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Since minors cannot directly own property, you have to take measured steps to include a child in your inheritance plan. One possible course of action would be the creation of a custodial account.
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These accounts were conceived as a result of the Uniform Gifts to Minors Act (UGMA). It was originally developed in 1956, and it was updated in 1966. The Uniform Transfers to Minors Act (UTMA) came along in 1986, and all states in the union are now offering these accounts with the exception of South Carolina and Vermont. A custodian will manage assets that have been conveyed into the account on behalf of a minor child. If you are creating the account for your child or grandchild, you could act as the custodian while you are living, but it is not required. The custodian would manage the assets on behalf of the child until the child reaches the age of majority.
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The assets belong to the child as soon as you establish and fund the account. If you are the custodian, you can withdraw money from the account if it is used to benefit the child. You would also be able to close the account, but you would be required to use the funds to establish a different account or fund a trust with the child as the sole beneficiary.
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This is the question that is at the core of the difference between the UGMA account and the UTMA account. The original custodial accounts could only hold financial products that you would typically see in mutual funds like stocks, bonds, and securities. The Uniform Transfers to Minors Act expanded the possibilities to include other types of property, like collectibles and real estate. You could actually transfer a car and a home into a UTMA account.
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The first $1100 of non-earned income is not taxable, and the second $1100 is taxable at the child’s rate. Anything above $2200 is taxed at the parents’ income tax rate.
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Money in the account can be used for any reason, including educational expenses. However, there is another option called a 529 account that is a better choice if the account is going to be used to pay for college. The flexibility is one advantage. You can take back the money that you put into the account at any time for any reason, and you can change the beneficiary if the first beneficiary does not use all of the funds. From a tax perspective, 529 accounts are far superior, because the earnings and education -related withdrawals are not subject to taxation. A 529 account does less harm when it comes to qualifying for student aid. Eligibility is reduced by 20 to 25 percent if the student has a UTMA account, but the maximum reduction is under six percent for a 529 account beneficiary.
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Money in the account can be used for any reason, including educational expenses. However, there is another option called a 529 account that is a better choice if the account is going to be used to pay for college. The flexibility is one advantage. You can take back the money that you put into the account at any time for any reason, and you can change the beneficiary if the first beneficiary does not use all of the funds. From a tax perspective, 529 accounts are far superior, because the earnings and education -related withdrawals are not subject to taxation. A 529 account does less harm when it comes to qualifying for student aid. Eligibility is reduced by 20 to 25 percent if the student has a UTMA account, but the maximum reduction is under six percent for a 529 account beneficiary.
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