Transferring property to minor children, such as money or other valuables, can be problematic. Most children do not have enough (or any) experience in dealing with valuable assets so they would be more likely to mismanage it. Third parties, such as financial institutions, will not risk doing business with minors because even though minors can enter into contracts, they can also void them without any consequences. Even so, there can be many estate planning reasons for transferring assets to minors.
What is the Uniform Transfers to Minors Act (UTMA)?
Instead of transferring property directly to a minor, what the Uniform Transfers to Minors Act authorizes is custodianship. This means that the transferred property would be owned by the minor but custody and control are in an adult or appropriate financial institution. In Connecticut, the custodianship remains in place until the minor reaches the age of 21 (this age may vary in other states), after which the minor will own and control the property.
How Is a Transfer Made Under the Uniform Transfers to Minors Act?
Custodianship is created by using the language provided in the Act itself. The custodian is given statutory authority to deal with the property and third parties regarding the property on behalf of the minor. This gives third parties greater comfort in the knowledge that they are dealing with the custodian. Furthermore, the transfer is a complete and irrevocable transfer to the minor, under applicable tax laws.
Isn’t This Just Like a Trust?
A trust is similar to a transfer under UTMA because it gives control and management of assets over to a competent and qualified person who serves as trustee. Yet, a trust differs because it can provide tailored instructions for the use of the property. The cost to set up and manage a trust, however, can make a trust impractical for smaller transfers.
What Are the Benefits of Transferring Assets Under UTMA?
A transfer under UTMA is both cheaper and less complicated than putting the assets in trust. Unlike a formal trust agreement, which controls how the trustee must deal with the assets, a transfer under UTMA simply transfers ownership of assets. Once the child reaches age 21, he or she has unfettered discretion as to how they may be used. As discussed below, however, this can turn out to be a blessing or a curse.
There may be tax advantages in transferring assets under UTMA. For example, if your estate is likely to exceed the federal gift and estate tax exemption limit, you may be able to reduce the size of your taxable estate by making transfers under UTMA. If this is your goal, you may want to designate someone other than yourself as custodian because if you die before the child is old enough to take them over, the transferred assets may be taxed as part of your estate.
What Are the Potential Downsides Using An UTMA?
Even though there are many ways to benefit from using UTMA to transfer property to a minor, there can also be some drawbacks. You might come to realize that your precocious little genius did not mature into a thoughtful young adult the way you expected or hoped. So, even upon reaching the age when control of the property passes to them, they still may not be able to handle the responsibility of managing valuable assets.
Another potential problem is the effect an UTMA transfer might have on the minor’s eligibility for financial aid. Even though your original motivation might have been as a way to establish college savings, the transfer can actually make getting financial aid more difficult because the asset is treated as being owned by the minor child and the financial aid formula penalizes the applicant for assets he or she owns.
It would be very frustrating if you transferred a large sum of money to a minor and then your circumstances changed and you discovered that you have a legitimate need for the money; or, you set up a UTMA account for one child and then have more children but your wealth isn’t sufficient to establish comparable accounts for the younger siblings.
It is important for you to thoroughly consider your estate planning needs as well as what might happen in the future to avoid regretting your decision to transfer assets under UTMA. Contact an experienced estate planning attorney to assist you in making these important decisions.
