Maximizing the Impact of Gifts to Children and Young Adults

Making a financial gift to a young person is an act of generosity that can resonate far into their future. Especially as year-end approaches, parents, grandparents, and other relatives often think about the young people in their lives and how they can help to provide for their path ahead. 

Practical questions often follow: Should I write a check before December 31? What is the right dollar amount? Should my gift come with conditions?

Because gifts above available exclusions may be subject to a 40% federal tax rate, annual and lifetime gift tax exclusions and exemptions are valuable planning tools. If you are considering a recurring or lump-sum gift, applying these exclusions and exemptions in combination with the right transfer vehicle can help you achieve your goal in a tax-efficient way.

The Spectrum of Gifts to Minors and Young Adults

Gifts to young people can take many forms. This can be as simple as writing a check or funding a custodial account, or as involved as setting up a trust when amounts are substantial or greater control is prudent. 

For wealthy families, gifts are more often made by funding accounts or entities with characteristics that meet family objectives. We highlight vehicles that are often used to make gifts to minors and young adults that can qualify for gift tax exclusions or exemptions. These include two types of trusts in addition to certain custodial, state-sponsored, and federally authorized accounts (Exhibit 1). Each method has its own level of control and withdrawal rights, tax implications, and asset protection. 

Perspective on Transfer Tax Exclusions and Exemptions

Although gifts can be made at any point in the year, those with giving intent may wish to consider applying unused transfer tax exclusions and exemptions, particularly annual exclusions that expire at year-end and renew in the following year. Exhibit 2 summarizes the different types of exclusions and exemptions available for 2026.

Gifts with Flexible Applications

Outright Gifts
The simplest and most flexible gifting approach is the direct transfer of cash, marketable securities, or other property. This is only possible for recipients who have reached the age of majority, as minors generally cannot accept or hold assets. While convenient, this method is generally better suited to an older, more financially mature recipient, and when the amount is modest. It is also useful when simplicity and accessibility are more important than asset protection or long-term management. 

Considerations:

• Limited creditor, divorce, spending, or investment protection
• Gifts of securities and other noncash assets require attention to three aspects:
  • Basis records, as the donor’s basis transfers to the recipient, effectively transferring the capital gains tax exposure
  • Valuation, as gifts are valued at the time of the gift for gift-tax exclusion purposes
  • Timing, as the transfer should settle before the tax year ends
• For gifts of cash, recipients should take care to deposit or cash checks prior to year-end
• Grandparents can apply the generation-skipping transfer (GST) tax exemption for grandchildren

Qualified Direct Payments
Qualified tuition and medical payments made directly to a service provider, such as a school, university, hospital, or health insurance company, are not subject to gift tax. This allows families to transfer considerably more than $19,000 every year without using the gift tax exemption. These payments can be made on behalf of any minor or adult.

Considerations:

• Payments satisfy current educational or medical liabilities rather than transferring assets for the recipient’s future use
• The donor will generally need information from the recipient regarding the applicable educational or medical expenses and payment logistics

UTMA or UGMA Custodial Accounts 
Funding a custodial account is one step removed from direct giving for a parent or relative who wants to make a flexible gift for the child’s general benefit yet restrict access to assets until they are older and more financially mature. A custodial account may be suitable when the recipient is a minor, the gift is not large enough to justify establishing a trust, and the donor would like to make annual gifts.

Donors can transfer cash and securities to the minor under the relevant state's Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). They appoint a custodian who manages the assets in the account until the beneficiary reaches the age of majority or a later age when the UTMA/UGMA account legally must terminate. This is generally age 18 or 21 and can be as late as 25 years in some states. The custodian may distribute assets at any point prior to that provided it is for the child’s general benefit.

Considerations:

• The beneficiary typically cannot be changed
• Limited creditor, divorce, spending, or investment protection
• Investment income in excess of a certain limit may be subject to the “kiddie tax,” payable by the minor or parent 

Trump Accounts
Congress created Trump Accounts in 2025, a long-term savings account notable because it can be established at birth. This creates a long growth period for contributions that can result in meaningful capital accumulation. 

