Two of the most commonly used methods of transferring money and assets to minors are a Uniform Transfer to Minors Act (UTMA) Account or a Trust. A UTMA
Account is relatively simple to create and fairly inexpensive, but you cannot exercise any control over the assets. While a trust allows you to maintain
a level of control, the expense may be substantial. Below are several pros and cons of each to consider before making your decision. Both mechanisms
can be implemented during a parent’s lifetime or upon their death. If you want to provide a gift to a minor child or some other beneficiary that has
not yet reached adulthood, depending on your personal goals for the gift a UTMA Account or Trust may be the perfect mechanism to achieve the desired
Whether you are a parent, grandparent, aunt, uncle, or friend, you can use a UTMA Account to make a gift to a minor child. If you decide to use a UTMA
Account, you will need to appoint a Custodian to manage the account. Once the account is opened, you can transfer whatever assets you like into the
account. Once the assets are transferred, the child becomes the owner of the property. Your child will not be able to gain control of the property
until he or she is 18 or 21 depending on the law in your state. Once your child reaches the specified age, he or she gains complete access and control
of all assets that remain in the account without limitation. Prior to reaching the specified age, the custodian may use or expend the funds for the
child’s benefit. For example, if you contribute $100,000 into a UTMA Account, the Custodian can expend the money for the child’s benefit for legitimate
expenses prior to the child reaching the specified age or the Custodian can leave the money in the account until the child turns 18 or 21 and, at that
moment, your child is entitled to the entire balance of the account. In each state, the rights and responsibilities of the custodian are specifically
outlined by statute. A breach of these responsibilities (also known as “fiduciary duties”) will subject the custodian to personal liability for any
mismanagement of the UTMA Account proceeds. Some states create additional duties such as providing an annual accounting, right of inspection, and other
unique duties that a custodian must abide by.
- Simple and easy to set up. Similar to setting up an individual bank account, only requires that an adult be named as custodian until the child reaches
the age of majority in your state (18 or 21).
- The custodian’s powers are governed by statute and are very broad.
- Generally, a custodian may make withdrawals from the account for the child’s benefit, so long as the expenses are legitimate. The custodian has a high
degree of discretion for the use and expending of property for the child’s benefit without court approval.
- The income earned in the UTMA Account is generally taxed at the child’s tax rate not your individual rate.
- Once your child reaches the age of majority, the funds are legally his/hers.
- Once the UTMA Custodianship terminates, your child will have immediate unfettered access to the assets and can expend the assets however he or she
wishes. They can use the assets for ANY purpose (e.g., vacations, Ferrari’s).
- As ownership transfers at the time of contribution, financing higher education can be negatively impacted as the assets in the UTMA will be considered
during the financial aid analysis formula.
- Once you have contributed money or assets, there is no getting them back.
- Your child will have to file an annual tax return if the income generated from the account meets certain thresholds. Depending on the amount of income,
the “kiddie tax” may also apply.
- The custodian has a high degree of discretion regarding use and expending property. Limitations on the use of the property is almost nonexistent. An
irresponsible Custodian may exhaust the funds prior to your child reaching age 18 or 21.
Trust for a Minor
Trusts can be tailored to meet your specific needs. The trust may be intended to provide funds for your child during childhood, or simply a means of protecting
the assets until your child reaches adulthood. Some trusts are used for specific purposes, such as education or medical expenses. The trust is created
by a legally operative document (i.e. a will or a specific trust document). A Trustee will need to be appointed to manage and distribute assets of
the trust in accordance with the trust document.
Generally, the trustee manages the assets for your child until some specified age or event triggers the trust to terminate and the trustee then distributes
all of the assets. A single trust can have multiple beneficiaries.
By using a trust, you can dictate specific uses of the contributed property, specific events that entitle your child to distributions, and various other
conditions as you see fit. The use of a trust allows you to make substantial contributions of assets to minor children without the fear that the funds
will be mismanaged by your minor child due to immaturity. For instance, if you wanted to leave your child $100,000, you can limit how that money is
distributed to your child or when your child can gain unfettered access to the money. The trustee has similar fiduciary responsibilities to that of
the custodian. By using a trust, you can create a Trust Protector. The Trust Protector oversees the trustee’s actions of the trustee and ensure the
trust funds are not mishandled. If the Trustee performs any action not authorized under the trust, the Trust Protector may remove the Trustee and appoint
a successor. If any harm has resulted as a result of some unauthorized transaction, the Trust Protector or the beneficiaries of the Trust may file
a lawsuit seeking court intervention.
- You, as the creator of the trust, control how the assets are to be handled. Thus you can be creative regarding how the funds are distributed. For example,
you can limit the child to receiving distributions of 1/3 the principal and interest at age 25, 30, and 35 or limiting a portion of the distribution
to be contingent upon graduation from college, graduate school or professional school. Recall that when using the UTMA Account, your only option
for distribution is age 18 or 21.
- Depending on your wishes, a trust allows you to dictate what actions a Trustee can and cannot take regarding the use of assets and distributions to
- Depending on the size of your family, you can create several trusts (one for each child) or a single trust that allows the trustee to manage and distribute
funds based on the individual needs of each child.
- The assets can be protected from threats of bankruptcy, future lawsuits, and divorce.
- The creation of the trust requires very specific language and should be drafted by an attorney.
- The creation and maintenance can involve substantial legal fees.
- Trustee must file an annual tax return for the trust. If the trust generates income and the trustee does not distribute the income to the beneficiaries,
the Trust could be taxed at the highest rate of 39.6% depending on the amount of income generated.
- The trustee may have to produce the trust document or will to banks and other institutions before the bank will allow the trustee to take action.
- Absent the inclusion of a Trust Protector, the beneficiaries of the trust must bring a lawsuit against the trustee in the event he or she mishandles
the trust funds.
In deciding which option is best for your situation, you should take note of not only the initial costs but also what you wish to achieve. If you intend
to provide your child with a substantial amount of money and assets, a UTMA Account may not be the best option as the child will have unfettered access
once he or she reaches the specified age (usually 18 or 21). On the other hand, if you simply wish to provide your child with a small transfer of assets
(down payment on a car or starter home), a trust may not be the best option as the administrative costs may outweigh the benefit.
By Jeffrey K. Gordon