Married individuals have more gifting options than those who are widowed, divorced, or never married.
Techniques involving the unlimited marital deduction typically serve as a cornerstone of federal and New Jersey transfer-tax planning for married persons. For a single individual, the unlimited marital deduction is not available.
A single individual whose estate is expected to exceed the Federal and Estate tax exemption amount must look to other tax-minimizing strategies.
Gifting Options for Single and Married Individuals
One planning option available, whether married or single, is making lifetime gifts. Lifetime gifting can be very powerful.
Gifting is a Simple Estate Planning Strategy
In any gifting strategy, the use of the gift-tax annual exclusion of $16,000 per person (this benefit is annually indexed for inflation) is a must. To qualify for this exclusion, the interest transferred must be a present interest, meaning the gift is available for the receiver’s beneficial use.
Making lifetime taxable gifts can also be a viable planning option, as such gifts irrevocably remove the assets and any subsequent appreciation from the donor’s estate. The applicable exclusion amount for lifetime gifts is currently $12.06 million (2022) and $24.12 million for married couples under the IRS tax code. This figure is indexed for inflation.
Lifetime charitable gifts also present planning options for both married and single individuals. Such gifts can provide significant income-tax savings in addition to gift- and estate-tax benefits.
Within these broad parameters, an estate planner might recommend a number of gifting strategies. As with any planning, a client’s personal situation and planning goals will dictate the most appropriate strategies. Interested in learning more?
Understanding the Uniform Transfer to Minors Act (UTMA)
- The Uniform Transfers to Minors Act (UTMA) allows a minor to receive gifts without the aid of a guardian or trustee.
- The law is an extension of the Uniform Gift to Minors Act.
- The minor named in the UTMA can avoid tax consequences until they attain the legal age in the state where the account is set up.
- The donor can name a custodian, who has a fiduciary duty to manage and invest the property on behalf of the minor until he/she becomes of legal age.
- New Jersey has adopted the UTMA for its residents, replacing its previous Uniform Gifts to Minors Act.
What is the Uniform Gift to Minors Act (UGMA)?
The Uniform Gift to Minors Act (UGMA) is a former law that allowed a minor to receive gifts without the aid of a guardian or trustee. Gifts can include money, real estate, and investment/brokerage accounts, etc.
Some states still have a UTGA law; NJ, however, does not. A UTGA law allows the gift giver to appoint a custodian to manage the minor’s account until the latter is of age. It also shields the grantor and the minor from tax consequences on gifts up to a specified dollar amount.
But Beware of Gifts to Minors When College is Near
The minor’s Social Security number (SSN) is used for tax reporting purposes on UTGA accounts. Because assets held in a UTMA account are owned by the minor, this may affect the minor’s eligibility for financial aid or scholarships.
Any earnings generated within a UTMA are taxed at the kiddie tax rate by the IRS up to the $2,200 threshold.
Thoughts About Appointing a Custodian
The UTMA allows the donor to name a custodian who has the fiduciary duty to manage and invest the property on behalf of the minor until that minor becomes of legal age. The property belongs to the minor from the time the property is gifted. If the donor dies while serving as custodian, the value of the custodianship property is included in the donor’s estate. Another consideration is that the assets in a UTMA are included in the custodian’s taxable estate until the minor takes possession.
Can a Minor Receive Gifts or Assets Without a Guardian or Trustee?
No, in New Jersey, a minor cannot receive gifts or assets or take legal ownership without a guardian or trustee being appointed. The UTMA is a law that governs the transfer of assets from adults to minors. It provides parents and other adults with a way to pass gifts to minors without creating a formal trust, but at a minimum, a designated custodian must be named.
What are the Pros and Cons of Using a UTMA Account?
The main advantage of using a UTMA account is that the money contributed to it is exempt from gift tax up to $16,000. Any income earned on the contributed funds is taxed at the minor’s tax rate. One drawback of using a UTMA account, however, is that it can make the recipient less eligible for need-based college scholarship programs and similar initiatives.
When Can a Child Claim Ownership of a UTMA Account?
In New Jersey, a UTMA account is transferred to a child when they reach age 21. This, of course, assumes the child knows the fund’s existence.
Paying for Education and Medical Care
Education
For individuals who want to help fund higher education costs, making contributions to a tax-favored Sec. 529 plan may be an attractive option. Section 529 plans generally are exempt from federal income tax. Plan contributions are not deductible for federal income-tax purposes, but qualifying distributions are not includable in the gross income of either the contributor or the designated beneficiary. A Section 529 plan, therefore, offers the potential for tax-free investment growth.
The tax code also allows the equivalent of five years’ worth of annual exclusion gifts to be made in one year to a Section 529 plan. The gifts will be treated as having been made on a pro rata basis over five tax years, commencing with the year of contribution. For individuals with college-age beneficiaries (especially students at expensive private universities), substantial gifts can be made at no gift-tax cost by paying tuition directly to the university.
Fredrick P. Niemann Esq.
Medical Care
Given the high cost of medical care, it is not uncommon to learn that a client is assisting a loved one with medical expenses. In this situation, making payments that qualify for the medical expenses exclusion can be a very useful tax strategy.
If you have questions about the advisability of making educational, medical, or gift contributions to minors in NJ, please contact Fredrick P. Niemann, Esq., at fniemann@hnlawfirm.com or call him at (732) 863-9900. He welcomes your inquiries.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Estate Planning Attorney
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