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Dual Estate Planning and Educational Vehicles
By Lawrence E. Howes; CFP™
By Joel B. Javer; CFP™
The Uniform Transfer to Minors Act (UTMA), or Uniform Gift to Minors Act (UGMA), provides for an account established by a checkmark on most mutual fund applications and/or brokerage accounts.
The account is primarily used by medical professionals as a tool for accumulating assets to pay for a child’s college education; however money may be used for most any purpose that benefits the child.
No trust documents have to be prepared. A uniform trust has been adopted by each state. A custodian, normally a physician-parent or grandparent is named as the party responsible for making investment decisions and distributing assets for the benefit of the child.
Example 1:
For example, reading classes, computer camp, ballet classes, etc. Money gifted to the trust qualifies under the annual gift tax exclusion [$12,000.00]. This money is a gift to the child and, depending upon state law, the child has control of it at age 18 or 21. The assets are removed from the physician donor’s estate, unless the giver dies while still the custodian of the account. In that case, the assets are taxed at the giver’s bracket until the child reaches age 14, at which time they are taxed directly to the child. Investments can be selected to minimize or eliminate taxation.
Example 2:
For example, individual stocks with no dividend might provide the appreciation without generating a taxable event until the stock is sold after the child reaches age 14. Alternatively, low turnover, growth-oriented, ETFs or tax-efficient mutual funds offer account growth with little or no taxable distributions.
Conclusion
What are the positives and negatives of UTMAs and UGMAs relative to college tuition; please comment?
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