When planning their estates, many parents and grandparents want to learn the best way they can make lifetime gifts to children or grandchildren. These gifts are usually intended to build a college fund for the child while also reducing the donor’s taxable estate. Although these parents and grandparents are to be commended for their proactive approach to protecting their loved ones, there are several pitfalls for the unwary in such lifetime planning.

Financial professionals often advise parents to establish custodial accounts for minors under the Uniform Transfer to Minors Act (UTMA). These accounts are easy to recommend because they are easy to establish and require few formal documents. The problem with this recommendation is that the child will be given all of the account assets when he or she turns twenty-one.

There is nothing magical about reaching one’s twenty-first birthday. Not all children are financially mature at that age and many need further guidance. If there are substantial sums in the account, the biggest question many children often face is, “What color should the Porsche be?” Some of the best parents in the world have raised children who cannot handle money. This lack of control is a major drawback that makes an UTMA definitely not the right vehicle for the parent or grandparent who desires to guide the child’s use of the assets.

If you want to retain control over how and when distributions are made from a child’s account, a Minor’s Demand Trust is an excellent option that should be explored. With a Minor’s Demand Trust, the parent or grandparent retains control over how the trust assets can be used while still escaping gift taxes that would otherwise be due. To accomplish this two requirements must be met. First, annual gifts are made that are kept under the annual gift tax exemption. Second, each time a gift is made the minor is given the legal right to demand the gift during a specified period of time (a window of opportunity). This withdrawal right poses no particular problem because, since the child is still a minor when the gift is made, it is of course the parent who decides whether to exercise the child’s withdrawal right. The parent can simply waive the demand right and instead invest the funds for the child’s future needs.

Another benefit of a Minor’s Demand Trust is that distributions are not limited to educational needs. The Trustee can use trust assets for the benefit of the child as desired or deemed appropriate.