How do people handle giving a gift to an infant, and possibly adding to the gift over the years, for the kid's use for college or maybe even to be given to the kid at a much later date, e.g. 35 years of age?
If the gift of a future interest does not fall within the annual gift tax exemption, does that mean it is subject to gift tax, and must be tracked? How is the present value of the future interest determined?
As for trust mechanics, any suggestions?
Through a somewhat convoluted process involving an irrevocable trust. You need to find a suitable trustee, and pay for the trust to be set up. You also need to think about the terms of the trust, the exact rules for withdrawals, etc.
How is it that the gift is of a future interest? I'm certain there are more relevant facts than you have shared. What is the donor's objective? Is it to fund the infant's college education? Something else? How old is the donor? How wealthy is that person? How is the donor related to the infant? Does the donor care where the infant goes to college?
the gift is a future interest in that the money will be put in trust until the kid is perhaps 30 years old, or has other needs at the trustees discretion.
the objective is to give the kid a fund for use much later on, and to hopefully teach the kid about prudent financial management as it grows up, since its parents are totally irresponsible.
The infant is just being baptized.
The donor is not too wealthy, but comfortable,and likely to become more so over time. And, other family members might contribute to the trust as well.
infant is nephew. its grandparents might add to the trust as well.
donor does not care where kid goes to college, or even if it chooses a different path when the time comes.
There are two ways this kind of thing is dealt with. The first is if the trust can be terminated and whatever is in it can be given to the child when he gets to be 21, it is not considered a gift of a future interest. So you just set it up to terminate at that time.
The other way is a Crummey Trust. Under this trust a gift is made to the trust and the beneficiary is given a time (e.g. 30 days) after being notified of the gift, to withdraw it from the trust. When the beneficiary is a minor, the notice and opportunity to withdraw belongs to the parent, so there should be no issue of an actual withdrawal.
When that is done, the money in the trust is treated for tax purposes as belonging to the minor at the time of notice (e.g. no future interest). Any interest earned is taxed to the minor, but it all stays in trust until the trustee uses it for the purposes determined in the trust.
One problem with this, of course, is that contributions made after the beneficiary turns 18 might be withdrawn by him.
Crummey trusts are generally used to hold life insurance. If it is started early enough, the insurance can be fully paid by the time the beneficiary is 18.
___ Stu
I thought I just read that such a case WOULD be a gift of a future interest - the kid doesn't get it until some time in the future.
Only once! After that, the contibutions would cease!
It's a future interest UNLESS the beneficiary receives it by the time he reaches 21 years. See Internal Revenue Code §2503(c).
Yes, that's the point. Once it the withdrawal window closes, the beneficiary can't get at that particular deposit again. That's all fine while the beneficiary is under 18. If he's older, there is a risk that he may withdraw a gift. And if you use it for life insurance, that's not good because there would be nothing in the trust to pay a premium.
___ Stu
good info, thanks.
So, assuming the trust specified he won't get the money by age 21, how is the funding handled? Subject to gift tax? But calcualted based on teh present value of the future interest?
Actually my point was this: The first time the kid says I want this year's (or month's) contribution NOW, any future contributions will cease!
If a contribution to a trust for the benefit of another is considered a future interest, the contribution does not qualify for the ($13,000) annual exclusion, and must be reported at its full present value (that is the value it has on the date it is deposted into the trust) must be reported on a gift tax return.
___ Stu
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