Look at your child and what do you see? A Girl Scout? A Little Leaguer? Or do you see a walking shield against the Internal Revenue Service? So many people today are using their children to save income taxes that I expect nurses soon to be emerging from delivery rooms saying, "Congratulations, it's a shelter."
Some changes in law probably will be coming soon to many states, making it easier to kid-shelter more types of property than ever.
The source of the shelter is very simple. The earnings on any money owned by your child will be taxed in his personal income-tax bracket, which is very low. Starting next year, there is no federal tax at all on the first $1,040 of a child's unearned income, such as interest and dividends (the size of this exemption will rise every year with the inflation rate). After that, the income is taxed in the 11 percent bracket.
If that same amount of money were in the parents' bank account instead of the child's, the tax on the earnings would be a lot higher.
Parents of wealth also will lower their estate taxes by getting money out of their own names and into the names of their children.
But the law doesn't let you be an Indian giver. Unless you use a special, short-term trust, any money given to a child is irrevocably his. You can't take it back again. So you shouldn't give him any money that you don't really mean him to have. And you should look very closely at the various ways of giving money to a child, because some provide more safeguards than others.
The simplest way, and the best for small sums, is to give the money to your child directly. That's what happens, for example, when you open a bank account in the child's name. He can save that money or spend it, as he likes. For that reason, outright gifts usually involve only small sums. (If you put money into a bank account in your own name "in trust for" your child, you control its use but lose your shelter, because all the earnings are taxed to you.)
The most complicated way to give money to a child is through a trust. But trusts are the very best way of handing over large sums and valuable properties. A trustee manages the property, and the money can be kept from the child's direct control for as many years as you like.
The middle ground -- and the most sensible one for the average gift -- is to use the Uniform Gifts to Minors Act, and here's where some changes are due in the law. The great value of UGMA is that it's easy to use, it usually costs you nothing at all, and it puts modest restraint on how soon the child can get his hands on the money. The property will be managed by a custodian (who can be you) until the child reaches majority -- usually age 18.
But there have been limits on UGMA that kept parents and others from using it as freely as they otherwise might. Also, as the various states fiddled with the law it grew less uniform, and lawyers started to worry about whether a gift that was legal in one state would pass muster if the family moved.
So the people who look after these things have written a replacement for the old law called the Uniform Transfers to Minors Act. So far, it has been substantially adopted only in California, Colorado and Idaho, but it's expected to spread gradually to the other states. Some of the new things it would allow:
* You'll be able to give gifts of real estate, partnerships and other types of complicated property. (Only a few states now let real estate pass under UGMA.)
* It will make life vastly easier for your young children, and save them money, if you die without a will or without setting up a trust for them. Right now, any such money would have to be handled by a court-appointed guardian, who is hedged with potentially costly limitations on how he must act. Under UTMA, the money could be handled by a custodian at a lower cost. If your children are left orphans after an auto accident, for example, they could receive any damage awards under UTMA, again saving the complications and expense of a guardianship.
* The proposed law urges states to raise to age 21, from the present 18, the age when the child gets control of most of the property, the chairman of UTMA's drafting committee, Lawrence Bugge, told my associate Virginia Wilson. More parents would use UTMA instead of a trust if the child could be just three years more mature before receiving the money.
The trouble with this law, in both its old and new versions, is that it's almost too easy to use. Your bank, your stockbroker and your insurance agent probably all will have the forms you need to sign to make a gift to your children, but they may not have the expertise to tell you all about the pros and cons. Gift-giving is simple on the surface, but complicated underneath -- something to be talked over with an estate-planning lawyer if any serious money is involved.