As financial planners, we get the opportunity to work with clients from all walks of life and varying types of family situations. One of the most common questions we get from clients of all demographics revolves around gifting or bequeathing assets to family members while maintaining a level of control over those assets. Some of the situations where clients are looking for extra control are obvious- such as gifts to minors, while others are more specific- like gifts to a family member who has a substance abuse or gambling issues. There is almost always a solution that can be crafted to fit the needs of the client, but the cost and complexity of the solution varies widely.

Education

The most common scenario for gifts to minors involves education planning. Luckily, there are two good options – 529 plans and qualified payments to schools – both of which allow the donor to retain some control over the spending.

• 529 Plans

529 Plans are like Roth IRAs for education. Money contributed to a 529 plan is not eligible for a federal tax deduction when contributions are made, but withdrawals are not taxed. Furthermore, no tax is owed on gains or income inside the account. The only stipulation is that the funds must be used for a defined set of education-related expenses. 529s are easy to establish and the investments are usually very inexpensive.

The great thing about 529 plans is that the child never actually owns the assets- giving the plan owner full control. Furthermore, many states offer some sort of tax incentive for 529 contributions. This makes 529 plans a great conduit for giving since most parents and grandparents would like to spend money on their kids and grandkids education.

• Direct Payment to Schools

Qualified payments made directly to educational institutions for tuition of any amount are always tax-free. This is a great way to give to minors because the gift can go directly from the donor’s account to the school- the child never touches it.

Gifts to Minors

• UTMA/UGMA Accounts

UTMA stands for Uniform Transfers to Minors Act and UGMA stands for Uniform Gifts to Minors Act. These laws were created as a way for minors to receive gifts that would remain under the control of an adult without needing to establish a trust. UGMA and UTMA accounts are known as “custodial” accounts. The account is established for the benefit of the minor, but it is managed by a custodian (typically the parent). The custodian manages the account and can control withdrawals. When the minor reaches the age of majority in their state (18 or 21), the minor gains full access to the account- meaning they can do whatever they want with it.

UGMAs and UTMAs are quite similar, but there are some differences in the assets they can hold and the age at which the assets transferred to the minor. In certain situations, UTMAs can transfer to the minor up to age 25. Not all states allow both types of accounts.

Trusts

Trusts come into play in many different planning scenarios such as:

• When the donor wishes to retain control even after the beneficiary reaches the age of majority
• When the beneficiary is not legally competent (Special Needs Trust)
• When the beneficiary has addiction issues
• When the beneficiary has issues controlling their spending (Spendthrift Trust)
• When there are family issues or a blended family situation

Trusts offer more control, but this comes with additional expenses. An attorney will need to draft the trust document, then assets must be transferred into or retitled in the name of the trust. The donor may be able to act as the trustee for a period of time, but a trustee (who may need to be paid for their services) will need to step in in the event of the original trustee’s death or incapacity. That being said, there is often no good way to avoid these costs. We have written extensively about trusts here.

Whatever your goals or concerns around gifts or bequests, there are many potential legal and tax pitfalls that must be avoided. We strongly recommend seeking the advice of a CERTIFIED FINANCIAL PLANNER™, CPA, and/or attorney prior to choosing a strategy.