Transfers To Minors–How To Get The Outcome Your Clients Want
The parent who leaves his son enormous wealth generally deadens the talents and energies of the son.
By John J. Scroggin
The client was furious. For over 20 years he and his son had placed money in a custodial account for the benefit of his grandson. The child had flunked in and out of college for several years and was now in the grandfathers office at age 21 demanding distribution of the $220,000 in his custodial account. His purpose? To travel to Europe to discover himself over the next year.
The client had also received a letter from his grandsons attorney demanding distribution of the funds. I told the client that he had no legal choice but to distribute the money. Unfortunately, the money did exactly the opposite of what it was intended to do. Instead of encouraging the child to attend college, it provided him the resources to leave school.
As planners we often tell our clients of the tax advantages of passing gifts to children and grandchildren using the $10,000 ($11,000 in 2002) annual exclusion. Many clients have placed these gifts in custodial accounts under either the Gift of Minors Act or the Transfers to Minors Act. In many cases (i.e., because of the significant distributions and/or investment return on these assets) the value of these custodial accounts are significant.
Unfortunately, both of the foregoing acts require the distribution of the custodial assets to the custodial ward by age 21. Many 21-year-olds such as my clients grandson do not have the maturity or skill-sets to handle such funds.
In order to provide greater administrative flexibility than is available in custodial accounts, many clients have set up minors trusts under Internal Revenue Code Section 2503(c). Unfortunately, such trusts also require the distribution of the trust fund to the trust beneficiary no later than age 21, creating the same distribution problem as a custodial account.
What is the alternative? For years we have used Crummey withdrawal rights to fund irrevocable life insurance trusts. This same approach can be used to create a Crummey Minors Trust. These trusts offer a number of benefits over both custodial accounts and 2503(c) trusts, including:
1.) While a custodial account and a 2503(c) trust can only have one custodial beneficiary, a Crummey Minors Trust can have multiple beneficiaries, each of whom has a separate Crummey withdrawal right–increasing the total gifts to a common trust fund. For example, suppose parents want to pre-fund their childrens college education. With a Crummey Minors Trust, if one child did not attend college, the funds could be used for the benefit of other children who did, effectively terminating the beneficial rights of the child who decided not to attend college.