UTMA

[canadianoutlaw]

There an interesting thread on UTMAs (Uniform Transfers to Minors Act) in the "Personal Finance and Budgeting" forum. I suspect this WCI forum community has widely different opinions on these. I'd be interested to hear some of the pros/cons of these from both a financial perspective as well as a behavioral one. 18 years seems quite young to suddenly have access to a 6 figure balance.

This may have been discussed before on the blog or elsewhere, but this hasn't really been on my radar.

[VagabondMD]

I am the author of said thread. My rationale for building a UTMA is the flexibility and the tax-deferred treatment. I understood all along that I technically would lose control of the money after my children turned 18, but I also grew up with one (my balance was about $85k when I graduated high school in the early 1980's), intended to pay for my college and med school, and it never occurred to me to raid it for nefarious purposes (or otherwise).

More practically, I did not have the wherewithal to access the assets had I wanted to do so, and I believe that my son is in the same boat. That said, he would be foolish to try to do so, and using the money for unapproved purposes would cut him off from larger sums of the money down the line.

[hansmatt]

We are considering using the UTMA for the same purpose as TheWhiteCoatInvestor, as a way to help our kids in their college/early life transition years.  Rather than "fund" a wedding, move, car, downpayment etc, this modest gift would let the kids make decisions on how they want to use their nest egg.  Undergraduate should largely be taken care of via 529's.  Though I sincerely hope I am wrong, but I can't plan on our own kids as having quite the same financial stability that we have enjoyed. I hope for this to be the right type of help (financial) at the right time.

We are also quite wary of the perils of having even a "modest" fund (less than $25K).  It would be good to know there is a safety net there, but also that there pretty limited funds they have to work with.  I know of young adults who have "failed to launch" and relied on parental handouts (cars, food, even a place to live) for far too long.  I don't want to enable, but help them potentially move along to find their own success and make their own life. As mentioned earlier, they will know that their choices certainly impact the possibility of future windfalls.

[TheAbacus]

Would it be better to open a Coverdell ESA instead? The following points (advantages in my opinion) could be considered as compared to an UTMA:

1. It's a smaller amount ($2000 contribution limit per beneficiary, per year, until age 18) - don't have to worry about your child's maturity to handle a 6 figure amount.

2. Functionally works as an "Educational Roth" - the penalty for non-qualified expenses limits the desire to "raid it for nefarious purposes" (love reading your posts Vagabond, MD!)

3. Though most of us (as individuals) don't qualify to make ESA contributions, the IRS seems to be OK with allowing the beneficiary to make contributions. That is, you could gift the money to your child, who would make the contribution.

Also, there are no income limits imposed on corporations and trusts.

https://www.irs.gov/publications/p970/ch07.html#en_US_2016_publink1000178414

From the above link:

Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000.

Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. There is no requirement that an organization's income be below a certain level.

 

What do you guys think?

[jfoxcpacfp]

Pros:

• Money can be used for any purpose.


• The first $2,100 (2017) is taxed to the child.


• Easy to set up.


• Parent/guardian has control of the account until child is an adult.


• Reduces your estate.


• No limit on the amount you can gift, but you will reduce your unified credit if over the $14k annual/pp/per beneficiary per year

Cons:

• Income over $2,100 is taxed at the parents' marginal rate


• $$ becomes child's at age of majority (18 most everywhere)


• Other ways of gifting/controlling assets are superior if you plan to contribute 6 figures+ (trust)

While the number of pros exceed the number of cons, the 1st 2 cons outweigh all of the pros (imo) if you plan to gift significant amounts of $. Of course, you can spend that money on something FBO the child just before he turns 18. A good choice might be a house with several bedrooms near the campus of where he is planning to attend college. Rooms could be rented out to other students, the parent could be part owner, the child can live there instead of paying room and board.

[Craigy]

You have to ask yourself what your intentions are for the account.  If your true intent is to make a gift to the child for the child to use when he become an adult, then the UTMA can be a very effective & direct tool for this.  Is it just a place to hold the child's money until he or she attains majority?  If so, it shouldn't be a concern about access at 18.  It's the child's money, not your own.  The purpose of an UTMA account is to protect the interests of the minor, not to allow a parent to keep the money or otherwise be a tool of coercion over the child.

If the intent is for it to be a vehicle to avoid estate taxes, but keep as much control over the cash as possible for as long as possible, or set aside money for a special needs child, then a trust strategy might be far more appropriate, and a qualified estate planning attorney can guide you through this.

If you're just looking for warm and fuzzies of making a gift, but don't actually want to give anything away until your kids are retirees themselves, you can accomplish that with a will, a more complex trust strategy, or both.  Many implement trusts and continue their rule over their children from the grave, sometimes to the extent where a trustee is making decisions for the child all the way to the child's death.

