UTMA for children?

[kork13]

I've been thinking about this for a few months, and decided I'd get some outside opinions. I have 2 sons, 1 & 3 y/o. At their birthdays back in June (both within 2 weeks of each other... poor planning on our part! ), their great-grandmother (92 y/o? That side of my family is very long-lived -- her mother lived to be nearly 101 y/o) decided to help start sending us some money to help fund their eventual mission trip for our church -- most young men in our church go on 2-yr missions sometime around age 18-22, at a current cost of $400/mo/missionary. It's not alot ($15/mo/child), but she "caught up" from birth, so she initially sent us $1200 between the two of them, and $30/mo since. The idea of sticking that money in a savings account for the next 15+ makes me cringe, so for the moment, I've been putting that money in their 529 accounts instead. Not 100% in line with her (very generous & appreciated) intentions, but most assuredly for their benefit in either case, and since money is fungible, I'm don't feel too guilty about the choice. But it did get me thinking again about how best to save money for them.

So when each of them were first born, I started a 529 & UTMA savings account for each of them. I eventually decided that keeping the money in savings for 15-20 years was silly, so I rolled those savings accounts into their 529s, and hadn't really thought about if for a year or so. But my grandmother's generosity sparked the question again, and I've been going back and forth with myself about it since June. Should I start UTMA investment accounts for my sons?

I'm aware of the financial aid ramifications of having UTMA money in their names come time for college, but that factor is a non-issue for me -- I have no intention of being in a position that they would need (or even qualify) for any financial aid in college, unless they eventually earn merit or athletic scholarships. I am planning to pay for most or all of their educations, and have a good start already with their 529s. They're currently at $8k & $15k, I'm adding $130-$150/mo, and on a plan to automatically increase the monthly amount every year. Following that plan, I project that their 529s will grow enough to cover at least 75% of their eventual college educations (which is sort of my goal... I'd rather not over-save in the 529 plans).

Are there any other reasons that building up a couple UTMA investment accounts for them would be a bad idea? We're 32/33 y/o, and saving aggressively for our future -- 25% of gross into retirement, plus another 25% of gross going into other investments & savings, with no plans to deviate from that, and our current net worth ~$800k... So DW & I will be just fine in any case. But I like the idea of being able to build up some money that is set aside for my sons to be able to start their adult lives on a solid footing. I'm thinking to be able to have enough for a car & a healthy home downpayment (say, $50k-$75k in today's dollars). Some quick math says I could do that with just $150-$200/mo/child (basically the same amount I'm sending to their 529s).

I expect the biggest concern would be the need to teach them to value and be responsible with money, because it would definitely be easy to hand it to them & have it cause problems (either giving them a sense of false affluence & entitlement, or just giving them an easy way to blow alot of money). A slight good thing is that Alaska law only requires that the UTMA be transferred to their control before age 25. So if nothing else, I'd be able to withhold it for a little while for them to have some more time to learn how to responsibly manage their money. Not totally sure yet exactly how I plan to do that, but it's definitely my intention.

As usual, I've prattled on and on with my thoughts... but hopefully all of that makes sense. I've tried discussing this with DW, but as with most money matters, she tends to just agree with "whatever [I] think is best" or "Sure, that sounds like a great idea!".... she doesn't really have many opinions about money matters as long as the basics are covered. So I'd really appreciate your thoughts, or any experience you can offer.

[creditcardfree]

We have semi small (less than $5K each) UTMAs for our daughters, who are now in college. We have not qualified for financial aid...other than to take out government loans. No regrets and like the ability this money can be for anything. Since you are concerned that they not take the money for granted you might consider a cap on the amount you invest. My only other suggestion getting a professional to give their take on this from a tax perspective, or estate planning.

[Smallsteps]

This is what I did I had some UTMA accounts for my son/ daughter.
I am not in the place to pay for school so as time approached the kids had PT jobs so I converted their funds into an IRA for them.
That was not considered when they applied for financial aid.

[disneysteve]

Hopefully one or both of the kids will get merit scholarships. It really isn't that difficult at most schools to at least get something. My daughter got 19K/year and then 3rd and 4th year was awarded an additional $3,000 departmental scholarship. If they do get scholarships, you are able to take money out of the 529s without penalty. If, however, you simply over save in the 529, you will pay a penalty to get out the excess. Just keep that in mind.

There is another option besides UTMA for the kids. You could just open an account in your own name with the money the grandparent is gifting, with the full intent of that money eventually being theirs. That avoids the financial aid concern. It also avoids the 18-year-old going wild and blowing thousands of dollars concern, too.

[kork13]

There is another option besides UTMA for the kids. You could just open an account in your own name with the money the grandparent is gifting, with the full intent of that money eventually being theirs. That avoids the financial aid concern. It also avoids the 18-year-old going wild and blowing thousands of dollars concern, too.

I've considered that as well... but if I were to keep it all in my name, then pull it out for them, that would end subject to the gift taxes... I suppose, it wouldn't be insurmountable to avoid the gift tax issues -- $15k from me, $15k from DW, then do the same thing on following years. And double that if he's married. (Obviously, the annual gift tax exemption will presumably increase periodically, but I'm thinking in current dollars for simplicity).

