Is This the Best Gift You Can Get Your Kids or Grandkids?

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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.

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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.

The pros

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.

The cons

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.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.