Uniform Transfer to Minors Act

One alternative to a trust in estate planning is the Uniform Transfers to Minors Act (UTMA). It allows a  custodian to manage the funds of a minor until the beneficiary reaches a certain age, up to age 21 in New York. UTMA accounts are easy to create, inexpensive, and allow a parent to create a fund that the minor can only access once he or she reaches the designated age. This makes the account an attractive alternative to a trust for some. However a trust may be better for someone who prefers a higher distribution age.

Any type of monetary instrument can be invested in an UTMA such as: stocks, bonds, mutual funds, interests in limited liability corporations, cash, and certificates of deposit. All withdrawals must be made by the custodian even after the beneficiary has reached the designated age. The difference at distribution age is that the custodian is legally required to perform transactions requested by the beneficiary, up to and including complete dissolution of the UTMA account. Any funds that are withdrawn by the custodian prior to the minor reaching the designated age must be used for the minor.

If a minor’s interest income plus dividends total more than $1,900 in one year, then the account will be subject to the Kiddie Tax. A portion of the minor’s UTMA interest income will be taxed at the tax rate of his or her parents or guardian to help ensure that parents or guardians do not use UTMA accounts as a means of circumventing income tax.

There is a similar account called the Uniform Gift to Minors Account (UGMA). There are fewer ways to fund the UGMA, however. It can only be funded only with life insurance payments, cash, and certificates of deposit. Consult with an experienced attorney for your estate planning needs.