Anyone wishing to sock away some money for a child has a lot of options and decisions to make. The key to making good decisions is defining your goals: 1) are you concerned about receiving a tax benefit for making the gift; 2) do you want the gift to be permanent (meaning you cannot change your mind and get it back later); 3) under what circumstances can the minor take distributions from the account; 4) are you concerned that the account will affect the child’s eligibility for federal college funding options; and 5) who is going to be in charge of managing the assets that are being held (and who will take over if that person cannot continue to be in charge)?
Additionally, you will need to decide what types of assets you intend to gift: cash; non-qualified investments; real estate; shares in a family-owned business; personal property with significant value such as classic cars, artwork, coin collections, etc.?
After you have thoroughly vetted your goals and discussed funding options, THEN you can learn which planning options meet your goals. UGMA is the Uniform Gifts to Minor’s Act. It provides for transfers of cash or cash/securities investments, insurance policies to your child and is irrevocable, but can affect your child’s eligibility for financial aid. UTMA is the Uniform Transfer to Minor’s Act. It provides for the same types of transfers as the UGMA but expands to real estate, personal tangible property, etc. With both the UGMA and the UTMA, the beneficiary is entitled to full distribution at age 21, which is younger than most college graduates. Typically, the person in charge of the money is a family member.
UGMA and UTMA accounts can be established at a financial institution, without the need for a formal trust document that spells out the circumstances under which distribution can be made, contingency planning for the event that the beneficiary becomes disabled, and instructions on who should take over if the person in charge is disabled, dies, or is behaving in a nefarious way. By now you should be thinking, “well, aren’t those things important, too?” YES, they are very important. A trust specifically designed to meet your goals and objectives is the more appropriate way to set aside money for a minor. Get education and advice from a knowledgeable estate planning attorney before deciding on an UGMA, UTMA, or 529 plan as a means to shift assets to your children.
