Gifting to minors raises some unique considerations. For one, people under the age of eighteen lack the legal capacity to own assets. The Uniform Transfer to Minors Act (UTMA) was created to protect assets that are passed on to minors. This act determines when minors can receive an inheritance for assets passed to the control of a custodian.
The primary advantage of an UTMA account is that funds passed into it are exempt from paying a gift tax of up to $16,000 a year for 2022. This gift may be in the form of money, bonds or stocks. Any money earned on contributed funds is taxed at the minor's rate. Given that a minor's income is almost always lower than an older donor's rate, this often results in income tax savings. One disadvantage to using an UTMA account is that it can make a recipient less eligible for needs based scholarship opportunities.
Whereas an UTMA account must pay out any unused balance to the minor at age 21, inheritances that involve substantial assets should be left to a trust instead which may extend the distribution to any age or "stagger" the distribution in a series of payments, or percentages, at stated ages.
One typical trust distribution goes as follows: 20% at age 30; one-half of the remaining balance at age 35 and the remainder at 40. The theory here is that the recipient of the gift may make unwise choices at age 30 but they would have to wait five years for the next installment and, finally, 10 years later when they have greater knowledge and experience about half of the estate is still left. It is important to note that, in the meantime, the trustee may still use any of the trust assets for their health, education, maintenance and support.
These trusts for minors may also be set up to protect inheritances from divorces, lawsuits and creditors later in life. If the minor dies, the trust assets come back to the parents first and the siblings second.
Finally, money left in a trust may avoid the need (and potential unpleasantness) of a prenuptial agreement, which young people are typically loathe to ask of their intended.