HOW TO LEAVE MONEY TO CHILDREN
There are many different ways to leave money for college or an inheritance to minor children. This web page discusses how to leave money to minors, not adults.
Uniform Transfers to Minors Act Account or UTMA:
A UTMA account can be established by an adult placing money or property in an account opened in the name of a minor child under the child’s social security number. A donor can make an irrevocable gift or transfer of cash, stocks or other property into the UTMA account. A UTMA account must be managed by an adult custodian for the benefit of the child until the child reaches the age of majority. The custodian is usually a parent or grandparent, but can be a third party. When the child reaches the age of majority, the custodian must distribute the funds in the account to the minor. Some states require the UTMA account be distributed to the minor at age 18, some at age 21, while other states allow the UTMA account to be kept under the custodian's control until the child reaches age 25. Research the laws of your state to determine what rules will apply. Be sure to name a successor custodian to manage the account in the event of the custodian’s death or incapacity.
Advantages of a UTMA Account:
Allows parent, grandparent or other donor to make a gift to child while child is still a minor and take advantage of annual gift tax exemption.
Provides a way to gift money or other property to child that can be used for any purpose such as college tuition, first home purchase, starting a business, medical bills, or financial security which can be a benefit if child does not attend college.
Avoids legal costs involved in creating a trust which may be unnecessary if only a small amount of money is transferred.
Many different types of assets can be transferred to a UTMA account including certificates of deposit, stocks, bonds, mutual funds, business interests, and real estate.
No cap on dollar amount a donor can gift or transfer to child. However, gift tax may apply to gifts in excess of donor’s annual gift tax exclusion amount.
If emergency funds are needed to care for child prior to age of majority, custodian can withdraw UTMA funds without penalty provided they are used for child’s benefit.
UTMA account is a great way to teach child about investing.
Disadvantages of a UTMA Account:
The gift is irrevocable so the donor has no control over how the assets in the UTMA are used after the child becomes an adult. After reaching adulthood, the recipient of a UTMA account can withdraw all the funds and go on a gambling spree in Las Vegas. If the donor wishes to control how the funds are used, a trust may be a better option. If the donor wants the gift to be used for college, a 529 savings plan account can be used.
A UTMA account may affect a child’s eligibility to receive financial aid for college.
Income or earnings from a UTMA account are taxable and do not grow tax-deferred, unlike some other types of accounts.
A UTMA account can make filing tax returns more complicated and may create an unnecessary burden if the amount in the UTMA account is small.
If the donor is custodian of the UTMA account and dies before the assets are distributed to the child at the age of majority, the UTMA account may be included in the donor’s gross estate, which can result in significant estate tax consequences if the amount transferred to the UTMA account was substantial. For this reason, many advisors recommend someone other than the donor serve as custodian if estate taxes are a concern. Consult your tax advisor for more information.
Uniform Gifts to Minors Act Account or UGMA:
UGMA accounts are very similar to UTMA accounts described above, with a few differences. UGMA accounts have more limitations on the types of assets that can be held in the account. For example, unlike UTMA accounts, UGMA accounts cannot hold real estate, artwork, and certain other types of property. UGMA accounts and UTMA accounts were used more frequently prior to the development of 529 college savings plan accounts.
Most states have replaced their Uniform Gifts to Minors Act with the Uniform Transfers to Minors Act. Therefore, if you open this type of account, in most states you will be opening a UTMA account. Consult your financial planner for more information.
Leaving Money for College to A Minor Child
If you want to set aside money for a college education for your child or another member of your family, visit our page on 529 college savings plans for helpful tips on account owner designation, gift taxes, generation-skipping transfer taxes, and estate planning.
Recommended books on gifting to children, UTMA’s, UGMA’s, and 529 college savings plans:
