Clients sometimes ask us if it is a good idea to set aside money for a child or grandchild using an UTMA (Uniform Transfer to Minor Act) account. As with any tool, it is a good idea to fully understand the pros and cons of an UTMA account before creating one for a child or grandchild.
It is inexpensive to set up an UTMA account. You do not need an attorney or the probate court to be involved. All you have to do is create an account and title it as follows:
“[Custodian’s name] as custodian for [child’s name] pursuant to the Michigan uniform transfers to minors act.”
If you do nothing else, the money must be paid to the child when he reaches age 18. The money can be held until the child reaches age 21 (at the latest), but only if the account is titled as follows:
“[Custodian’s name] as custodian for [child’s name] until age ____ pursuant to the Michigan uniform transfers to minors act.”
UTMA or Trust?
Once the child reaches the required age, he is entitled to all the money. Period. The law makes it mandatory for the custodian to pay the funds at that required age. Even if the child is a spendthrift, a substance abuser or too immature to handle the money, the custodian cannot transfer the money back to himself. This would violate his fiduciary responsibility and may cause the IRS to assess back taxes plus penalties. In addition, the child could sue to recover the funds. Likewise, the custodian cannot attach other requirements before the funds are released, like making the child finish college. As a result, some donors prefer to set up a trust that has more detailed restrictions, or an older age, for the release of the funds.
Consider Other Income
If the child receives public benefits like Social Security or Medicaid, the UTMA account is not considered “available” (and therefore does not reduce or eliminate benefits), until the child reaches the age for the money to be released. After that, the money is counted as the child’s asset and can reduce the public benefits. If the UTMA has a large sum or if the public benefits are critical to the child’s care, it might be better to set up a special needs trust for the child.
What About Financial Aid for College?
Similarly, the money in the UTMA account will need to be reported on the child’s application for financial aid for college. The existence of the UTMA (even if it has not yet been released) may reduce or prevent need-based student aid. By contrast, a 529 plan, pre-paid tuition plan, or Coverdell Education Saving Account is treated as an asset of the parent and may have a much lower impact on the student’s eligibility for financial aid.
Questions? Contact us for a free consultation!