As a parent, grandparent, or other family member, you may wish to gift assets to minors within your estate plan. If so, care must be taken when making gifts to minors, both during your lifetime and after you are gone. The Indianapolis estate planning attorneys at Frank & Kraft explain why you need to understand the Uniform Transfer to Minors Act (UTMA) if you plan to transfer assets to minors in 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 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?
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 (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.
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.
UTMA Account vs. a Trust
Creating a trust to hold assets for a minor is another popular way to gift to minors. Which is the better option, a UTMA account or a trust? 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 rust 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 Indianapolis Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding estate planning, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.