The moment you found out you were going to be a parent, you probably started worrying about, and planning for, your child’s future. Estate planning also took on a heightened importance because you wanted to be certain your child was protected if something happened to you. One tool in the estate planning toolbox for parents is a Uniform Transfers to Minors Act (UTMA) account. For those who are unfamiliar with this tool, a Nashua estate planning attorney at DeBruyckere Law Offices explains the Uniform Transfer to Minors Act.
Why Was the UTMA Created?
The Uniform Transfer to Minors Act is a model law that has been enacted, to some extent, in all but one state. The reason the UTMA was created was to offer parents and grandparents a way to safeguard money or assets intended for a minor. By law, a minor cannot inherit directly from your estate. Therefore, an adult must protect and manage a child’s inheritance and/or gifts made to a minor until the child is old enough to inherit directly.
What Is the UTMA?
Similar to the Uniform Gift to Minors Act (UGMA), the UTMA is simply a custodial account that holds and protects assets for a minor until that minor reaches the age of majority in his/her state. Because state laws govern the implementation of the UTMA, the rules and procedures for a UTMA account can vary somewhat from one state to the next. Generally, however, a UTMA account can be funded with cash, stocks, bonds, and mutual funds. Higher risk investment though are not typically allowed. The creator of the account (usually a parent or grandparent) designates a custodian for the account who is in charge of managing the account until the child reaches the age of majority (anywhere from 18 to 21, depending on the state) at which time the custodian has to turn over control of the account to the child.
Benefits of the UTMA
One attractive feature of a UTMA account, also referred to as a “custodial account,” can be found in the tax treatment of the account. Assets held in a UTMA account are considered the property of the minor, therefore up to a certain amount of the investment income is not taxed (the amount fluctuates) and an equal amount is taxed at the lower child’s tax rate instead of the higher parents’ rate. After that, however, excess income is taxed at the parents’ marginal tax bracket.
Drawbacks to the UTMA
All withdrawals made by the custodian must be for the benefit of the child and they must be for a legitimate need. While the child is a minor, the custodian has discretion regarding when to authorize withdrawals. Once the child becomes a legal adult, however, the child can use the money without limitations for anything he/she wants.
Is a UTMA Account or a Trust A Better Option to Protect My Child’s Inheritance?
If you wish to leave or gift assets to a child or grandchild, you way be wondering whether using a UTMA account or a trust is the better option. Because there are so many factors to consider, you should consult with your estate planning attorney before deciding. One of the primary differences, however, between using a UTMA account and a trust is that you have no control over how the assets are used by the beneficiary once he/she reaches adulthood with a UTMA account. With a trust, however, you can use the trust terms to dictate how the assets can be used both while the child is a minor and after he/she reaches adulthood. Moreover, with a trust there is no requirement that the assets remaining in the trust be disbursed just because the beneficiary reaches adulthood. The additional control offered by a trust is one reason why many people ultimately choose to establish a trust instead of using a UTMA account.
Contact a Nashua Estate Planning Attorney
For more information, please download our FREE estate planning worksheet. If you have additional questions about including a UTMA account in your estate plan, contact a Nashua estate planning attorney at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.
Yes. You can create separate accounts for separate beneficiaries.
Consult with your estate planning attorney to determine when the best time is to create a UTMA account and/or transfer money into an account.
You may be able to use the annual exclusion to make gifts to a UTMA account; however, you need to talk to your estate planning attorney to be certain if the exclusion applies.