With Christmas nearly here, many parents and grandparents are scrambling for the last minute gifts and stocking-stuffers to delight the kids in their lives. There’s nothing better than seeing the wonder in children’s eyes as they unwrap a present, but there’s another gift you can give your children or grandchildren that will be just as powerful.
Passing on wealth to your children or grandchildren for college, a down-payment on their first home, or for other reasons can be a powerful kick-start to their lives. I suggest using UGMAs to accomplish your wealth transfer. Here’s what Fidelity has to say about UGMA accounts:
UGMAs/UTMAs offer more investment options but less control.
A parent or grandparent can use a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account (i.e., “custodial” account) to save for a child, but the child named on the account would gain control once he or she reaches a specified age. So, you would need to be ready to give up control of the money.
- Broad investment options. While the loss of control might be a disadvantage to many parents or grandparents, the greater range of investment options in a custodial account versus a 529 plan could be attractive to a knowledgeable, self-directed investor.
- No limit on contributions. You can contribute virtually any type of asset, for any amount, on both UTMAs and UGMAs. In the case of UTMAs, you can even contribute real estate. Note, though, that taxes may apply, so you should consult with a tax attorney or accountant before making a contribution.
- Loss of control. The custodian controls the account until the child reaches a specified age, typically 18 or 21 (rules vary by state). Once the account beneficiary reaches that age, he or she can use the money for anything. This might be a concern for people who fear that the beneficiary might spend the money unwisely or on noneducational materials.
- Potential for less student aid. Because custodial accounts—such as UGMA and UTMAs—are counted as a student’s asset, they are generally factored into the EFC at 20%, which is much higher than the 3%–5.6% factored in for parental assets.
- Modest tax benefits. The interest, dividends, and capital gains each year from the UTMA are reported under the child’s Social Security number. If the child is a minor (or full-time student under age 24), the first $1,050 earned in 2017 is tax exempt. The next $1,050 is taxed at the child’s tax rate, typically lower than the parents’. Any yearly earnings above $2,100 are taxed at the parents’ rate. However, all withdrawals face taxes on capital gains. Also, unlike 529 plans, UTMA/UGMA accounts are included in the estate of the account’s custodian (parent or grandparent) for estate tax purposes.
Read more here about ways to help the children in your life save.
E.J. Smith - Your Survival Guy
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