Legal Blog
The Weekly Scenario: UTMA Accounts
Question: What is a UTMA account and is it a recommended account?
Answer: A Uniform Transfer to Minors Act (UTMA) account is an account consisting of funds held for a child (generally) until he or she turns 21. Because minors cannot own property in their own name until age 18 (with some exceptions), parents and grandparents often look for ways to give money to younger family members in a tax efficient manner while also minimizing legal fees. A UTMA account is often viewed as an appropriate way to leave funds to the minor when they reach adulthood.
In terms of advantages, UTMAs are inexpensive. You only need to set up the account at a financial institution, name an adult custodian for the account, and let the custodian invest the funds. No complex trust documentation is necessary. Moreover, UTMAs are taxed at the income tax rate of the child, who tends to have a low-income tax rate.
In terms of disadvantages, twenty-one year olds are usually too young to receive substantial funds without some sort of management or supervision. Young beneficiaries could have substance abuse problems, creditor issues or just be too immature to handle money. Moreover, UTMA funds are includable on a FAFSA form (significant amounts in an UTMA can affect student aid (in contrast, 529 plan assets owned by anyone other than a parent, do not affect student aid).
UTMA beneficiaries cannot be changed. For example: if a beneficiary is receiving Medicaid when he/she reaches 21, the UTMA funds will be included in the beneficiary’s resources and would invalidate benefits.
Comment: While people don’t generally like complexity, the UTMA approach may be penny wise and pound foolish. A well-drafted trust is usually a better tool for flexibility by providing the ability to consider ongoing contingencies.
As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or .
ABOUT STEVE SHANE
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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