Gift to Minor Can Be Held Until Recipient Is 25

Q: In a recent column you told a reader that he could not change the terms of the savings account he established for his nephew under the California Uniform Gift to Minors Act to keep control of the account until the nephew turns 21. I believe gifts to minors can be continued past 18 under the Uniform Transfers to Minors Act. Could your legal advisers have led you astray?-- K.P.

A: Actually, my legal advisers were correct--technically. But this does not mean you are wrong. There is still far more to be said about custodian accounts established on behalf of minors. And many of you wrote to remind us.

Here’s the full story from Paul Gordon Hoffman, a Los Angeles attorney, and Harlan W. Snyder, a Glendale financial planner: On Jan. 1, 1985, the California Uniform Gift to Minors Act was replaced by the California Uniform Transfers to Minors Act. It was more than a name change.

The act permits those who establish custodian accounts on behalf of minors to specify that the child not touch the account until a precise time after reaching 18. Depending on how the account is established, the child could gain access to the funds at 21 or 25. If the account is established when the donor is living, the donor can specify a date up until the recipient’s 21st birthday. If the account is created at the donor’s death, through a bequest, the access date can be deferred until the recipient is 25. In all cases, the law stipulates that the child be given access to the money by age 25.

Custodian accounts established before 1985 are covered by the old law, which automatically gave children access to their funds at 18. Even accounts established after 1985 can be given over to the minor at 18 if the donor fails to specify that the account is to be held until after that. So, the reader who wrote for advice must turn over the funds in the custodian account to his nephew when the nephew turns 18, regardless of what the new law allows. The uncle is also powerless to change the terms of the account.

Although a donor cannot change the terms of an account once it is opened, nothing prevents him from opening a second account with a later termination date and making all subsequent gifts into that account--which will have terms that he prefers. This is the course of action that the reader who wrote seeking advice should follow. The only way to ensure that custodian accounts are turned over to a beneficiary after he or she turns 18 is to include that provision in the terms of any new account opened under the Uniform Transfers to Minors Act.

Retiree’s Earnings Won’t Boost Pension

Q: I started to collect Social Security retirement benefits at 62. Since then I have been working part time, earning about $4,000 per year. Since Social Security taxes are withheld from my pay check, shouldn’t I receive a small increase in my Social Security check?-- H.S.

A: Theoretically, what you say is true, and if you were making more money, you would likely see a small increase in your benefits. However, according to Social Security Administration officials, the relatively low level of your annual earnings--and therefore the small amount of Social Security taxes withheld from your pay check--are insufficient to make a difference in your monthly benefits.

Remember, benefits are largely determined by your highest-earnings years. Unless you have a substantial number of years of very low earnings, your $4,000 annual income these days isn’t going to count for much in the overall equation.

County Assessment May Be Deductible

Q: Earlier this year, an assessment for a county improvement was levied against my property for $43,284.75. Because I was unable to refinance my property to pay my assessment at once, I am paying the county over 20 years at an annual interest rate of 8.5%. However, if I had been able to refinance, my new loan would have been covered by a trust deed and the interest portion of my payment would have been deductible. I am wondering if I am entitled to a deduction on the interest I am paying on the bond. There is a lien against my property for the assessment that would seem to be the equivalent of a trust deed. Do I get the deduction?-- J.R.K.

A: Whether you’re entitled to the deduction depends on the type of interest you are paying and whether it matches the types the government deems deductible.

The Internal Revenue Service allows you to deduct interest on the purchase of or improvements to a primary or secondary residence. This category wouldn’t appear to apply to you. You probably also don’t qualify for the business interest deduction, unless the property is somehow tied to a business venture.

Your county assessment interest charge probably would qualify as personal interest, but in 1990 just 10% of these charges are deductible, and the category is being eliminated next year.

However, there is still one more chance to deduct the interest. It hinges on whether the county improvement interest can be considered the result of a home equity loan. Our legal advisers say the interest probably can pass the home equity test--assuming, of course, that the property is your residence.

The final test in determining the deductibility of your assessment interest is how much you have already borrowed on your home. The IRS allows you to deduct the interest on just $100,000 worth of additional home equity debt whose proceeds are used for personal expenses. To the extent that the $100,000 additional mortgage limit is exceeded, the interest on the loan is not deductible.

NOTE: Last week’s column on interest-free loans between family members incorrectly described IRS rules for deducting home equity interest. As discussed again this week, the IRS allows taxpayers to deduct interest payments on up to $100,000 worth of home equity debt when the proceeds are used for personal expenses. The IRS does not limit the deductibility of interest on home equity loans when proceeds are used to substantially improve or rehabilitate the taxpayer’s residence.