The Pennsylvania Uniform Transfers to Minors Act (UTMA) enables parents, grandparents and others to segregate money or property for the benefit of a minor child until the child reaches age 21, and in some instances up to age 25. UTMA transfers can occur during lifetime or after death, if a direction is made in your Will or Trust. UTMA accounts can easily be created with a bank, brokerage or other institution by designating a custodian for the account under the UTMA rules. The appointed custodian is responsible to hold the property for the child’s benefit until the child reaches the stated age of majority. Other property can also be held under the UTMA statute, such as real estate, securities and similar property, by titling it in the name of the custodian for the benefit of the minor child. It is important to follow the requirements of the Pennsylvania and federal laws to assure the property is designated appropriately. We generally recommend that the individual making the transfer not serve as custodian, to avoid the account being included in the value of his or her estate. Further, we stress naming successor custodians on the account or property to avoid issues in the event the original custodian dies or resigns.

An UTMA account must be for the benefit of only one child, but multiple people can contribute to it. UTMA accounts are often preferred over a trust due to the ease of creation and administration. However, unlike a trust that can designate any age for distribution, the UTMA account becomes the property of the minor upon attaining age 21 (or at a later age (up to age 25) if the property is so designated at the time the account is created). Until the child receives the account or property, the custodian can use or expend the funds for the benefit of the child. If there is concern about a child receiving property at age 21 or even up to age 25, a trust may be preferred over an UTMA account.

The Federal law also treats UTMA accounts favorably under the gift tax laws. The Internal Revenue Code imposes a tax on gifts of property that do not fall within an exclusion or exemption. Every year any person can gift $13,000 to another person without triggering any gift tax. This is referred to as the annual exclusion. This amount can be doubled ($26,000) if the gift is made by spouses who agree to treat one-half of the gift as made by each of them. There is one important catch: the person receiving the gift must have immediate and present use of the gift for it to qualify as an annual exclusion gift. If the ability to use the property is delayed (such as a future interest gift), or if the gift exceeds $13,000 ($26,000 in the case of joint spouse gifts), then a person’s lifetime exemption kicks in. The lifetime exemption is the total amount you can give away during your life or at death free of any estate or gift tax. The lifetime exemption amount in 2012, is $5.12 million dollars. Therefore, as long as your total lifetime gifts are under $5.12 million dollars, there would still be no gift tax. While a gift to a child that is delayed until age 21 would normally be a future interest gift, the federal law treats UTMA transfers as annual exclusion gifts. This does not, however, apply to UTMA accounts that delay possession past age 21. These accounts will not meet the requirements of the federal law (that the children receive the property at age 21) and would not be considered an annual exclusion gift.

Any income (over $1,900) earned on UTMA property is still taxed at the parents’ tax rates, unless the child is over the age of 19 (and not a full time student), in which case it would be taxed at the child’s tax rate. UTMA accounts are a great way for grandparents, aunts and uncles, and other relatives to gift money to children at a young age. They are very useful savings vehicles for education costs, and unlike a 529 plan or other education savings plan, if the money is not used for education, the child or grandchild can use the funds to start a business, buy a home or to invest responsibly upon reaching age 21.

A member of our Estates Department would be happy to answer any questions you may have or provide you with more information about setting up an UTMA account.