Uniform Transfers to Minors Act, 529 Plans (including College Illinois Prepaid Tuition Plan) and Tax Benefits of Gifts
Gifts to children can be made into special accounts or to custodians for the children. Illinois law allows for transfers to custodians for minors and places obligations on those custodians to use the money for the children. By not making direct transfers to children, hopefully the assets will be protected and better managed.
What is a good means of making gifts?
I am married and have minor (under 18) children. My parents are well-to-do, in their early 60’s, and in good health. They wish to provide for me, and also provide for my children now, instead of waiting until they die. What is a good means of my parents making gifts to my children and me?
Your parents are planning wisely. By a plan of gift making they can reduce the size of the estates they leave upon their deaths, thus reduce or eliminate estate taxes. The means are discussed below.
Isn’t there a “gift tax”?
Yes, but through to 2021 the first $15,000 of a gift, per recipient, is excluded from tax. If your father and mother both make a gift during the year, the exclusion is $30,000. Your parents (collectively) could therefore make gifts to each of your children of $30,000, a gift to you of $30,000 and a gift to your wife of $30,000, and none of these gifts would be subject to a gift tax. At the same time these gifts would reduce, or eliminate, your parents’ potential estate tax. Yet keep in mind that the gift tax exclusion has increased over the years and these issues usually now only come into play when it is anticipated that the tax code may be changed or when there is a very substantial potential estate.
Does the gift have to be in cash?
No. The gift may be of any type of property.
Can a gift be made directly to a minor?
Yes, but it is unwise to do so. Ways to make to benefit a minor include a gift under the Illinois Uniform Transfers to Minors Act (UTMA) or by funding a 529 Plan. An advantage of a 529 plan is that one can change the beneficiary to another member of the beneficiary’s family.
Children Custodian Accounts Funds
My wife’s parents, during my marriage to my wife, set up custodian accounts for our children, and I am the custodian. We are now divorced and I continue to retain the custodian accounts, which are of substantial value. Can my in-laws revoke the custodian accounts? Can I use these funds for the benefit of the children, for example, taking them on vacation, or paying their tuition at a private school?
- To qualify as a gift under the Illinois Uniform Transfers to Minors Act, the gift must be irrevocable.
- Gifts cannot be revoked. A gift is not complete until the donor (gift maker) parts with dominion or control over the transfer of property or property interest.
- Regarding the use of the custodian account for the benefit of the child, the Illinois Uniform Transfers to Minors Act states that the custodian may “expend for the minor’s benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to (I) the duty or ability of the custodian personally or of any other person to support the minor.” The custodian, however, must keep the custodian account (the minor’s property) separate and distinct from his own and must keep records of all transactions.
Can there be a tax on gifts to my spouse?
No. There is no tax on gifts between spouses regardless of size.
What is the Illinois Uniform Transfers to Minors Act?
The Uniform Transfers to Minors Act allows transfers to be made to another person as “custodian” for a minor. The act makes it easier to protect assets transferred to a minor without having to go through the hassle of creating a trust.
Can the custodian use the money for himself her herself?
No. Though the custodian has legal title to the assets, he has a duty to protect the assets and expend them only for the minor.
Can the custodian use the money to fulfill a legal support obligation?
Yes. The custodian may use the money without regard to the ability or duty of himself or any other person to support the child. This means the custodian can use the funds to pay for food or shelter for the child even if you would otherwise have an obligation to provide these for the child. You cannot use money in a custodial account to pay court ordered child support.
When can the “minor” use the money?
The custodian of a UTMA account has the discretion to spend the money for the benefit of the minor. Generally under Illinois law the age of minority is age 18. For this purpose the UTMA defines a minor is a child who has not attained the age of 21. At age 21, the custodian must transfer the property to the minor.
What are the downsides to a gift to my children under the Illinois Uniform Transfers to Minors Act?
The downside is if the funds are to be used for college and the child might receive grants, loans, or scholarships. Funds in a so called 529 plan have preferential treatment compared to funds in a UTMA account. But the law in this regard changes so you should consult lawyer and financial advisor in this regard.
Are gifts taxable?
Gifts are subject to the Federal gift tax limits.
Can I exceed $15,000 per person?
Yes. If you are married, you may elect to split the gift between you and your spouse. When splitting, it does not matter whose property the gift is made from and you can give each individual up to $30,000. For a 529 Plan, there is also the possibility of a $70,000 contribution with a five year election (Superfunding).
What if I give one person more than $15,000?
You may need to file a gift tax return. You may have to pay tax on the amount in excess of $15,000 if your lifetime taxable gifts have exceeded certain amounts.
What are the tax benefits of yearly gifts?
Regular giving slowly decreases the value of your estate, limiting your estate tax liability. In addition, the income from the assets is attributed to the donee, reducing your income tax. Finally, lifetime giving can often be accomplished tax free.
What is the generation skipping transfer tax?
The generation skipping transfer tax applies to all gifts, whether during life or at death, that skip the generation immediately below the gift giver. Simply put, it applies when you give taxable gifts to your grandchildren.
I have heard about a College Illinois pre-paid tuition plan. How does this operate?
The College Illinois! 529 Prepaid Tuition Program is a type of 529 plan. There are currently 3 distinct plans with their own price and payment options. One decides the number of semesters and the payment option. This plan can be applied to colleges or universities outside of Illinois. This plan allows one to make monthly, annual or lump-sum payments depending on the plan choice and age of the child. The most expensive of these plans are the University and the University Plus plans. Account owners can make a lump-sum contribution of up to $70,000 per beneficiary and avoid incurring a gift tax by electing to use five years of the annual gift tax exclusion in one year (although there are important caveats).