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E. Gifts

E. Gifts

One way to avoid probate of an asset is to transfer it before you die. (But some property is better to transfer at death – see below.) If the gift is to young children, you should be aware of the Uniform Transfers to Minors Act (UTMA), which is used in most states.

Under this provision, a gift of money or other property is made by the donor placing the asset in the name of a person called the “custodian.” It is simply a matter of titling the asset or account initially, to show the world that it is held pursuant to the UTMA. There are no tax returns to be filed. Legal title is held by the minor, but the custodian manages the asset until the minor is 21 years old (18 in a few states), at which time the property is turned over to the minor.

Until then, the custodian is required to pay to, or for the benefit of the minor as much of the property as the custodian deems advisable for his/her support, benefit, maintenance and education.

BEWARE ! If these funds are used to pay for basic parental obligations, this may be considered taxable income to the parents. The theory is that a taxable benefit accrues to the parents to the extent they are relieved of their legal duty of support.

TIP: Overall family federal income tax savings are possible by using gifts to minors. The child will get a $750 standard deduction, so no tax need be paid on that amount of his/her investment income each year. If the child is under 14, the next $750 will be taxed at his/her low rate. After that, the rate jumps to whatever the parent’s rate is. But if the child is 14 or over, he/she is taxed according to the same brackets as everybody else, so the first $28,400 of taxable income (in 2003) is subject to the lowest (15%) rate.

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