Q: I have written about gifting to minors in the past, but because I have encountered so many problems since the first of the year, letÕs briefly explore some of the difficulties associated with such transfers.
A: The gift tax rule is that except as between spouses, any transfer is a taxable event when less than full value is received in exchange for the item transferred. The combined gift tax rate (both state and federal) is about forty- five percent on the difference. The two exceptions (besides the spousal unlimited amount) are that one person can gift $11,000 per person per year and also that a total of $1,000,000 can be given away tax-free during oneÕs lifetime if the appropriate tax returns are filed.
It is possible to gift personal property by writing a list of tangible personal property on a separate sheet of paper, if the required wording is contained within the Will. Oral understandings or labels on items are not enforceable. So keep personal property and enjoy your things knowing that the "memorandum list" will be binding. Plus, if you change your mind, then you are still in control because you still "own" the property and can make adjustments accordingly.
For gifting other property, do not transfer appreciating assets, unless it is expected that the transferred item will shoot up greatly in value in the near future. Remember in gifting, the recipient retains the giverÕs basis (what was paid for it) and thus as an example, a transfer of $11,000 is actually less after the potential capital gain is considered, once the item is sold. Thus, the built in tax liability means that the chance to reduce oneÕs estate by the full $11,000 is not accomplished.
Do not put assets in the minorÕs name. Although a minor can own property, he or she does not have the legal authority to enter into binding contracts. Thus, the property is "frozen" or "tied up" until the child reaches majority. The only alternative is to go to court and set up a conservatorship with all of the related costs and restrictions. But after the transfer has occurred, we do not have any other choices.
To avoid these complications, if a transfer is still desired, it should be made into a trust or under the laws commonly known as the Uniform Gift to Minors Act. At least then the legal mechanism has been established to deal with the consequences of the transfer. Although certain assets can just sit there until the child reaches majority age, most will at some point need someone with authority to take action, such as to sell stock dropping in value, contest the new real property assessment, move money to a higher rate of return, etc.
Do not put a minorÕs name on things such as real estate or stocks, again for the previously mentioned reasons. But there is a twist. Under Colorado law the other joint tenant of real property or other assets has the power to deal with his or her retained share of the asset. But title companies for real estate and out of state transfer agents for things like stock do not honor Colorado law and refuse to recognize that right. So not only is the minorÕs part tied up without a conservatorship, but so is the giverÕs part until some type of legal action is taken.
Bottom line is that before gifting, whether or not to a minor and regardless of the asset type, consult with your attorney or CPA. It is much easier to deal with these matters beforehand than to put "Humpty Dumpty back together again."