If you've been thinking about making a gift to a minor child or grandchild, you should first consider the pros and cons of gifts to minors. If you have weighed the advantages and disadvantages, and still want to make a gift, the next logical question is, "How should I make the gift?"
The good news is, there are a variety of options from which to choose, depending on your goals, the type of asset you're giving, the level of control you want to maintain over the gift, and the recipient(s). The bad news is, the sheer number of choices can be paralyzing, and making the wrong choice can do more harm than good to both you and the person(s) receiving the gift.
Let's take some time and explore your options for making gifts to a minor, to make the decision process easier.
If you're looking for ease, there is nothing more straightforward than simply giving the asset to your loved one. If you are concerned about how the gift will be used, however, an outright gift may not be the best choice. Once given, you can't take the gift back and have no control over how the recipient uses the gift. And if your loved one is applying for financial aid, their assets, including this gift, will be counted in the calculation. In addition, if your loved one has creditors, they may be able to reach the gift to satisfy the debt.
Nearly as simple as an outright gift, this option involves paying tuition or medical expenses directly to the provider. While you can't take back the gift, this option at least allows you the confidence that it will be used for a specific purpose (education or healthcare) and relieve a financial burden. Qualifying payments do not apply toward your lifetime exemption or annual gift exclusion—BUT certain payments, like those for room and board, are not "qualifying," and like an outright gift, payment of expenses could affect a child's financial aid award.
If you are 18 or older, you can make a gift to a minor by transferring the property to a custodian for the minor's benefit under the Uniform Transfers to Minors Act. All that is required to make the transfer is a simple document, so it is fairly straightforward. You cannot take the gift back or change beneficiaries, but if you serve as the custodian, you can control distributions from the account. (This control may lead to adverse estate tax consequences for you. Also, if you are the custodian and die before the minor, the property will be included in your estate). The income must be reported by the minor for tax purposes. The asset will be counted in financial aid calculations, and, as property of the minor, is not protected from the minor's creditors.
UTMA assets in Ohio may be held until the minor turns 25. Depending on how much you expect to remain in the account, you may want to consider whether you are comfortable with the asset being turned over to your loved one at that age.
529 Plans are named for the section of the IRS Code that authorizes them. A 529 plan is an investment account intended to pay for a beneficiary's educational expenses (most often college, but can be used for K-12 as well).
It's simple to set up a 529 plan, and this option offers a donor both control and tax benefits (so long as distributions are made for qualified higher education expenses). There are no tax consequences for changing the beneficiary (say, from one grandchild to another). A 529 Plan can be funded with up to five times your annual exclusion amount.
If a parent owns a 529 plan, the assets in the plan are treated as the parent's assets until the student turns 24. If a grandparent or other family member owns the account, it is not reported on financial aid form, but distributions are treated as student income for purposes of calculating financial aid.
Crummey trusts are a good option for givers who want to allow distributions for more than just educational expenses, and want to be able to delay distributions past the beneficiary reaching adulthood.
Using a Crummey trust is a little more involved than other gifting methods, involving annual reporting requirements. It is considered unwise for the donor to serve as the trustee, although he or she can set the terms of the trust and limit the uses of the funds in the trust.
A Crummey trust offers some creditor protection if it includes spendthrift provisions, which is another advantage over other types of giving options. However, because a trust beneficiary can withdraw some assets, this protection is limited.
Dynasty trusts are the most complex option listed here. But if you have a large estate, it may be in your best interests to use part of your lifetime gift tax exemption and generation skipping transfer tax exemption to create a dynasty trust.
As the name suggests, a dynasty trust may continue for generations. As the creator (grantor) of the trust, you can set the terms of the trust, including how long it will continue. Depending on how the trust is structured, trust income may be taxed to you, to the trust itself, or to the beneficiaries. If structured as a grantor trust, the trust principal will not be reduced by income taxes.
Dynasty trusts also provide protection from the creditors of beneficiaries, but the primary advantage of this type of trust is the tax benefits it offers.
As a general rule, if you have significant assets that you want to use for the benefit of someone who is a minor, it is best to discuss your options with an experienced Ohio estate planning attorney. Your attorney will be able to ask you questions you may not have considered to get to the heart of what matters most to you.