Using PA UTMA Accounts for Gifts to Grandchildren:
We frequently have clients asking about ways they can make gifts to grandchildren. For large gifts (ie. hundreds of thousands of dollars), we will almost most often use some form of irrevocable trust to aid in the proper protection and management of the gifted assets. However, there are many grandparents who want to make generous, yet smaller gifts (ie. thousands of dollards) to grandchildren. In those cases, an irrevocable trust might not be cost effective as the the expense may outweigh the gain. Luckily there is an alternative that can be used that allows for tax efficiency and retained control.
The Pennsylvania Uniform Transfers to Minors Act (sometimes known as PAUTMA or UTMA, or, formerly, as the Pennsylvania Uniform Gifts to Minors Act, or PUGMA) can be found at 20 Pa.C.S.A. § 5301, et seq.. The UTMA has sometimes been called the “granddaddy” of college savings accounts. It allows parents to establish custodial accounts for a minor child, and a grandparent can then make gifts to the account. Because the account is in the name of the child, the tax liability is often shifted to the child, who presumably is in a lower tax bracket than the grandparent or the grandchild’s parents. Gifts to such accounts are irrevocable, but the gift-giver retains control of the money and decides how it will be invested.
The PA UTMA allows a wide variety of investments, including mutual funds, stocks, bonds, real estate — even artwork. Banking institutions and brokerage firms offer UTMA accounts. This wide range of investment options provides the grandparent with a lot of flexibility in what types of investments are appropriate depending on the age of the grandchild and his or her proximity to needing the gifted assets for college or other expenditure.
The account should be managed by someone other than the parent; otherwise, the parent will be responsible for the income tax on the account income. For children, or students under age 24, income below $950 is not taxed, income from $950 through $1,900 is taxed at the child’s rate, and income over $1,900 is taxed at the grandparent’s rate (figures for 2013).
The major downside of these accounts is that custodians must turn the money over to the child when he or she reaches the age of majority (21 in Pennsylvania). Upon attaining the age of 21 years, the child is legally entitled to fully access the assets that remain in the account. He or she can then do as he or she wishes with the money — and it may not be what you would prefer. In addition, as with custodial accounts, the child’s sudden ownership of the account funds could jeopardize his or her eligibility for financial aid for college.
Typically, the UTMA accounts will be established with amounts of money that are expected to be fully or mostly utilized by the time child reaches the age of majority (21). Where grandparents are looking to make larger gifts that they want protected beyond the age of 21, an irrevocable trust will be a better and more flexible solution. The creator of an irrevocable trust will have the ability to name a trustee to manage the assets for the benefit of a grandchild until whatever age they deem appropriate. Further, they might be able to utilize the irrevocable trust to provide long term divorce and asset protection for the grandchild.
For more information regarding PA UTMA accounts, irrevocable trusts, Representation of Executors, Asset Protection, Elder Law and Estate Planning in Pennsylvania, please contact Douglas L. Kaune, esquire at 610 933 8069 or email him at dkaune@utbf.com. Unruh, Turner, Burke & Frees, P.C. is a full service law firm which has three convenient office locations in Phoenixville, West Chester and Paoli, Pennsylvania. The firm primarily services clients in Chester, Montgomery, Delaware, Philadelphia, Bucks and Berks Counties, but can represent clients throughout Pennsylvania.
