Grandparents in love with their grandchildren – I am one of them. Our Ruby and Jo are so precious.

So, we will do whatever we can to make our grandchildren’s lives the best. Not good or better, but the best.

As an estate planning attorney in New York who understands estate taxes, I know my options. This leads me to gifts under the Uniform Transfers to Minors Act (UTMA). While the UTMA provides an inexpensive and expedient arrangement for accumulating wealth for minors, like anything else, there are pros and cons.

Benefits of an UTMA

One of the benefits of a UTMA account is tax savings. For instance, a donor’s income tax may be lowered by transferring income-producing assets to a child, who is likely in a lower tax bracket. The first $1,000 of unearned income (interest, dividends, or capital gains) in a UTMA account is exempt from federal income tax if the child is under age 18 at the end of the tax year. The second $1,000 of unearned income is taxed at the child’s rate. Any unearned income greater than $2,000 is taxed at the higher of the child’s or parent’s marginal tax rates.

UTMA accounts have an adult designated to manage the money for the minor until the minor reaches adulthood. Then the control passes to the child. During that time, the custodian can spend the funds on the beneficiary, your grandchild.

Downsides of an UTMA

Any unused money must be distributed to the grandchild by the time they reach the age of majority or the maximum age allowed for custodial accounts in their state. Different accounts have varying age limits:

• Classic UGMA (Uniform Gift to Minors Act) accounts generally consider the majority age to be 18
• Newer UTMA accounts are usually age 21 but may be as late as age 25
• Current New York law says minors are entitled to the funds at age 21
• Older New York UGMAs (before 01/01/97) allow minors to access the funds at age 18

Just remember, when your grandchild turns 21 (depending upon the account and state law), they will be legally entitled to the account. So, now your lovely grandchild can spend the money on anything they want – clothes, dinners, down payment on a car. However, what about drugs, poor financial decisions, and friends of your grandchild who become vultures.

Protecting Your Grandchild’s Funds in a Trust Instead

For most Americans (in fact, almost all Americans), gift taxes are no longer an issue. That being the case, there are better ways to make gifts than into UTMA accounts. The better way is to set up a trust to hold the gifted monies for the benefit of your grandchild. The parents of the grandchild can be the trustee, and there is no mandatory age for the distribution of the trust assets to the grandchild. Here are some options:

• You define the age in the terms of the trust
• Give the trustee (your child) the discretion to decide when to pay the funds out to your grandchild
• The parent or trustee can also spend the money for the benefit of the grandchild

For those who want to take advantage of the federal annual gift tax exclusion to reduce estate taxes, remember it is always best to use a trust to serve your main purposes. The trust needs to be irrevocable and allow the beneficiary to have withdrawal powers, known as “crummy powers.”

The benefit here is that the gifted monies are not subject to the grandchild’s creditors, bad marriages, lawsuits, and undue influence. Now, that sounds a whole lot better.

When deciding whether to open a UTMA account, it is important to know that there are options available that may be better suited to your specific situation.

It is important to speak with a qualified estate planning attorney in New York who specializes in trusts and estate taxes to make the most informed decision about the future of your grandchildren. Our attorneys can evaluate your current situation and recommend the best options.

Please do not hesitate to contact Russo Law Group, P.C, with questions. Benefit from our experience, as well as caring and compassionate staff. You may also take advantage of our free seminars and webinars to learn more about how Russo Law Group, P.C., helps with Medicaid benefits for your parent.