Wealth Transfer Strategies for Minors – Estate Planning

Wealth Transfer Strategies for Minors

By Alan G. Orlowsky

A favorite practice for many grandparents is making financial gifts to grandchildren or even great-grandchildren to help provide future educational expenses. Most grandparents, however, know better than to simply hand cash to the grand kids. They understand that the money would probably go to video games, food, clothes, or a car – instead of to college. Some grandparents choose to make gifts under a law known as the Uniform Transfers to Minors Act (UTMA) which was at one time called the Uniform Gifts to Minors Act (UGMA). These accounts are allowed in one form or another in most states. It allows Grandma and Grandpa to set aside funds which can be managed by a custodian and be used later for education or other necessary support.

UTMA Accounts

The attraction of the UTMA accounts is that they are easy to set up at a local bank or brokerage firm. They do not require the involvement of an attorney, nor do they require a separate tax return. The income is reported on the minor’s income tax return if the minor earns enough to even require a return. The minor is typically in a lower tax bracket than the grandparents, thus saving taxes and helping to preserve and grow the investment. The big problem with UTMA accounts is that the grandchild receives complete control over the assets in the account when they turn 18 or 21, depending on specific state law. Once that happens, the grandchild can spend the money in the account in any way they please. Even if the grandparents specified that the funds were for college only, they no longer have any control over the distribution.

If the grandchild prefers a Porsche over a college education, there is nothing stopping him or her from making that purchase. Of course, the funds are also subject to the grandchild’s creditors. And to add insult to injury, now that the account is the grandchild’s asset, it may disqualify him or her from getting any other financial aid for college. A better solution for most grandparents to accomplish their goal of providing educational opportunities is to set up an irrevocable trust for the grandchild, appointing the grandchild’s parents as Trustees. Any funds gifted to the trust are removed from the grandparents’ estate, along with any appreciation that accrues over time. This reduces estate taxes for Grandma and Grandpa.

TRUSTS

As long as the funds remain in the trust, they are protected from creditors. And the trust can provide very specific (and enforceable) instructions on how the funds are to be used. They can be restricted to educational purposes, or depending on the size of the gift, could provide many other benefits for the grandchild. Some grandparents might want to provide for the expenses of the grandchild’s first wedding, or a down payment for the purchase of the grandchild’s first home. And the grandparents (through the Trustees) are able to limit benefits if the grandchild gets into trouble with the law, or with substance abuse. The uses and benefits of such a trust are limited only by the grandparents’ imagination.

Contact an Illinois Estate Planning Attorney Today

If you or someone that you know has questions about transfer strategies in Northbrook, Skokie, Evanston, Glencoe, Glenview, or Highland Park, let the experienced attorneys at Orlowsky & Wilson, Ltd. help. Call or contact the office today for a free and confidential consultation of your case

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