Market Overview
What’s left for the kids?
After you retire, if you’ve planned and executed well, you enter what those in the financial services industry call the “gifting” phase of life.
Whether you’re subject to an estate tax – or “death tax” – or not, it makes sense for most of us to transfer at least some of our wealth while we’re still alive. Not only can we take a more active part in the details while we’re still able to fog a mirror, we can also take immediate pleasure in seeing how our hard work benefits our loved ones.
So if and when you decide that you want to give some of your money to your kids, what are the best investment vehicles?
Minor considerations
If your intended recipient – a grandchild, perhaps – has not yet reached adulthood, there are a couple options that are uniquely tailored for this situation.
They sound similar enough to each other to get confusing: the Uniform Gift to Minors Act and the Uniform Transfer to Minors Act. When you get down to acronyms, it gets even worse: UGMA and UTMA.
With both UGMA and UTMA accounts, the donor manages the account on behalf of the beneficiary, whose name is on the account and is considered the owner of all assets once they’re deposited into the account. Upon receiving a payout from the account, the beneficiary is responsible for paying all taxes owed – at their own applicable rate – on gains, dividends and interest.
So that’s how they’re similar. Here’s how they’re different:
UGMAs can accept money, life insurance, stocks, annuities and other basic assets and these gifts can only be used for support purposes. Although state laws differ, generally speaking payout occurs on the beneficiary’s 18th birthday.
UTMAs, though, can serve as conduits for a wider range of investments. Swaps, options, precious metals, Action Comics #1, whatever, can all be held in trust via an UTMA. Since the assets are more abstruse, it stands to reason that the beneficiary can spend the money on anything they care to, far beyond merely keeping body and soul together. It also stands to reason that the average 18-year-old can’t be trusted with that kind of windfall and, as such UTMAs usually don’t end up in beneficiaries’ pockets until they’re 25, and almost never before they’re 21.
These are the two types of custodial accounts enshrined by U.S. statute. Custodial accounts are distinct from guardian accounts, which are similar in most respects but provide fiduciary care for those who are declared incompetent by a judge.
Good habits
You could probably tell at a glance whether an UGMA or an UTMA would be better in your case, given your circumstances. But there are other options for which the beneficiaries aren’t limited to minor children – although minors could be beneficiaries of these as well.
As we reported in this space last year, Roth IRAs are remarkably versatile accounts to consider utilizing. Not only can they fund everyday expenses throughout your retirement, they can be purposed to pay for long-term expenses or serve as tax-free instruments to pass along assets to your heirs once you’ve passed on. But there’s no reason why you – or, more pointedly, they – have to wait until your death. Your heirs can benefit tax-free from your largesse while you’re still around to see their grateful faces around the holiday table.
Your generous giving may be a teachable moment for your heirs, a chance for you to teach them the value of thrift and the importance of good saving habits. Then perhaps you can watch as they come up with their own plans for a comfortable retirement and for the care of future generations.
The details of UTMA, UGMA, Roth IRA, 529, mutual funds or other plans is beyond what we have space to discuss here. We recommend that you contact an experienced financial advisor for advice before making any decisions. Consider doing so soon.
