Married individuals have more gifting options than someone widowed, divorced, or never married.
Techniques involving the unlimited marital deduction typically serve as a cornerstone of federal and NJ 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 of the planning options available whether married or single is a strategy of making lifetime gifts. Lifetime gifting can be very powerful.
Gifting is a Simple Estate Planning Strategy
In any gifting strategy use of the gift-tax annual exclusion of $16,000 per person (this benefit is annually indexed for inflation) per year is a must. To qualify for this exclusion, the interest transferred must be a present interest, meaning the gift is available for beneficial use by the receiver of the gift.
Making lifetime taxable gifts can also be a viable planning option in that 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, there are a number of gifting strategies an estate planner might recommend. 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 legal age for the state in which 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 term Uniform Gift to Minors Act (UGMA) refers to a previous 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; not NJ, however. 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 the gifts, up to a specified dollar value.
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 have a negative impact when the minor applies for financial aid or scholarships.
Any earnings that are generated within a UTMA are taxed at the kiddie tax rate by the IRS up to the allotted threshold of $2,200.
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 counted as part of 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 gits 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 on gifts to minors without needing to create a formal trust, but at a minimum, there must be a designated custodian.
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 the account is exempted from paying a gift tax of up to a maximum of $16,000. Any income earned on the contributed funds is taxed at the tax rate of the minor who is being gifted the funds. One of the drawbacks of using a UTMA account, however, is that it can make the recipient less eligible for need-based college scholarship programs and other such initiatives.
When Can a Child Claim Ownership of an UTMA Account?
In New Jersey, a UTMA account is handed over to a child when they reach the age of 21. This, of course, is if the child knows of the fund’s existence.
Paying for Education and Medical Care
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 who have college-age beneficiaries (especially students in expensive private universities), substantial gifts can be made at no gift-tax cost by making tuition payments directly to the university.
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 concerning the advisability of making educational, medical or gifts to minors in NJ, please contact Fredrick P. Niemann, Esq. at firstname.lastname@example.org or call him toll-free at (855) 376-5291. He welcomes your inquiries.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Estate Planning Attorney
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