[Jluke]

You can gift upwards of $5 million or so (check me on that) tax free for your lifetime.

If you give more than the current $15k per person per year then you file a tax form to document the gift.

[moneybags]

I've considered that as well... but if I were to keep it all in my name, then pull it out for them, that would end subject to the gift taxes... I suppose, it wouldn't be insurmountable to avoid the gift tax issues -- $15k from me, $15k from DW, then do the same thing on following years. And double that if he's married. (Obviously, the annual gift tax exemption will presumably increase periodically, but I'm thinking in current dollars for simplicity).

You can also gift them stocks or mutual funds from your accounts. When they sell the funds, their capital gain is based on your basis, but the tax rate is zero for low incomes (all based on current tax law, of course). I would gift them shares, have them sell and reinvest the money before they start earning a large income.

[Like2Plan]

Kork,
Read up on the kiddie tax rules. They made a big change for UTMA accounts which if the child's investment earnings exceed $2100, they are taxed at trust rates. The kiddie tax applies all the way up to age 24 if your child is a dependent and a full-time student.

https://www.kiplinger.com/article/taxes/T054-C005-S001-big-change-for-kiddie-tax-under-the-new-tax-law.html

[kork13]

L2P, thanks for the article, I hadn't heard about that change. Kind of a rip. The more I look into it, the more it seems better to just keep everything in my name... It just seems silly that there would be such significant deterrents to giving any sizeable amount of money to your kids.
I guess now it's just a question of setting up a separate account to be physically separate from the rest of our investments, or just not bother, build up my assets all in one pile, then work out a way to give them some of it later on. The cynic in me says to not even bother...

[Jluke]

How will you deposit a check into your account if it is made payable to the child?

If I gave a child a monetary gift I would expect the money to be held in an account for the child. Not a parental IOU account.

[disneysteve]

How will you deposit a check into your account if it is made payable to the child?

If I gave a child a monetary gift I would expect the money to be held in an account for the child. Not a parental IOU account.

Depositing into our account was never an issue. It’s all done electronically now. Nobody actually looks at the checks anyway. Any time our daughter got a check I would deposit it and give her the money (until she had her own account).

it doesn’t matter who a check is written to. I once accidentally deposited a check written to my mother into my own account. I just wrote her a check to replace the funds.

[kork13]

How will you deposit a check into your account if it is made payable to the child?

If I gave a child a monetary gift I would expect the money to be held in an account for the child. Not a parental IOU account.

That's one of the factors that I was reading about as I've been looking into all of this. And frankly, I haven't figured out how to crack that nut. In general, I would do exactly what DS described. It's the same thing my parents always did for me. But until they're old enough to actually handle their own money, what do I do with that money?

With an UTMA, the child has an absolute, undisputed right to his/her money, and parents (or whoever serves as the UTMA custodian) is held responsible to a fiduciary standard. There's a shocking number of cases in which children have very successfully sued their parents for mismanagement or misuse of their money, even if the money was arguably for their benefit -- technically, moving money from their UTMA to a 529 with them as the beneficiary is considered improper, because it's taking the money from their account, and moving it to an account that I own as the parent. Even just failing to keep adequate records for the account is a foul. Although I don't expect that my kids would ever sue me for how I were to manage money that we gift to them, even the spectre of that is extremely off-putting.

[disneysteve]

I've spoken about this before, but Jen's first "bank account" was at the "Bank of Dad". I made an account ledger for her and she "deposited" money from gifts, allowance, etc. The actual money was in our checking account but there was the paper record of what belonged to her. To help teach her about saving, I paid her a very high interest rate (5%/month) so that the money would grow fast enough for her to see it increasing since actual bank accounts at the time were paying a fraction of one percent interest so she might only have earned a few cents in a year. Once she got her own account, I gave her that money.

[Like2Plan]

Kork,
It might be beneficial to have a UTMA account for gifts as long as the earnings don't exceed some predetermined amount that fits in with your tax planning. It is nice to not have to pay taxes on that first threshold amount. With stocks, you could do some key tax gain harvesting (sell and then buy back immediately) along the way. But, I will say our planned UTMA account for our now grown son did run afoul with kiddie tax changes over the years-so you can't always count on things staying the same over 18 years. The kiddie tax code changed at least 3 times becoming more stricter over our savings time horizon.

[kork13]

Kork,
It might be beneficial to have a UTMA account for gifts as long as the earnings don't exceed some predetermined amount that fits in with your tax planning. It is nice to not have to pay taxes on that first threshold amount. With stocks, you could do some key tax gain harvesting (sell and then buy back immediately) along the way. But, I will say our planned UTMA account for our now grown son did run afoul with kiddie tax changes over the years-so you can't always count on things staying the same over 18 years. The kiddie tax code changed at least 3 times becoming more stricter over our savings time horizon.

Perhaps that will end up the best middle-ground option... just have a small-ish UTMA for them, and worry about helping them to pay for big purchases later on. I'll just have to read up on the Kiddie Tax rules... But in general terms, it seems that as long as the account is still fairly small, it won't be an issue. We will have to contend with the Alaska PFD income for them ($1100/person this year), which significantly lowers the threshold of investment income they can have & still pay no taxes, but that shouldn't be a show-stopper, and it might just be a "future-me problem."