When meeting with clients, I am often asked how to leave money to minor children. Clients want to include their own children, grandchildren, or even nieces and nephews. When these discussions arise, one tool that we will often discuss is the use of an UTMA account. Let’s explore exactly what an UTMA account is and its limitations.
UTMA is the Uniform Transfers to Minor’s Act. Each state can adopt their own version of these laws, however they remain very similar state by state. Essentially, the UTMA allows a custodian to hold money for the benefit of a minor without the need to create a trust or any court proceedings. There are a few key considerations and benefits to an UTMA account.
- The money is considered a gift for gift tax purposes. Any gift to an UTMA account over $17,000 will need to be reported on a gift tax return by the donor.
- The money legally becomes the minor’s when they reach age 19 or 21, depending on the state. For Maryland residents, it is age 21.
- The money in the account is taxed using the minor’s social security number, so any interest, dividends, or capital gains are taxed to the minor who likely has no other taxable income.
- The custodian can manage the money at their discretion, all for the benefit of the minor child.
UTMA accounts are great simple tools used frequently in estate planning. They can be extremely effective to set aside smaller amounts of money for minor children. However, if I have a client that wants to set aside a larger sum or wants asset management past the age of 21, it may make sense to create a trust. With a trust, we can name a trustee to oversee the management of the assets and place conditions or restrictions on the use of the money. The money can be distributed later in life or can only be used for specific purposes established by the trustor. There may be instances where a trust has greater tax consequences than an UTMA, but we need to weigh that with the client’s goals and concerns.
If you need guidance on how to leave money to a minor child, please reach out to us today. It is best to work with an experienced estate planning attorney to guide you through your options.