Informed Gifting: Navigating UTMA Accounts, Trusts, and 529 Plans for Minors
As winter is coming to an end (hopefully soon) and spring is ready to enter the chat, I want to share a bit with you about the importance of considering the long-term implications of gifting assets to minors. What really got me thinking is who legally owns all the birthday money my grandchildren have from those Disney theme birthday parties…
In all seriousness, when gifting assets to minors, it’s crucial to understand the laws about Uniform Transfers to Minor Act (UTMA) accounts, trusts, and 529 plans. These gifting accounts have some flexibility and can provide tax advantages, but they also come with specific rules and restrictions as well.
Main takeaways when considering transferring assets to minors-
Understanding UTMA Accounts: Contributions to UTMA accounts are completed and considered gifts for tax purposes, and therefore, assets are owned by the minor. UTMA distributions can cover a wide range of expenses that benefit the minor. However, the custodian manages these assets until the minor reaches the UTMA termination age, which is usually 21 but is age-dependent. In Illinois, it is 21.
Alternative Gifting Strategies: A 529 plan is an investment account that offers tax advantages for saving toward the beneficiary’s educational needs, and only educational needs with more flexibility in ownership but less on how the funds are allowed to be distributed. Non-qualified withdrawals are subject to taxes and penalties.
Alternate Gifting Strategies: Trusts can be slightly more labor-intensive and costly than 529 plans and UTMAs. However, they can be revocable, allowing the grantor to make changes or revoke or amend the trust, providing flexibility for later controlling the trust. Irrevocable trusts, on the other hand, are less flexible but offer tax advantages and asset protection.
Restructuring Existing Gifts: If you have already funded a UTMA account and are concerned about the minor’s future access, there are ways to adjust or restructure the gift. In this case, the money in the UTMA account could be used on certain expenses for the minor, transferring assets to a 529 plan, or converting the UTMA account to a 2503(c) trust.
All in all, there are options for getting gifting appropriately done!