If you plan to gift assets to a minor, either while you are alive or after you are gone, care must be taken to ensure that those assets are protected and properly managed while the beneficiary is a minor. There is more than one way to do that. The Uniform Transfer to Minors Act (UTMA) was created specifically to provide one option while creating a trust is another possibility. To help you better understand your options, the Oklahoma City trust attorneys at Parman & Easterday explain the Uniform Transfer to Minors Act and compare it to using a trust to safeguard the assets of a minor child.
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?
Similar to 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. As a general rule, 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 is in charge of managing 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 child’s (lower) tax rate instead of the parents’ (higher) rate. After that, however, excess income is taxed at the parents’ marginal tax bracket.
Account Disbursements
All withdrawals made by the custodian must be for the benefit of the child and they must be for a legitimate need. As long as 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.
Should I Create a UTMA Account or a Trust?
If you wish to leave or gift assets to a child or grandchild, you may be wondering whether using a UTMA account or a trust is the better option. Because there are so many factors to consider, you should consult with your estate planning attorney before making a decision. One of the primary differences, however, between using a UTMA account and a trust is that with the UTMA you have no control over how the assets are used by the beneficiary once he/she reaches adulthood. 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 trust 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 Oklahoma City Trust Attorneys
For additional information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding the Uniform Transfer to Minors Act, or you wish to discuss establishing a trust vs. using a UTMA account, contact the experienced Oklahoma City trust attorneys at Parman & Easterday by calling 405-843-6100 or 913-385-9400 to schedule your appointment today.
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