When you have a young child on your inheritance list, you have to find a way to set aside the funds until they can manage their own money. There are a few different approaches that can be taken, and a custodial account is one of the options.
UGMA and UTMA Accounts
The Uniform Gifts to Minors Act (UGMA) was originally proposed in 1956, and it was revised a decade later. It allowed for the creation of custodial savings accounts for child beneficiaries, and the assets would be held in the custodian’s name until the child reaches the age of majority.
Initially, the assets were taxed at the child’s income tax rate, but laws have been implemented along the way that have imposed a so-called “kiddie tax” with certain prescribed parameters.
For beneficiaries that have not yet reached the age of 19, the first $1050 of earnings are not subject to taxation, and the second $1050 will be taxed at the child’s tax rate. Earnings that exceed $2100 are taxed at the parents’ rate.
These accounts can hold only hold financial products that would be in an individual retirement account such as cash, stocks, mutual funds, and bonds.
The Uniform Transfers to Minors Act (UTMA) that came along in 1986 expanded on the UGMA account concept. A UTMA account can hold the financial instruments that we itemized above along with other types of property like real estate, vehicles, and collectibles.
In New York, the age of majority is 18 for UGMA accounts and 21 for UTMA accounts.
Testamentary Trust
Another way to transfer assets to a minor would be to utilize a testamentary trust. This is a trust that is contained within a will, and if you create this type of trust, it would not go into effect until you pass away.
This type of trust can be beneficial if you have life insurance that you have purchased to protect your child if something was to happen to you. The trustee that you name would be the initial beneficiary of the policy, and if you pass away, the trust would be funded with the proceeds.
In the trust declaration, you would record terms that would be followed by the trustee. You would set the age at which your child would take direct control of the funds.
Revocable Living Trust
The revocable living trust is a versatile estate planning tool that can be used to provide for people on your inheritance of all ages. When you are living, you would act as the trustee, and you would name a trustee to succeed you. Your heirs would be the beneficiaries of the trust.
You would have total control of the assets throughout your life, and the successor trustee would distribute assets to the beneficiaries in accordance with your wishes after your death.
If there is a minor beneficiary, the trustee would manage the resources on their behalf until they become adults. Once again, you would be able to spell out the details with regard to the way you want the assets to be distributed when you draw up the trust declaration.
Access Our Free Worksheet
We have developed an estate planning worksheet that you can go through to gain a better understanding of this important process. It is being offered free of charge at the present time, and it can be completed quickly and easily, so you should definitely take advantage of the opportunity.
You can get your copy right now if you head over to our worksheet access page and follow the simple instructions.
We Are Here to Help!
At some point, you have to put the procrastination behind you and work with an attorney to put an estate plan in place. If that time is now, we would be more than glad to provide the help you need.
Each situation is different, and there is no universal estate plan that is right for everyone. We can gain an understanding of your goals and your family dynamic and work with you to develop a plan that ideally suits your needs.
You can schedule a consultation appointment if you give us a call at 585-374-5210, and you can fill out our contact form if you would rather send us a message.
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