Account contributions are invested in low-cost funds and grow tax-free until the beneficiary turns 18, after which the account converts to a traditional IRA. 

The annual contribution limit is $5,000 through 2027 and will be indexed for inflation thereafter. As the limit is below the annual exclusion amount, Trump Accounts can supplement other types of gifting, including 529 savings plan contributions and trust planning.

Eligible children born between January 1, 2025, and December 31, 2028, also receive a one-time federal pilot contribution of $1,000 when the account is established. This does not count toward the annual contribution limit.

Considerations:

• As with any new legislation, implementation guidance from the Treasury Department and the IRS will continue to shape planning considerations

Crummey Trusts 
Crummey Trusts are particularly useful when the donor plans to make annual gifts and wants to broadly support the beneficiary but does not want them to automatically receive the assets at age 18, 21, or 25, as would be the case with UTMA/UGMA accounts. 

Annual gifts to a Crummey Trust may qualify for the annual gift tax exclusion through a process where notice is given to the beneficiary (or, in the case of a minor, to a parent on behalf of the beneficiary) after each contribution. This gives the beneficiary a temporary right to withdraw these newly contributed assets, satisfying the tax exclusion requirement for a “present interest.” The key to the Crummey notice process is for the withdrawal period to expire unexercised, allowing the property to remain in trust.

A Crummey Trust offers some protection from creditor and divorce claims, and the gift may be invested for decades using professional investment management. Trustee control can continue well into the beneficiary’s adulthood and the standards for distributions can be customized.

Considerations:

• Proper withdrawal powers and Crummey notices are critical
• Administrative discipline is essential
• Trust income tax and administrative costs should be considered
• For grandparents, GST tax planning becomes more complicated, especially for trusts benefiting multiple generations

If you are considering establishing a Crummey Trust, it is important to do so with enough time to make contributions to permit the proper administration of withdrawal notices. Doing so too close to December 31 could leave insufficient time for beneficiaries to receive and act on their Crummey withdrawal notices before the lapse period ends, jeopardizing the gift’s qualification for the annual gift tax exclusion.

Section 2503(c) Minor's Trusts 
A Section 2503(c) Minor’s Trust can be useful when the donor wants more control and flexibility than a custodial account but does not want the administrative burden of the notice process that accompanies Crummey Trusts before age 21. 

To qualify for the annual exclusion, however, the beneficiary must generally have a temporary right to withdraw the entire trust at age 21, and the donor must be comfortable with that potential access. A properly drafted trust may continue after that age if the beneficiary does not exercise the required withdrawal right, and the assets will be distributed according to the trust terms. The donor appoints a trustee to manage the trust assets while the trust remains in existence.

Considerations:

• Trust administration and tax-return preparation costs exceed those of a UTMA account or 529 savings plan.
• Undistributed income retained by a trust can reach the highest federal income tax rate at relatively low levels of taxable income.
• Additional contributions after age 21 require separate analysis if annual exclusion treatment is desired.

Gifts with Specific Applications: Funding Education and Contributing to Retirement Savings for a Working Child

Education Funding: 529 Savings Plans 
For parents and other family members focused on supporting a child’s education, contributing to a state-sponsored 529 account can be a simple way to make an annual or one-time gift. The funds can be invested and grow free of federal and, often, state income tax. However, to avoid penalties, they can generally only be used for qualified education expenses, such as tuition, room, and board. One area of flexibility unique to 529 plans is the ability to transfer account balances to different qualified beneficiaries within the family. 

Through recent legislation, certain unused 529 assets can now be transferred to the beneficiary’s Roth IRA, subject to annual limits and up to a lifetime maximum of $35,000 per beneficiary in 2026, provided certain conditions are satisfied.