Otherwise, putting money in the hands of a child and trying to control it thereafter only works by putting more money in the hands of said child.  As soon as that spigot is shut off or as soon as that well dries out, the control is lost.

 

 

[Kamban]

Our state does not have UTMA but UGMA, which has some variations but overall it is similar.

My rationale for starting a UGMA is to give away as much as my wife and I can during our lifetime and not count towards the maximum lifetime transfer. Currently that is $5M per person but who knows when the laws will change and how much it can be reduced or expanded.

Once we had a handle on her personality we started contributing $28K per year in a Vanguard UGMA. She has a bit of type A personality, a overachiever who likes to be in the top 5 or even 1 percentile and hates to lose especially if she has put in an effort. I don't envision her trying to spend the money in UGAM after 18, and neglect her studies or future employment. She also knows that how she saves it will affect our decision on future gift transfers.

In the end, it is still a big unknown.

[jfoxcpacfp]

Kamban wrote:

In the end, it is still a big unknown.

Click to expand...

One of the biggest, if not THE biggest, unknown uncontrollable in this situation is who your child will marry.

[TheAbacus]

jfoxcpacfp wrote:

Cons:

• Income over $2,100 is taxed at the parents’ marginal rate

Click to expand...

Does 'income' refer to the growth of the investment account per annum? Or does it refer to a contribution limit to the UTMA account?

 

Also, it is correct that 529, UTMA, ESA contributions all count towards the annual gift tax exclusion of $14,000?

[jfoxcpacfp]

TheAbacus wrote:

Does ‘income’ refer to the growth of the investment account per annum? Or does it refer to a contribution limit to the UTMA account?   Also, it is correct that 529, UTMA, ESA contributions all count towards the annual gift tax exclusion of $14,000?

Click to expand...

• Income is capital gains, interest and dividends reported on 1099 annually.


• Yes, the contributions to 529, UTMA/UGMA, ESA all count toward the annual $14k limit per person/per donor.

Gifts are not counted as "income" but they are tracked to ensure that people don't avoid estate and gift taxes at death** by transferring their wealth to others, usually the next generation.

**gift taxes can be assessed during the lifetime if the full unified credit exemption is used up before death. For the ultra-wealthy, this may make sense.

 

[VagabondMD]

There are lots of things to worry about with children, and as they got older, the worries get more complex. Of all the issues that might concern me, my son cashing in his UTMA and buying heroin or a Ferrari with the proceeds is close to the bottom of the list of my worries. Even though I have discussed the UTMA with him (in the context of possibly drawing from it to assist with college expenses, to give him some "skin in the game", so to speak), and he has learned about UTMA accounts in his high school personal finance class, the chances that he will even ask me when he can get access to the money (let alone make a move on his own) are low single digits, perhaps less than 1%.

[jfoxcpacfp]

Vagabond MD wrote:

There are lots of things to worry about with children, and as they got older, the worries get more complex. Of all the issues that might concern me, my son cashing in his UTMA and buying heroin or a Ferrari with the proceeds is close to the bottom of the list of my worries. Even though I have discussed the UTMA with him (in the context of possibly drawing from it to assist with college expenses, to give him some “skin in the game”, so to speak), and he has learned about UTMA accounts in his high school personal finance class, the chances that he will even ask me when he can get access to the money (let alone make a move on his own) are low single digits, perhaps less than 1%.

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I agree. The problem with hashing out these issues in public is that we always tend to focus on the extremes. Of course, my job to think of the worst that can happen, bring it to clients' attention, and present solutions before it does. Given your knowledge of the risks, your child's potential heroin habit should not be a concern.

[canadianoutlaw]

Vagabond MD wrote:

high school personal finance class

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my goodness - high school personal finance class?? amazing you have that.

[uptoolate]

So far 3 of my 4 children have passed the age 18 mark and had their very low 6-figure (i.e. 110-130k at the time of transfer) accounts transferred to their names. So far none of them have touched them and all of the money is still in market index funds. To his credit, the oldest (23) has added another 35k of his own money during the intervening school years. I'm not sure whether it is the frugality of their parents (or their grandparents) or their belief that 'with great power comes great responsibility' that has seemingly enabled them to not spend it.  We haven't threatened them in any way about what would happen if they spent it on something frivolous but of course they do know our money philosophy.  And of course nothing would happen except a bit of tut-tutting and some queries about the wisdom of whatever the purchase was.

[Kamban]

jfoxcpacfp wrote:

One of the biggest, if not THE biggest, unknown uncontrollable in this situation is who your child will marry.

Click to expand...

For us it is the main worry now that we have a handle of her personality. Even though we came her as immigrants, out daughter is US born American with all the American traits and values. She can choose who she wants to marry but I hope that her future spouse has the same money values as her.