Because a minor cannot directly receive a gift, extra care must be taken when gifting to a minor. Assets for a minor must be managed and protected by a responsible and trustworthy adult until the beneficiary reaches adulthood. One way to do that is to put the assets in a trust. Another option is to create a Uniform Transfers to Minors Act Account. In this blog, a Fayetteville estate planning attorney at Wilcox Attorneys, PA explains the ins and outs of the Uniform Transfer to Minors Act.
What Is the Uniform Transfer to Minors Act?
The Uniform Transfers to Minors Act (UTMA) is a model law that has been enacted in most states, including Arkansas. UTMA was created to offer parents and grandparents a way to safeguard money or assets intended for a minor. The Uniform Gift to Minors Act (UGMA) allows money and financial securities to be transferred to minors. UTMA goes a step beyond UGMA. It includes such gifts as bonds, real estate, and art to be transferred to minors.
An UTMA account is a custodial account that holds and protects assets for a minor. When the minor reaches the age of majority in his state he receives the gift outright. Arkansas Code § 9-26-201 et seq. governs UTMA accounts in Arkansas.
The creator of the account, usually a parent or grandparent, designates a custodian for the account. The custodian is responsible for managing the account until the child reaches the age of majority. In Arkansas, the beneficiary receives the assets as early as age 18 but no later than age 21, depending on the applicable statute and language used by the account creator.
How Is a UTMA Account Taxed?
One attractive feature of an UTMA account can be found in the tax treatment of the account. Assets held in an UTMA account are considered the property of the minor. A certain amount (the amount fluctuates) of the investment income is not taxed. An equal amount is taxed at the child’s lower tax rate instead of the higher rate applicable to the creator of the account. Excess income will be taxed at the creator’s marginal tax rate. Understanding the tax implications of an UTMA account is crucial when deciding to create such an account.
Can Assets Be Withdrawn from a UTMA Account?
Once an UTMA account has been created, the custodian may make withdrawals from the account; however, the funds must be used for the benefit of the child and must be for a legitimate need of the child. Until the child is an adult, only the designated custodian may authorize withdrawals. When the beneficiary becomes an adult there are no restrictions on how the beneficiary uses the funds.
Is a UTMA Account or a Trust a Better Option?
If you are a parent or grandparent who plans to gift assets to a minor, either a trust or an UTMA account can be used. One of the primary differences between the two options is control over the funds. When an UTMA account is chosen, you have no control over how the assets are used by the beneficiary once he reaches adulthood. However, when a trust is used, it can retain control over how the assets are used, even after the beneficiary becomes an adult. Another difference is that all assets held in an UTMA account must be disbursed by the time the beneficiary turns 21. Assets in a trust can be held indefinitely.
Contact a Fayetteville Estate Planning Attorney
For additional information, please sign up for one of our FREE estate planning webinars. If you have additional questions or concerns about using an UTMA account to make gifts to minors, contact an experienced Northwest Arkansas estate planning attorney at Wilcox Attorneys, PA by calling 479-443-0062 to schedule your appointment.
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