Can I use annual exclusion for UGMA/UTMA gifts if age of termination is over 21? Present vs future interest question

You've spotted an important nuance in the gift tax rules. Yes, you've identified the issue correctly. For a gift to qualify for the annual gift tax exclusion ($18,000 for 2025), it must be a gift of "present interest" - meaning the recipient can immediately use, possess, or enjoy the gift. The IRS considers UGMA/UTMA accounts as present interest gifts ONLY if the funds will be distributed to the minor when they reach age 21. If you set the termination age higher (like 25), the IRS views this as a "future interest" gift since the beneficiary can't fully access the funds at 21. Future interest gifts don't qualify for the annual exclusion. So in your situation, if you set up UGMA/UTMA accounts with termination at age 25, you would need to use part of your lifetime gift tax exemption when filing Form 709. That said, with the current lifetime exemption being over $13 million per person, many people aren't concerned about using some of it.

Just wanted to share my experience using https://taxr.ai when I ran into this exact issue last year. I uploaded my Form 709 draft and the custodial account documents, and their system instantly flagged this present vs. future interest problem that I had completely missed. Saved me from potentially making a costly mistake! I ended up changing my UGMA accounts to terminate at 21 instead of 25 so I could use my annual exclusion. Their analysis showed that this would save me thousands compared to using my lifetime exemption. The report they generated even explained how I could create a separate trust for any assets I wanted to keep controlled until they were 25.

I just tried https://taxr.ai after seeing the recommendation here, and wow - totally worth it! I uploaded my draft 709 form and the UGMA paperwork for my grandkids, and within minutes it identified that I had made the exact mistake about termination age. The system showed me how to structure the gifts to qualify for the annual exclusion by setting the age to 21, while still providing some protection against them blowing the money. It suggested creating a separate trust with specific distribution terms for any assets I wanted to control longer. The report was incredibly detailed but easy to understand. My tax preparer was impressed with the recommendations and said it would have taken her hours to research this specific issue. Definitely using this for all my tax document reviews going forward!

If you're having trouble getting clear answers about this UGMA/UTMA gift tax issue, I'd strongly recommend using https://claimyr.com to get through to the IRS directly. I spent weeks trying to reach someone at the IRS for clarification on this exact present vs. future interest question, always getting disconnected or waiting for hours. Finally tried Claimyr, and they got me connected to an IRS specialist in less than 20 minutes. The agent confirmed exactly what others have said here - setting the age above 21 makes it a future interest gift. He also gave me specific instructions for how to report it properly on Form 709. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c Saved me so much time and frustration compared to trying to call on my own, and I got the official answer straight from the source.

Just following up on my skepticism about Claimyr - I decided to try it since I was desperate to talk to someone at the IRS about my own gift tax question. I'm honestly shocked at how well it worked. I've been trying for MONTHS to get through on my own. Used their service yesterday afternoon, and they got me connected to an IRS gift tax specialist in about 35 minutes. The specialist confirmed the exact issue about UGMA accounts needing to terminate at 21 to qualify as present interest gifts. She also helped me understand how to properly document this on my 709 form. For anyone struggling with these complex gift tax issues, being able to actually talk to a human at the IRS who knows the answers is worth every penny. Will definitely use again for any future tax questions that need official clarification.

Adding another perspective - if you don't want to use your lifetime exemption but still want the funds controlled until 25, consider a minor's trust (2503(c) trust) instead of UGMA/UTMA. These are specifically designed to qualify for the annual gift tax exclusion while still providing extended control. The trust must distribute assets to the beneficiary at 21, BUT you can include a provision that gives the beneficiary a limited window (like 30-60 days) to withdraw the assets when they turn 21. If they don't exercise this right, the assets remain in trust until the later age you designate. Since they had the opportunity to access the funds at 21, it qualifies as a present interest gift.

One option nobody's mentioned - if your state allows you to select the termination age, couldn't you just set up the UGMA/UTMA to terminate at 21 (qualifying for annual exclusion) but then talk to your nieces/nephews when they're approaching 21 about the importance of not spending it all? If you've built good financial values in them and they trust you, they might voluntarily keep the money invested based on your guidance rather than spending it. I did this with my own kids - their accounts legally terminated at 21, but we had good conversations about preserving the assets for education, housing, etc. They ended up keeping most of it invested until their mid-twenties anyway.

I'm confused because my tax advisor told me something different. He said that a UGMA gift is ALWAYS a present interest gift because the income generated is available to the minor immediately (via the custodian), even if the principal is locked until 25. So the gift still qualifies for the annual exclusion. Now I'm not sure what to believe.

This is a great discussion that highlights how nuanced gift tax rules can be. I wanted to add one more consideration that might help with your decision-making process. If you're concerned about the responsibility factor at age 21 but still want to use your annual exclusion, you could consider making smaller annual gifts to UGMA accounts that terminate at 21, rather than making one large gift that would require using your lifetime exemption. For example, instead of gifting $50,000 now to an account that terminates at 25 (using lifetime exemption), you could gift $18,000 annually for multiple years to accounts terminating at 21. This approach gives you the best of both worlds - you preserve your lifetime exemption while still building substantial assets for your nieces and nephews. By the time they reach 21, they'll have had several more years of maturity, and you'll have had multiple conversations about financial responsibility. Plus, the assets will have had more time to grow. Just something to consider as you weigh your options between the various strategies mentioned here!

This thread has been incredibly helpful! I'm dealing with a similar situation but with a twist - I'm planning to gift to both UGMA accounts AND a 529 plan for each child. From what I understand, 529 contributions always qualify for the annual exclusion since the beneficiary (or their parent/guardian) can request distributions at any time, even if there are penalties for non-qualified expenses. So I could potentially do $18,000 to a 529 plan (qualifying for annual exclusion) plus additional amounts to UGMA accounts set to terminate at 25 (using lifetime exemption) if I want that extra control. Has anyone here structured their gifting this way? I'm trying to figure out if there are any coordination issues between the two types of accounts that I should be aware of, especially when it comes to financial aid calculations later on. The annual gifting strategy that Zoe mentioned is really smart too - I might combine that approach with 529 funding to maximize my annual exclusions while still building substantial education funds.

This is such a valuable thread - thank you everyone for sharing your experiences and knowledge! As someone who's been wrestling with similar gifting decisions, I wanted to add one more consideration that might be helpful. If you're looking at larger gift amounts and are concerned about the complexity of trusts but still want more control than standard UGMA/UTMA accounts provide, some states offer "Enhanced UGMA" or "UGMA Plus" accounts. These allow you to set specific distribution schedules (like 1/3 at 21, 1/3 at 25, 1/3 at 30) while still potentially qualifying for annual exclusion treatment, depending on how they're structured. The key is that the first distribution must occur at 21 to maintain present interest status, but subsequent distributions can be delayed. It's like a middle ground between the simplicity of regular UGMA accounts and the complexity of formal trusts. Not all custodians offer these enhanced options, so you'd need to shop around. But it might be worth exploring if you want more control than age 21 termination but less complexity than setting up formal trusts for each beneficiary. Has anyone here worked with these enhanced UGMA products? I'd be curious to hear about real-world experiences with them.