Uniform Gift To Minors

"Experts Aren't" -- Once again, I find this quote to be true. Here's the real scoop on giving tax-free gifts and filing IRS Form 709 as of 1998.

Information you find here is not advice; it's simply a narrative. I'm a private citizen interested in conserving my assets for purposes I choose. I'm not a fan of taxes. What began as a simple desire to set up a college fund for my kids became a year long eductional process of reconciling what investment companies, the IRS, and the Internal Revenue Code each say. And indeed, each was different. Here's what I found.

The IRS Form 709 is not a schedule or addendum to your normal tax filing. It is a totally separate filing, that only coincidently has the same due date. It has its own Schedule A, Schedule B, and Schedule C. It's used to report gifts you make to other people. Married couples are not allowed to file joint Form 709s; they must be filed by individuals. This is true even if corporations or other legal entities make gifts -- it must come down to some individual making the gift.

The default position of the IRS is to tax a gift at an 18% to 55% rate. Basically, anything you give to anybody, the IRS wants a portion of it.  There are various deductions and credits that reduce this tax rate. Most everybody is unaware of the tax because an exclusion that almost everybody uses (whether they know it or not) is the $10,000/yr annual tax-free gift. Without it, you'd be legally taxed on the $10 of gas money you gave your kid!

Running in parallel to the $10k/yr exclusion, there is a $600,000 (or more, post 1998) life-time exemption most people never use until they die, and their estate makes gifts to children or spouses. But if you make other taxable gifts through the years, each Form 709 you file whittles away at this $600,000 starting value.

You don't need to file a Form 709 for any given year (simultaneously, any gifts are non-taxable) if you meet all of the following conditions:

• You made no gifts during the year to your spouse;
• You gave no more than $10,000 during the year to any one donee;
• All the gifts you made were of present interest.

The second one is often quoted as part of the Uniform Gifts to Minors Act. In fact, it applies to anybody. If I gave $9000 to you this year, I don't have to report it.  In fact, I could give under $10K to lots of people in a year, and still not have to file the Form 709.  See the Investment FAQ for more information in this area.

The third one is the one that has given me grief. I wanted to set up a trust for my kids, and approached my mutual fund investment company about their GiftTrust mutual fund.

On the bottom of the mutual fund application, the creator is asked to sign an agreement that the money is a gift of future interest.  In other words, the company is covering their back side by getting your acknowledgment that you (not them) have to file tax forms for the trust.   In fact, because it's an irrovocable trust, the gift is of present interest.  When I called the IRS, I was advised that it's a gift of present interest.  Knowing that what one agent says means nothing in a defense for one's actions, I called back 2 more times.  Three of three times I got the same answer, so I went ahead and did the investment and didn't file the IRS Form 709.

One caution about giving gifts to your own children:  Tax Court has ruled that if the donor and the custodian for a minor are the same person, the gift can be disallowed.

2008 update: during the economy crash of 2007 and 2008, most of the value of these investment evaporated.