Uniform transfers/uniform gifts to minors acts.
Gifts can be made to a minor by transferring property to a custodian under the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). Because the UGMA places restrictions on the types of property that can be the subject of a custodial gift, most states have now adopted the UTMA. It appears that life insurance policies may be the subject of a gift in all states. However, in most states there are restrictions on who may be named insured; there may also be restrictions on who may be named beneficiary (see discussion of Minors and Life Insurance, page 477).
Gifts made under either act can qualify for the annual exclusion (see chart, page 55). All income from the gift will be taxable to the minor (unless it is used to discharge the legal obligation of another person, in which case the income would be taxable to that person). Unlike a minor's trust, the custodian does not file a separate tax return and all income is reported by the minor on his own tax return. The minor has the right to receive possession of the property upon attaining the age specified in the relevant state's statute (age varies from state to state, and may depend upon the instructions of the donor or the nature of the transaction that created the custodianship).
If the donor appoints himself as custodian, the property will be included in his taxable estate if he dies while serving as custodian. There can be only one beneficiary per custodial account, and therefore separate accounts must be established for multiple beneficiaries. Likewise, each account can only have one custodian and successor custodians are usually the minor's guardians.
Generally, for 2010, a dependent child must file a tax return if the child has unearned income of more than $950 or total gross income in excess of the standard deduction (the greater of (a) $950, or (b) earned income plus $300, but not exceeding $5,700).
Unearned income of a child [(1) under age 18, (2) under age 19 whose earned income does not exceed half of his or her own support, or (3) under age 24, if a full-time student, whose earned income does not exceed half of his or her own support] that exceeds $1,900 generally is taxed to the child at the parent's maximum rate (known as the "kiddie tax").
A parent can elect to claim the unearned income of a child [(1) under age 18, (2) under age 19 whose earned income does not exceed half of his or her own support, or (3) under age 24, if a full-time student, whose earned income does not exceed half of his or her own support] on the parent's return if: (1) the child's income is solely from interest and dividends; and (2) the income is more than $950 but less than $9,500; and (3) there has been no backup withholding or estimated tax payments under the child's taxpayer identification number. If the election is made, the parent includes as income taxable at the parent's rate any gross income of the child in excess of $1,900. With respect to the first $1,900 for each child to whom the election applies, there is a tax of 10 percent of the lesser of (1) $950 or (2) the excess of the gross income of the child over $950.