Custodian Accounts

Suppose your estate is modest and you don’t think it warrants setting up a trust for your children. But you still want to convey property to them upon your death. You can set up a custodian account for them while you are still alive and usually bequeath funds to that account through your will. The Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) have been adopted by almost all the states. Most states permit you to make gifts to these accounts in your will.

The UGMA and UTMA authorize the creation of custodian accounts for minors. Thus, they’re different from bank accounts you’d open in a child’s name. But the mechanism they authorize is so simple that you can probably set them up using just a bank or brokerage. These laws allow you to open an account and deposit money or property in it while you are still alive. You can make yourself custodian of the account, and set up a successor in case you die while the child is under 18 (or up to 21 or even 25 in some states). Use the child’s social security number.

An Estate Tax Tip

If you are the custodian for your children’s accounts, their accounts will be included in your estate for estate tax purposes if you die before the child reaches the age of majority. If the purpose of the gifting is to remove assets from your estate, consider other gifting alternatives, have someone else serve as custodian, or name a successor custodian.

Both laws give the custodian broad powers, with the powers under the UTMA being somewhat wider. For example, an UGMA custodian cannot take title to real property unless the statute has been modified.

When your children are over age 13, the federal government taxes income in these accounts at the children’s rate, which will almost certainly be lower than yours. For younger children, through the “kiddie tax,” the federal government taxes income from the account at your tax rate.

The drawbacks? Some parents might be uncomfortable with the fact that in many states the funds become the child’s property when he or she reaches age 18, leaving you no control over them after that.

Leaving Gifts to Someone Else’s Kids

In the states that allow you to leave a gift in your will to UGMA and UTMA accounts, you can use this mechanism to leave a gift to children who aren’t yours, say a favorite nephew. Or you could set up a trust just as you would for your own children. Or you could leave money to the child’s parents to be used for his benefit (although this wouldn’t legally bind the parents to spend it on the child).

Using an UGMA, UTMA, or trust will reduce the amount of supervision and paperwork required by the court, and thus lower expenses to your estate. If most of the assets you leave to the child are handled by these methods, it can reduce the probate court’s involvement to almost nothing.

But even if you make gifts to your child in any of these ways, you still must name a personal guardian in your will. You must also name a property guardian to manage property the child receives after you die and property inadvertently left out of the trust or UGMA/UTMA gift. You can make the same person the personal guardian, property guardian, custodian, and trustee.

There are also a number of minors’ trusts that can be set up to benefit your children. See chapter 22 for a brief discussion of them.