Let's say that a parent wants to give away some of his wealth to his 3 year old child so child could start to use it once he turns 18.

What would be the main differences between creating trust or opening a simple custodian account?

In particular

  1. Would gift tax consequences be exactly the same in both scenarios? If I understand correctly then in both cases gift tax would be triggered when assets are transferred into custodian account or trust.
  2. Would income tax consequences be exactly the same in both scenarios? If I understand correctly, then if assets are sold in custodian account then child needs to file form 1040. However, how income taxes would be filed with trust - would they be under grantors name or separate entity?
  3. Are investment options the same for trust and custodian account? In other words can both be diversified in stocks, real estate etc?
  4. If beneficiary would receive stocks instead of cash, then would cost basis be transferred the same way in custodian account and trust case?

1 Answer 1


You have asked a rather long and complex question. The only time you have to worry about gift tax is if there is a completed gift. Hence, if you put money into a revocable trust for your child there is no gift tax. However, if you put money into a irrevocable trust for your child then there could be gift tax issues.

If you give somebody a gift of $1 and it is not a gift of present interest then you must file a gift tax return. For purposes of this rule, contributions to a minor's trust (also known as a Sec. 2503(c) trust) are considered to be gifts of present interest.

If you give somebody stock, the cost basis is transferred.

An irrevocable trust (unless it is defective (sometimes called an IDGT) ) has to file an annual income tax return. If the trust is paying taxes on its income then you do not have to pay the tax and your child does not have to pay the tax. However, the trust rates maybe significantly higher than you or your child's marginal tax rate.

I am wondering why you want to do this now. Are you trying to save on estate tax? Are you trying to protect the assets in case you are sued?

The trust documents will specify what the trust can invest in. Typically trusts invest in stocks and bonds. They can also borrow money.

I do not think (but I am not sure) that a custodian account can invest in real estate. However, it could invest in a REIT.

If you are thinking about transferring a significant amount of money to your child, I would be talking to a lawyer. Not just any lawyer, I would be talking to lawyer that does wills and estates and only that.

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