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40 Va. Tax Rev. 475 (2020-2021)
Custodianships, Trusts, and Guardianships

handle is hein.journals/vrgtr40 and id is 493 raw text is: CUSTODIANSHIPS, TRUSTS, AND GUARDIANSHIPS Grayson M.P. McCouch* Gifts to a minor beneficiary often take the form of a statutory custodianship under the Uniform Transfers to Minors Act (or its predecessor, the Uniform Gifts to Minors Act). A custodianship functions as a simple, convenient alternative to an outright gift of property or a gift in trust for the minor beneficiary, avoiding the need for a court-appointed guardian as well as the expense and formality of an express trust. Although less flexible than a custom-tailored trust, the custodianship may be viewed as a hybrid arrangement that embodies aspects of both a guardianship and a trust. The conceptual ambiguity of the custodianship is reflected in the federal tax treatment of the donor, the custodian, and the minor beneficiary. For gift and estate tax purposes, the Service views the creation of a custodianship as a transfer in trust rather than an outright gift. The trust analogy does not jeopardize the gift tax annual exclusion, but it does mean that the transferred property may be includible in the donor's gross estate if the donor dies while acting as custodian. For income tax purposes, the Service views the minor as the owner of the custodial property, with the result that income from the property generally is taxed directly to the minor. Nevertheless, the Service insists that the minor's parent is taxable on any income that is actually used to discharge the parent's legal obligation to support the minor. The Service's approach appears to rest on a misreading of the powers and duties of custodians under local law as well as a misapplication of grantor trust principles. The Service should reconsider its bifurcated income tax approach and treat all income from custodial property as taxable directly to the minor. TABLE OF CONTENTS I. IN TRO D U CTIO N .................................................................................. 476 II. CUSTODIANSHIPS IN CONTEXT.......................................................... 477 III. FEDERAL TAX CONSEQUENCES ........................................................ 489 A. Gift Tax ....................................................................................... 490 B. Estate Tax ................................................................................... 495 C. Income Tax ................................................................................. 502 IV. CONCLUSION ..................................................................................... 510 Clarence TeSelle Professor of Law, University of Florida. 475

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