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Is an UTMA account the right choice?

Grandparents in love – in love with their grandchildren – and I am one of them.  Our Ruby and Jo are so precious – joy abounds.

So, we will do whatever we can to make our grandchildren’s lives the best. Not good or better, but the best.

Which leads me to gifts under the Uniform Transfers to Minors Act (UTMA). While the UTMA provides an inexpensive and expedient arrangement for accumulating wealth on behalf of a minor, like anything else, there are pros and cons.grandparent

One of the benefits of an UTMA account is tax savings. For instance, a donor’s income tax may be lowered by transferring income-producing assets to a child, who is likely to be in a lower tax bracket. The first $1,000 of unearned income (interest, dividends or capital gains) in an UTMA account is exempt from federal income tax if the child is under age 18 at the end of the tax year. The second $1,000 of unearned income is taxed at the child’s rate. Any unearned income that is greater than $2,000 is taxed at the higher of the child’s or parent’s marginal tax rates.

UTMA accounts have an adult designated to manage the money for the minor until the minor reaches the age of majority, then the control passes to the child. During that time, the custodian can spend the funds on the beneficiary (i.e., grandchild).

Any unused money must be distributed to the grandchild by the time they reach the age of majority or the maximum age allowed for custodial accounts in their state. For classic UGMA (Uniform Gift to Minors Act) accounts, the age that the beneficiary is entitled to the funds is generally age 18. For the newer UTMA accounts, this is usually age 21, but may be as late as age 25. Under current New York law, a minor is entitled to the funds at age 21. However, if an account was opened under New York’s old UGMA (before 01/01/97), the minor is entitled to the funds at age 18.

Just remember, when your grandchild turns 21 (depending upon the account and State law), he or she will be legally entitled to the account. So, now your lovely grandchild can spend the money on anything that they want – clothes, dinners, down payment on a car – sounds ok – but what about drugs, poor financial sense and friends of your grandchild who become vultures.

For most Americans (in fact, almost all Americans), gift taxes are no longer an issue. If that is the case, there are better ways to makes gifts than into UTMA accounts.  The better way is to set up trust to hold the gifted monies for the benefit of your grandchild. The parents of the grandchild can be the trustee and there is no mandatory age for the distribution of the trust assets to the grandchild.  You decide in the trust or give the trustee (your child) the discretion to decide when to pay the funds out to your grandchild or in the alternative, the trustee can spend the money for the benefit of the grandchild.

For those who want to take advantage of the Federal annual gift tax exclusion to save estate taxes, the answer is still that it is best to use a Trust to serve your purposes. The trust needs to be irrevocable and have withdrawal powers as to the beneficiary (known as “crummy powers).”

The benefit here is that the gifted monies are not subject to the grandchild’s creditors, bad marriage, lawsuits and undue influence.  Now, that sounds a whole lot better.

When deciding whether to open an UTMA account it is important to know that there are options available that may be better suited. 

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