Why Can't I Have a Corvette Now? ... It's My Money!
By Donald B. Formoso
Unless made through a trust, a sizeable gift, bequest or inheritance to a minor beneficiary may lead to a lengthy and costly guardianship proceeding. In that instance, a court would appoint a guardian (a non-parent in PA) and supervise his or her actions pertaining to the protection and investment of the assets. While this process aims to protect the minor, it can end up burdening all of the parties involved and restrict a well- meaning guardian from quickly and prudently acting in the minor’s best interest. One alternative employed by the courts is a “sequestered” or “restricted account” which requires a court order to make withdrawals before age 18 — not a perfect solution.
Fortunately, Pennsylvania’s Uniform Transfers to Minors Act (“UTMA”) allows individuals to give assets to children during the donor’s life or upon his or her death, while avoiding the restraints of the guardianship process and the expenses involved in establishing a restrictive account or creating a trust. Under the UTMA, a donor appoints a custodian of the property transferred to the minor. The custodian’s duties are similar to those of a trustee as he or she can invest and expend the assets for the minor’s benefit until the date of distribution designated by the donor. The law requires the custodian to maintain accurate records and act honestly and responsibly in managing the assets, which helps to protect the minor’s interest.
In addition, a gift under the UTMA can have significant tax advantages. From a federal estate tax standpoint, the property transferred to the minor during the donor’s lifetime will not be included in the donor’s gross estate, provided that the donor is not acting as custodian. Further, a UTMA transfer is a completed gift for gift tax purposes and any income earned from the transferred property is taxable to the minor. This is favorable because a child is likely to be in a lower tax bracket than the donor and enjoys a lesser overall income tax liability as compared to a trust. Unfortunately, these rules may not pertain to gifts made by parents.
As with any estate or gift planning strategy, a UTMA transfer is not without its disadvantages. One drawback to a UTMA gift is that it is irrevocable — once in the hands of the custodian, the assets are no longer the property of the donor and the gift cannot be rescinded. Further, all assets held for the benefit of the child become his or her sole property upon the applicable birthday.
In Pennsylvania, for lifetime gifts the latest that final distribution can take place under the UTMA is age 21. The law creates an exception for such transfers made under a will or trust, allowing the donor to delay distribution until the beneficiary reaches age 25. A donor who wishes to extend oversight of the property until the recipient is older must explore other options, such as creating a trust.
The Pennsylvania UTMA provides a simple and cost-effective way to plan for the future. However, it is not a universal solution and in many instances a trust is a more effective instrument to accomplish one’s goals. In order to make the right decision, it is important to consult a qualified estate planning attorney first.
Peacock Keller, LLP • 70 East Beau Street • Washington PA 15301 • 724-222-4520