Evening star. [volume] (Washington, D.C.) 1854-1972, 1958-02-12

than let the tax collectors take
a giant share of their property
when they die, they prefer to
make gifts of their property to
their children while they are
alive. The gifts can be made
on a nontaxable basis. or If
they are large enough to be
subject to a gift tax, this tax
still can be a lot less than the
estate tax cost of transferring
the same shares to the chill
dren when the parent dies.
Until quite recently there had
been a big legal roadblock to
giving securities to children, but
it has been overcome by the
development of stock GUS
todian" law which simplifleS the
whole operation. The law has
swept the country, with state
after state passing a version
of it. In these states the par
ent buys the securities, names
someone-it can be himself or
anyone else-to hold the secur-
tiles as custodian for his child
and fills out a simple certificate
to that effect. The custodian
holds the securities. collects the
income and turns everything
over to the child when he
reaches 81. Until the child
reaches 81, the custodian may
use the income for the child's
support, If he thinks this is
advisable.
But while it now is legally
easy to make a gift of securities
to your children, you must
watch out for these two tax
traps.
The income tax trap is this:
The income from a custodian
account is taxable to your minor
child unless the income is used
to discharge the legal obligation
of the parent Cor anyone else
who may be legally obligated
under the State law) to support
the child. To the extent the
custodian actually uses the in
come for support. it's taxable
to the parent Cor other person.
who had the legal duty to sup
port. And this is so regardless
of who set up the custodian
account or who the custodian is.
Procedure Explained
For instance. say a father
buys shares for his minor son
and makes his wife the custo-
dian Of the sons account. AS
long as the wife collects the
dividends and holds them for
her son. they are taxable to the
son. But If she uses some Of the
dividends to help pay the FAM
ily's rent bill, the father-and
not the son-will be taxed on
the dividends used for that pur-
pose. Undoubtedly, the father
is liable under state law to
support his son; the dividends
used for rent satisfy this obli-
cation and are therefore taxable
to the father.
The estate tax trap is this:
The Treasury ruled last year
that If a father dies while act
ing as custodian for his sons
securities account, before the
son becomes 81, the securities
will be considered part of the
fathers estate. The father who
tries to cut down his own estate
by giving securities he owns. to
his minor son but who makes
himself the custodian of the
sons account well may achieve
nothing by the transfer.
The way out of the income |
tax pitfall is clear: Don't use
the income your child receives
on securities you give him for
any family expense-and that
goes no matter who is custo-
dian of his account.
The way out of the estate tax
pitfall also is clear: If your
purpose is to cut your estate
tax, do not name yourself as
custodian Of your child's &C
count when you give him the
securities. Name anyone else
your wife, brother, friend, etc.
and then you can be pretty
sure you have removed the
securities from your estate even
If you die before your child
reaches 81.
81 $50
Tomorrow: How to prove