Minors Act (UTMA) account allows adult custodians to hold and manage assets for beneficiaries until the age of 21 rather than 18, as most other custody accounts require. N.J.S.A. 46:38A-26.  Custodians may invest assets and make distributions to benefit the minor, but these gifts cannot be taken back once they are made. When the custodianship ends, the beneficiary receives complete control of the remaining assets and may use them for any purpose.

Most accounts under the New Jersey UTMA statute terminate when the beneficiary reaches age 21. Income generated by the account is generally reported under the child’s Social Security number and may be subject to the federal “kiddie tax” under I.R.C. § 1(g)(2). UTMA assets may receive less favorable treatment in college financial-aid calculations than some parent-owned accounts, and do not enjoy the tax deferral status of 529 Plans.

529 Plans: Designed for Education
A qualified tuition program established can be attractive when the donor’s primary goal is education. I.R.C. § 529.  Contributions are made with after-tax dollars, but investment earnings grow free from federal income tax. Withdrawals are generally tax-free when used for qualified education expenses; however, income tax is imposed and a 10% penalty is charged for non-qualified withdrawals.

529 Plans can finance an array of educational programs, including elementary and secondary schools, trade and vocational schools, and colleges and graduate schools. Unused funds may be transferred to another eligible family member or rolled into the beneficiary’s Roth IRA, subject to federal limits and holding-period requirements.

Unlike UTMA accounts, 529 plans permit account owners to retain control. Beneficiaries will not automatically receive unrestricted access at age 18 or 21. The owner generally decides when to distribute funds.

Contributions are ordinarily treated as a completed gift for federal gift tax purposes. A special election allows a donor to qualify a larger contribution for annual gift tax exclusion treatment over five years. I.R.C. § 529(c)(2)(B).

Trump Accounts: A New Long-Term Savings Option
Trump Accounts are new tax-advantaged, long-term accounts for minors and may be established for children who are United States citizens and have valid Social Security numbers.

Currently, the government provides a one-time $1,000 contribution for eligible children born from January 1, 2025, through December 31, 2028. Others may also contribute to the account, subject to an aggregate annual limit that is currently $5,000. I.R.C. § 530A(c)(2). Government pilot contributions and certain qualifying general contributions do not count against that limit.  While the IRS has issued guidance and proposed regulations, families should confirm the operative rules before funding an account because this remains a developing area.

Irrevocable Trusts: Greater Protection and Flexibility
Gifts to irrevocable trusts may be advisable when donors are concerned about federal estate taxes.  Trusts also provide greater control and flexibility.  An irrevocable trust can run for the time period established by the grantor of the trust, including for a child’s or grandchild’s lifetime, and distributions from the trust are not limited to educational expenses.

Trusts offers professional management and greater protection, but require careful drafting and ongoing administration.

Coordinating Gifts With the Estate Plan
Donors should first decide upon the gift’s purpose and then consider the beneficiary’s age and maturity, the expected gift amount, income and gift tax consequences, financial-aid requirements, and the age at which the beneficiary should assume control. A coordinated discussion among the estate planning attorney, accountant, and financial adviser can help ensure that a donor’s generosity will provide for a minor child or grandchild without creating unintended consequences later.