How Can I Transfer Wealth to My Kids and Avoid Gift Tax?

A Minor’s Trust is one solution! This trust allows you to gift assets for the benefit of a minor child while ensuring that a designated trustee correctly handles the trust until the child is 21.

What are the benefits of a Minor’s Trust?

• Assets will be distributed to the minor according to the trust instrument until they come of age. At age 21, the child can withdraw the assets, waive the right to withdraw and extend the time to distribute the assets to a later date, or take the assets from trust and invest them into a family holding company.
• You can determine what will happen with the assets in the trust should the beneficiary pass away.
• You can use your annual gift tax exclusion to fund the trust.

How Can I Avoid Gift Tax?

Congress enacted §2503(c) to allow taxpayers to transfer assets in trust for the benefit of minor children and have the gifts still qualify for the annual gift tax exclusion. The Code section provides a special exclusion for gifts for the benefit of persons less than 21 years of age that otherwise would be considered gifts of future interests not qualifying for the annual gift tax exclusion. If the statutory requirements are met, the value of property transferred to the trust will be considered a gift of a present interest that qualifies for the annual exclusion.

If the assets contributed to the trust become too large for a young adult child to handle, the child can waive the right to withdraw the assets at age 21 and elect to keep the assets in the trust for an extended period.

Let’s say you and your spouse elect to contribute $34,000 per year (the current annual exclusion in 2023) to a minor’s trust when your child is 8 years old, for the next 13 years. By the time the child reaches age 21, you will have contributed $442,000. Assuming no growth in the assets, it still represents a significant amount of assets to hand over to a 21-year-old.

You could convince the child to waive his or her right to withdraw the assets at age 21, and elect to keep the assets in trust until age 30, 35 or 40, when you feel they are old enough to properly handle the trust assets. In that case, the trust would be converted into a self-settled trust, which may qualify as a domestic asset protection trust in certain states, such as Virginia, and allow the trust assets to be protected from the child’s creditors.

Alternatively, the trust beneficiary could contribute the trust assets into a family limited liability company (i.e., a family holding company), where the family pools some of their investment assets. This may allow you to manage the investments but give the child access to investment income and capital appreciation on his or her share of the LLC.