Estate Planning and UTMA

Estate plans frequently have to account for minors who may not necessarily know how to handle their inheritance. One way in which this situation is handled is by creating a trust, but there are other methods as well. These methods can be quite simple, but knowledge of the laws pertaining to gifts and transfers of assets is still important.

One law, called the Uniform Transfers to Minors Act (or UTMA), provides a very simple way in which to gift assets to minors. There are just a few requirements to fulfill in order to work with this law.

The Uniform Transfers to Minors Act

UTMA is a federal law that allows you to gift money or other assets into an account set up in the minor’s name. Assets may include cash, royalties, patents, securities, real estate, and even paintings. The assets within the account are legally considered to belong to the child, but you will also name a custodian who’ll manage that account until the child is of legal age.

Assets placed in the account are considered gifts, and they are therefore subject to the $14,000 annual limit under the IRS. Any amounts beyond that may be taxed, just like with other gifts.

The custodian has a fiduciary duty to manage the account on the child’s behalf, which means they must handle it in such a way that it benefits the child. They may invest the property, but the end goal must be in the best interests of the beneficiary.

While UTMA was passed by the federal government, it was left to the states to implement it. As such, each state has its own nuances that may influence exactly how an UTMA account works.

UTMA Accounts in Illinois

In the state of Illinois, the age limitation is 21, which means the account must end before the child reaches that age. The age is specified in a will or trust, so you could allow your child or grandchild’s UTMA account to end at the age of 19 or 20 if you so desire. Once the account ends, the assets fall under the beneficiary’s control, and they may do with them as they wish.

Incorporating UTMA Accounts into Your Estate Plan

An UTMA account can be created in your will by naming the beneficiary and custodian. Specific wording is needed in order to make sure your wishes are clear.

These accounts may also be established by the executor of a will or trustee of a trust, but only if the amount is below $10,000. Beyond that amount, the account must be approved by the court. This means careful planning is recommended to make sure your estate is disbursed without undue risk of probate.

Alternatives

In addition to UTMA accounts, money may be left to minors through trusts or with a 529 plan. The latter option is strictly a college savings account, and it remains tax free as long as the amounts within it are used for designated college purposes (tuition, supplies, books, room and board, etc.).

In order to determine which option is best for you, it is best to contact an estate planning attorney. The lawyers at Hart David Carson LLP can help you create an efficient and effective estate plan that accounts for your children, grandchildren, and other minors.

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