SHOULD GRANDMA SET UP A MINOR’S TRUST OR AN UGMA OR UTMA ACCOUNT?

Temecula Estate Planning Attorneys want to make sure you have the facts so that you can decide what option will be best for your grandchild.: A Minor’s Trust, UGMA or UTMA

UGMA AND UTMA

The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are sometimes called the “granddaddies” of college savings accounts.  Both allow parents or grandparents to establish custodial accounts for a minor child, and they can then make gifts to the account

Because the account is in the name of the child, the tax liability is often shifted to the child, who presumably is in a lower tax bracket than the parents. Gifts to such accounts are irrevocable, but the gift-giver retains control of the money and decides how it will be invested, but not necessarily when they get the money

UGMA and UTMA differ in the type of property they permit a person to transfer: States usually restrict UGMA investments to life insurance, cash and certificates of deposit, while UTMA allows a wider variety of investments, including mutual funds, stocks, bonds, real estate — even artwork. Banking institutions and brokerage firms offer UGMA and UTMA accounts. Our affiliate office, LifeStyle Financial, can help you. https://lifestylefinancialplanning.com.

Either type of account should be managed by someone other than the parent or grandparent; otherwise, the parent will be responsible for taxes on the account income. For children, or students under age 24, income up to $1,150 is not taxed, income from $1,150 through $2,300 is taxed at the child’s rate, and income over $2,300 is taxed at the parents or grandparent’s rate (figures for 2022).

The major downside of these accounts is that custodians must turn the money over to the child when he or she reaches the age of majority (18 in California). The child may then do as he or she wishes with the money – Buy a Harley, or start a Rock Band, and it may not be what you would prefer. In addition, as with custodial accounts, the child’s sudden ownership of the account funds could jeopardize his or her eligibility for financial aid for college.

MINOR’S TRUST

A minor’s trust or children’s trust is a trust that leaves property to a young person but in the care of a trustee until the young person reaches a designated age. You get to choose the age or ages at which time the child gets the money. This type of trust is often created through your living trust.

Trusts for minors are usually set up by parents or grandparents who want to leave property to a young person, but also want to name a trusted adult to care for the property until the child is old enough to be financially responsible. 

This type of minor’s trust can be set up within your living trust. In your trust document, you leave the property to the young person, but you also include a provision that says if that person is still a minor when you die, you leave the property to a trustee who must care for the property until the child reaches the age you state. 

The age at which they get the money can be staggered over several years. For example, they can get 25% when they reach the age of 25 and 25% at age 30, and the rest at age 35.

When the maker of the trust dies, the minor’s trust is created according to the terms of the document. The trustee receives the property and cares for it until the young person reaches the specified age. When that time comes, the trustee will transfer property from the minor’s trust to the beneficiary outright—including any income the trust has produced.

If you are interested in learning more about these options, speak to our Temecula and Murrieta elder law or estate planning attorneys. To schedule an appointment at our Temecula office or one of our other offices located throughout the state of California, contact us at  (800) 244-8814.

If you have any further questions about estate planning and strategies to shield your wealth, or if you’d like to have your current asset protection plan reviewed to make sure it still meets your needs, please contact us at one of our offices located throughout the state of California 800-244-8814 to set up a consultation.