Many of my clients wish to make lifetime or testamentary gifts to minors as part of their estate planning. One tool to know about when transferring assets to minors is the Uniform Transfer to Minors Act (UTMA). This is probably the easiest, abut least favored approach to transferring funds to minors. Almost every year I speak with someone who set up an UTMA account without our assistance and now wishes they had not. Nevertheless, it has its place.
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 make a gift to a minor but still safeguard money or assets. By law, a minor cannot inherit directly from your estate. Therefore, we often structure a trust for a minor beneficiary as part of a plan. An UTMA account is an alternative approach with the allure of simplicity and the reality of inflexibility. It is intended to create a structure to manage the money until the child is old enough to manager his or her own money, but presumes this will be when they turn 18 or 21 (depending upon the law). I like to say every child is running his or her own race, and they don’t all get there at the same time. I’m sometimes heard to say that when it comes to children and managing money, 35 is the new 21.
What Is the UTMA?
Much like 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. Generally, 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 oversees the management of 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. In North Carolina, the maximum age for holding money in an UTMA account is 21.
All withdrawals made by the custodian must be for the benefit of the child and they must be for a legitimate need. While 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.
UTMA Account vs. a Trust
Creating a trust to hold assets for a minor is another popular way to gift to minors. Which is the better option, a UTMA account or a trust? Because there are so many factors to consider, you should consult with your estate planning attorney before deciding. One of the primary differences, however, between using a UTMA account and a trust is that you have no control over how the assets are used by the beneficiary once he/she reaches adulthood with a UTMA account and you have no options to protect the money or the child should it be clear that he or she is not ready to control the funds at the age of majority. 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 rust be disbursed just because the beneficiary reaches adulthood. The additional control and flexibility offered by a trust is one reason why many people ultimately choose to establish a trust instead of using a UTMA account.
Contact Raleigh, Durham Chapel Hill area Estate Planning Attorneys
If you have additional questions or concerns regarding the Uniform Transfer to Minors Act or estate planning in general, please contact the estate planning attorneys at Clarity Legal Group by calling us at 919-484-0012 or contact us online.