Front Loading. 529s have a feature where a donor may contribute up to five years’ worth of annual gift tax exclusions in one year, or $95,000 per donor per beneficiary (or $190,000 per married couple) in 2026. This can have many uses, including for family members who wish to accelerate their gifts to ensure receipt during their lifetime. Front loading a 529 plan requires filing a gift tax return and should be coordinated with broader tax planning.

Expanded benefits for K-12 expenses. The annual federal limit for qualified expenses rose from $10,000 to $20,000 in 2026 and now extends beyond tuition to items such as curriculum and instructional materials, qualifying tutoring, standardized and college admission testing, dual-enrollment fees, and certain educational therapies.

Postsecondary qualifications. From 2026 onward, 529 funds can also be used to pay certain expenses for recognized postsecondary credential programs, making the account relevant to vocational and professional development.

Considerations

• Only cash contributions are accepted
• No creditor, divorce, spending, or investment protection
• Investment choices are limited to the plan’s offerings
• Care is needed with beneficiary changes across generations because gift tax and GST tax consequences can arise

Retirement Funding: Roth IRA for a Working Child 
If a child has taxable compensation from a job or legitimate self-employment, a parent or other relative can provide the cash that enables the child to make a Roth IRA contribution. 

For 2026, the IRA contribution ceiling is $7,500 or the child's taxable compensation for the year, if it is less. This approach is especially attractive for gifts to teenagers with summer or part-time jobs, college students earning wages, children legitimately working in a family business, or young adults just beginning their careers.

Similar to Trump Accounts, a modest gift received at age 15 or 18, for example, can benefit from an extended compounding period as assets in a Roth IRA can potentially grow tax-free over several decades. Contributions can generally be withdrawn later without income tax or penalty, providing some flexibility, although different rules apply to investment earnings.

Considerations:

• The total contribution cannot exceed the child’s qualifying compensation for the year.
• Documentation of wages or self-employment should be maintained — particularly when the child works for a family business.
• Ordinary Roth IRA income restrictions apply.

As year-end draws closer, choosing the right structure for your gifts can go a long way in maximizing their financial impact. The best gift is not always the most expedient one, so by planning ahead, you can help ensure that all options are within your reach. 

A 529 savings plan contribution may be ideal for education, a UTMA or UGMA account may work well for a modest flexible gift, and a trust may be a better option when ongoing management or asset protection is important. Newer options such as Trump Accounts and the 529-to-Roth rollover provide additional ways to give a child a financial head start. Direct tuition and medical payments can also supplement these strategies when appropriate. 

Year-end is therefore a useful time not only to ask whether to make a gift, but also whether the vehicle for the gift matches the family’s long-term objectives. Your Bessemer advisor can help you evaluate your options and navigate the gifting process.

Appendix

Gifting to Minors and Young Adults: Vehicle Directory
Compare different giving goals and the vehicles typically associated with them. Click on any vehicle to learn more about its characteristics.

“●” indicates that the vehicle is structured to support that purpose on favorable or intended terms.

“◐” indicates that the vehicle can support that purpose to a limited extent.

“○” indicates that the vehicle isn’t structured for that purpose.

1 The custodian or trustee respectively retains control of the assets while the child is a minor

2 In the calendar year the beneficiary turns 18, the account generally becomes subject to traditional IRA rules.

3 Certain unused 529 assets can be transferred directly to the beneficiary’s Roth IRA.

4 Funds can only be used for qualified education expenses, with exceptions outlined in footnote 3.

5 For withdrawals in excess of prior contributions, certain distributions may avoid the 10% early withdrawal tax, including qualified higher education expenses, up to $10,000 for a qualifying first-time home purchase, and certain medical expenses or health insurance premiums during unemployment.

6 Contributions (not earnings) may be withdrawn at any time, tax- and penalty-free, since they were made with after-tax dollars. Earnings are tax- and penalty-free only as part of a ”qualified distribution” — requiring both a five-year holding period (from the first contribution) and a triggering event (age 59½, disability, death, or up to $10,000 for a first-time home purchase).