Understanding gift accounts for minors
As our families expand through the birth of children and grandchildren, it can provide a great sense of joy to make financial gifts to those children. But what is the best way to do this? The options are many, including Uniform Transfer to Minors Act gifts (UTMAs), 529 college savings plans, Roth IRAs, or a trust to benefit that child. With each, there are pros and cons.
UTMA accounts are an irrevocable gift to the minor. They are set up with a custodian (often the child’s parent) who is vested with the fiduciary responsibility for the minor’s account. The pro for UTMAs is the simplicity. While a trust does not need to be drafted, you also have less control over the disposition of the funds. Ready or not, funds are turned over to the child at age 21, though in Florida the age to transfer the funds can be extended to age 25 with some caveats. In addition, the child will be taxed on the income and gains generated in these accounts. UTMA accounts are considered an asset of the child and are considered when applying for college financial aid. The custodian might misappropriate funds from the account. Even well-meaning custodians could be liable for using funds from the minor’s account that the court considers a parental obligation such as medical costs.
529 College Savings Plans come with a very attractive feature — tax benefits to the giver and the recipient. Funds gifted into a 529 account grow tax free and remain so if used for qualified educational expenses. The list of allowable qualified educational expenses has grown. Unused assets in the account can be transferred to another qualified family member (often a younger sibling preparing for college) often with no tax consequences federally (state taxes may vary). Some states offer tax advantages for enrolling in their 529 plans. A 529 account can be “Superfunded” with up-front contributions of $75,000 per person or $150,000 per couple, allowing you to use up your annual federal gift tax exclusion for the next five years. The 529 plans can name a parent as the custodian, so the assets would not count as heavily against a student applying for financial aid.
Roth IRAs are a great way to jump-start retirement savings for those children and grandchildren (minors and adults) who are in the work force. You can fund a Roth IRA for a child up to the lesser of their earnings or the Roth contribution limits for a given year ($6,000 for 2021 if under age 50). Roth IRAs grow tax free and distributions in retirement are tax free, too. This is a great way to illustrate to the child the value of saving and the effects of compounding.
Trust accounts offer you the most control over the funds, both for disbursements and for irrevocable trust creditor protection. Trusts can help keep assets within the family bloodline should your beneficiary predecease a spouse or become divorced. An irrevocable trust can help lock in federal estate-tax exemptions and help you plan for generation-skipping tax benefits. Trusts require an estate planning attorney to draft the document. Moving funds into an irrevocable account would remove the grantor’s access to those funds for future needs.
Robin L. Cook is with wealth services for The Sanibel Captiva Trust Company.