When gifting assets to a minor, certain legal restrictions must be considered because minors cannot directly own property or financial assets. A responsible adult must oversee and manage the assets until the child reaches adulthood. One approach is to establish a trust, but another widely used option is to create a custodial account under the Uniform Transfers to Minors Act (UTMA). The attorneys at Legacy Care Law Firm explain what a UTMA account is, how it functions, and how it compares to other options for managing assets intended for minors.
What Is the Uniform Transfers to Minors Act (UTMA)?
The Uniform Transfers to Minors Act (UTMA) is a law adopted in most states, including New Hampshire and Massachusetts, that provides a structured way for adults to transfer financial and tangible assets to minors. The law was designed to simplify the process of gifting money, investments, and property to children without the need for a formal trust agreement. UTMA is an expansion of the earlier Uniform Gifts to Minors Act (UGMA). While UGMA accounts are limited to financial assets such as stocks, bonds, and cash, UTMA accounts can also include physical property, such as real estate, fine art, and collectibles. This broader scope allows families to transfer a wider variety of assets while ensuring that they are managed responsibly until the minor reaches adulthood.
Like UGMA, UTMA accounts function as custodial accounts, meaning a designated adult, known as the custodian, is responsible for managing the assets. The custodian has a fiduciary duty to act in the best interests of the minor and to use the funds solely for their benefit. The specific rules governing UTMA accounts vary by state, including the age at which the minor assumes full control of the assets. In both New Hampshire and Massachusetts, the age of majority under UTMA is 21.
Tax Treatment of UTMA Accounts
One reason UTMA accounts are an attractive estate planning tool is the favorable tax treatment they receive. Since assets in the account legally belong to the minor, a portion of any income generated by the investments is either untaxed or taxed at the child’s lower tax rate. However, once income surpasses a set threshold, it may be taxed at the custodian’s higher tax rate. This aspect of UTMA accounts makes them a useful strategy for families looking to minimize the tax burden while transferring wealth to younger generations. Despite these benefits, it is important to understand that tax laws can change, and the exact income thresholds that determine tax treatment fluctuate over time. Anyone considering setting up a UTMA account should consult with a tax professional to ensure they understand the potential implications.
Can Funds Be Withdrawn from a UTMA Account?
While the assets in a UTMA account are intended for the minor, they are not directly accessible to them until they reach adulthood. Instead, the custodian has the authority to withdraw funds from the account, but only if the money is used for the child’s benefit. Acceptable expenses might include education costs, medical care, extracurricular activities, or other necessities. The custodian must ensure that withdrawals align with the child’s needs and cannot use the funds for personal expenses. Once the child reaches the legal age of majority, they gain full control of the assets in the account. At that point, there are no restrictions on how the beneficiary may use the funds, which can be a drawback for those who wish to maintain long-term control over the assets.
Comparing UTMA Accounts to Trusts
For parents and grandparents considering how best to transfer assets to a minor, both UTMA accounts and trusts offer viable solutions, but they differ significantly in terms of control and flexibility.
One major distinction between a UTMA account and a trust agreement is that with a UTMA account, the assets automatically become the beneficiary’s property once they reach adulthood. For the beneficiary of a UTMA account, this means they can use the funds however they choose, without any restrictions. For individuals who wish to maintain some level of oversight beyond the age of majority, a trust is often a better option.
A trust allows the creator to establish specific terms governing how and when the assets may be used. For example, a trust could stipulate that distributions be made only for education, home purchases, or other approved purposes. Additionally, a trust can extend asset protection beyond the minor’s 21st birthday, providing a safeguard against reckless spending, creditors, or financial mismanagement.
Another key difference is that while a UTMA account must be distributed by the time the beneficiary reaches 21, a trust can hold and manage assets indefinitely, depending on the terms established by the Grantor. Trusts also offer enhanced estate planning benefits, such as protection against estate taxes and asset preservation for future generations.
Is a UTMA Account Right for Your Estate Plan?
Choosing between a UTMA account and a trust depends on your specific financial goals, the amount of control you wish to retain, and the level of flexibility you want to provide for the minor. UTMA accounts are simple to set up and can be a useful tool for modest gifts that the child may need access to early in adulthood; however, for those who wish to protect and control assets over a longer period, a trust is often the more strategic choice.
If you are considering establishing a UTMA account or a trust as part of your estate planning strategy, consulting with an experienced estate planning attorney can help you make an informed decision. Proper planning ensures that your gifts to minors are managed responsibly and align with your long-term objectives.
Can We Help You Decide If a UTMA Account Is Right for Your New Hampshire or Massachusetts Estate Plan?
For more information, please join us for an upcoming FREE seminar. If you are interested in including advance directives in your New Hampshire or Massachusetts estate plan, contact our estate planning attorneys in our North Andover, Woburn, and Beverly offices at (978) 969-0331. Our Salem and Nashua, New Hampshire office can be reached at (603) 894-4141.
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