Having children changes one’s life, and gives it profound new meaning.  As parents and grandparents, you always want what’s best for your children and grandchildren. You want to instill in them a hope about the future, which comes with a need to give them everything you can. Many aspirations in life come at a cost, be it the cost of an education and its subsequent supplies, tutoring, and specific training, or even a recreational cost, such as a trip or workshop. Whatever their dream is, you want to help them fulfill as best you can. Parents and grandparents wish for their children to have sufficient means with which to follow their dreams. A discussion of how to best distribute funds on behalf of your children then emerges. Before gifting funds to children or grandchildren, it is important to consider the different types of financial accounts available to you and which type of account will secure your family’s assets most adequately. UTMA accounts and trusts are two financial account options that you can mention to your attorney when discussing the financial support of children and grandchildren.

A UTMA (Uniform Transfer for Minors Act) account is a financial account that allows a parent, grandparent, or other individual to irrevocably gift assets or funds to a minor. Once the money and/or assets are gifted, the transferor relinquishes ownership and control. UTMA accounts are a type of savings account referred to as custodial accounts. Custodial accounts are controlled by an adult on behalf of a minor (who is under the age of 21) and make money accessible through a financial institution such as a bank, mutual fund company, or brokerage firm. The individual gifting the funds or assets is typically known as the transferor. The individual or institution (i.e. bank or trust company) that is designated to manage the finances of the account on behalf of the minor is referred to as the custodian.

In some instances, the transferor and the custodian can be the same person. If,  for example, a parent wants to gift funds to his or her child, but still wants to maintain control over the funds in question, then this parent could be both the transferor and the custodian of the UTMA account. The only exception is that the transferor can only be the custodian of funds, not of tangible personal property. Tangible personal property is simply defined as movable property: from personal effects, such as jewelry and clothes, to household items such as: books, furniture, and appliances. All these items would can be considered tangible personal property. In order to ensure that a transfer has taken place, these items cannot be under the custodial control of the transferor. If the original owner is in possession and control of the gifted items, there is no way of knowing whether or not the items have been gifted to the minor yet. In order to ensure that a transfer has been made to the minor, the child will most likely be made custodian of the items in question, and the items will be put in his or her possession.

Substitute custodians may also be specified in the event of the first custodian’s passing or inability to serve. The custodian of a minor’s UTMA can also be the parent or guardian of the minor, but does not have to be. It is important to note that while the custodian provides oversight over the account, the parent(s) or guardian(s) remain financially liable for the minor, even after the funds are transferred into the account. In other words, setting up the account does not relieve the parent of their obligation of support. Under the UTMA, custodians can use the funds in question liberally for the exclusive benefit of the minor.

There are a variety of benefits to such an account. Firstly, a UTMA custodial account is the simplest form of transaction when compared to other options, such as express trusts or payments to a guardian on behalf of the child, both of which have more complex requirements. Coinciding with this account’s simplicity, is its low-cost compared to trusts, which are more expensive due to their added protections. (See discussion of trusts below). Consequently, these types of accounts are ideal for smaller amounts of money or assets. UTMA accounts can cover essentially all kinds of property, which is beneficial if one wishes to gift assets or property in addition to money. Additionally, one’s income tax could potentially be lowered, because once the funds are transferred to the custodial account, they are subject to the child’s or the parent’s income tax as opposed to that of the transferor.

However, there are several drawbacks to take into consideration when discussing UTMA custodial accounts, the primary one being the irrevocable nature of the account. Once the funds and/or assets in question are transferred into the custodial account, the transferor is relinquishing control entirely. The funds and/or assets are to be used at the custodian’s discretion until the minor turns 21, at which point, control is given to the beneficiary. Considering the young age of the beneficiary gaining access to the account, issues of financial and personal responsibility are brought into question. Many young adults simply do not possess the maturity to manage their own financial means, which could potentially lead to financial loss for both the beneficiary and the transferor. They may, for example, choose to spend their money, as it is now legally in their control, on frivolous luxury items, like designer clothing or vehicles.

Further financial risks can face the beneficiary if they choose to apply for financial aid. Monies held in a UTMA account are considered part of the student’s assets, which means they could be taken into consideration if the student applies for financial aid. To colleges, student assets are viewed as more significant than parental assets. UTMA accounts may diminish the amount of financial aid the beneficiary can receive. The beneficiary could be expected to pay for their college tuition using the UTMA funds. UTMA accounts should not be considered a college savings plan.

Lastly, the assets and funds within the UTMA account may not be used with the degree of discretion that the transferor wanted. With this type of account, unless the transferor chooses to also be the custodian, there is no way for the transferor to specify how he or she wants the assets to be distributed and used.

It is for these concerns surrounding asset protection that many individuals opt for a trust instead of a UTMA account. A trust allows the transferor to have a much larger degree of control over the assets and maintain this control for a longer period of time. In contrast to a UTMA, a trust is ideal for any sum of money, not just smaller amounts. A trust established for the benefit of a minor allows the transferor to set an agreed upon age for the trust to terminate. As such, a trust can provide protection and management potentially for the child’s entire life. The trust can provide detailed instructions on the types of distributions, as well as the timing and purpose of those distributions. For example, the creator of the trust may want to provide that funds are used to purchase a home or start a business. These types of wishes cannot be memorialized in setting up a UTMA account. A trust can be tailored specifically to the creator’s wishes. A trust can have as many beneficiaries, as well as many distribution provisions as the creator desires. A trust can have charitable beneficiaries. Also, a trust can have “waterfall” provisions which are clauses that designate contingent beneficiaries if the primary beneficiary dies. This means that the children of a trust beneficiary can become the primary beneficiaries of the trust if their parents pass away. There is a far larger degree of control on part of the creator of the trust. The trust allows for funds to be used for the minor’s benefit, but provides maximum flexibility as to the management and control of the funds. Finally, while trusts afford the benefit of being irrevocable, one can revoke it through certain legal procedures.

The choice of whether or not to choose a UTMA account comes down to a few factors which one should discuss with an estate planning attorney: the amount of assets in question, the number of beneficiaries and most importantly, the amount of control one wants to have over the assets once they are placed into an account. Ultimately, it is a matter of choosing an avenue that will best fit your individual needs. Everyone’s familial and financial situation differs, so it is important to call upon experts so that they can help you determine how to best protect your property and belongings. Contact an elder law and/or estate planning attorney today.