What Is the UTMA?
If you plan to make gifts in your estate plan to minor beneficiaries, care must be taken when making those gifts. This applies whether the gifts are made during your lifetime or after you are gone. One estate planning tool that may be able to help is the Uniform Transfer to Minors Act. To help you better understand, the Coral Gables estate planning attorneys at Stivers Law explain what the UTMA is and help you decide how it might fit into your estate plan.
The History of the UTMA
The Uniform Transfer to Minors Act is a model law that has been enacted, to some extent, in all but one state. The UTMA was created 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?
Much like 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 investments though are not typically allowed. The creator of the account (usually a parent or grandparent) designates a custodian for the account who oversees the management of the account until the child reaches the age of majority (21 in Maryland but it can be as young as 18 in other states) at which time the custodian must turn over control of the account to the child.
Taxes and the UTMA
One attractive feature of a UTMA 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.
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.
Should I Establish a UTMA Account or a Trust Agreement?
A trust can also hold assets for a minor, making a trust agreement another popular estate planning tool. How do you decide whether a UTMA account or a trust is the best option for you? Given the complexity inherent in gifting to minors, you should consult with your estate planning attorney to decide which is right for you. An important difference, however, between using a UTMA account and a trust is that with a UTMA account, you have no control over how the assets are used by the beneficiary once he/she reaches adulthood whereas with a trust 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. Furthermore, there is no requirement that the assets in a trust be disbursed when the beneficiary reaches adulthood unless you include that as a term in the trust agreement.
Contact Coral Gables Estate Planning Attorneys
For more information, please join us for an upcoming FREE webinar. If you have additional questions or concerns about estate planning, contact the experienced Coral Gables estate planning attorneys at Stivers Law by calling (305) 456-3255 to schedule an appointment.