The California Uniform Transfer to Minors Act (CUTMA) can be found in sections 3900 to 3925 of the California Probate Code. It provides a means for parents (and grandparents) to make gifts to their children, without the need for setting up a formal trust or court-supervised guardianship.
Parents who take advantage of CUTMA, will often set up a “custodial account” or “CUTMA trust” for each of their children at a financial institution. Only one parent (or some other adult or institution) may be named the custodian of each child’s account. Sometimes, each parent will set up a CUTMA trust for each child. During their lifetimes, each parent gives the maximum annual, tax-free gift to each child. Because the annual tax-free gift is currently $13,000, a total of $26,000 may be given to each child, each year. (Calif. Prob. Code §3909(2); IRC §2503(b).)
It should be remembered that gifts that are made to a child’s CUTMA trust, while the parents are still living, will be given to the child outright on the child’s 21st birthday, but only if it is specified in the transfer document. (Otherwise, the default age is the child’s 18th birthday.) (Calif. Prob. Code §3920.5(e).) On the other hand, a “testamentary gift” that is given to a child (or grandchild) as the heir of a deceased parent or grandparent, may be kept in a CUTMA trust until the child’s 25th birthday.
If both parents make annual, $13,000, gifts to a child on the day the child is born, and on each of the next 21 birthdays, and the gifts grow at an annual rate of 5.0%, then the child will receive a gift of $1,001,136 on his or her 21st birthday. (Calif. Prob. Code §3920.5(c).)
The parents have transferred more than one million dollars from their estates to their children, without incurring one cent in gift tax, while also reducing their potential estate tax liability by up to $550,625. Moreover, using the rules under CUTMA, this has been achieved by a relatively simple estate planning technique, which does not involve a formal guardianship or irrevocable trust.