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 $17,000 a year for 2023. 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.