UTMA AND UGMA ACCOUNTS: SMART SAVINGS PLAN OR TRAP FOR THE UNWARY?
When working with clients who have minor children, we spend a lot of time discussing the kids: their individual personalities, the values the clients are trying to instill, and concerns for their future. We do our best to craft an estate plan that will secure the children’s financial future. This usually involves planning both from a financial perspective (making sure there is enough money for future expenses, especially if something happened to the clients), with the help of the clients’ financial advisors, and from a legal standpoint (ensuring the children will have access to any money when and how the clients judge best).
We have seen many clients who used accounts set up under the Uniform Transfers to Minors Act, called “UTMA accounts” (also known as “UGMA accounts” under a prior version of the law), to save for their kids’ or grandkids’ future. These accounts allow an adult to immediately transfer money to a minor (a child under the age of 18), but retain control over the money until the child reaches a specified age (18 or 21, depending on the account). The problem is that, when the child reaches the stated age, the money must be turned over to him or her. All control by the parent is lost.
As you might imagine, not every 18- or 21-year-old is ready to responsibly manage thousands of dollars. In fact, many of our clients believe that the youngest age at which their children would be ready for that task is 25, and some wait as late as 35. Unfortunately, we have recently seen situations where a parent was forced, kicking and screaming, to hand over sizable UTMA or UGMA accounts to an irresponsible child.
It is always devastating to see a plan fail because the implications were not fully understood at the time it was made. Developing your own planning “team” of financial, tax, and estate planning professionals, who will work together to meet your goals, should allow you to avoid such a failure. Additionally, with proper trust planning, parents can maintain control over how a child may spend money for a much longer time, even for the life of the child, if desired. To learn more about protecting your children from themselves and others until they become responsible adults, attend one of our monthly “Truth About Estate Planning” workshops.