Allowing a youngster to become financially independent is a priceless gift. In the long run, you'll be able to do much more for the kids you care about financially if you start investing for them now. You can shield children from the burden of high-interest student loans so they can pursue other goals, such as starting a business, buying a home, seeing the world, etc. However, there are many other types of investment vehicles available. Trusts and UTMA are two of the most common vehicles, and each has advantages and disadvantages. You'll learn the fundamentals of trusts, UTMA accounts, and the distinctions seen between the two in this comprehensive manual.
Difference between Trust Funds and UTMAs and Their Working
Basics of UTMA
A UTMA is a custodial account. Hence there are certain guidelines for setting one up and using it. Financial or other assets are held in the name of a minor through a custodial account. A UTMA allows a minor kid to acquire property rights. When assets are given under a UTMA, the beneficiary is the minor. You can't take back your gift now. This action is irreversible, and the donor may not revoke the gift. The UTMA records state that the minor has no legal entitlement to the cash until they attain the age of majority. Until the child reaches the age of majority, the assets are maintained in the name of a custodian.
The Benefits of UTMA
The custodian is only a temporary steward of the child's UTMA assets. Assets held in a trust are not included in a parent's or custodian's estate if they file for bankruptcy, unlike a 529 college savings plan or a bank account in which the parent is named as a joint owner.
UTMA Drawbacks
For federal financial aid purposes, the value of a UTMA will be considered a liability for the beneficiary kid. Student assets are used to determine financial aid awards. Students with fewer resources may qualify for additional financial aid to help cover their education costs. Having funds in a UTMA may affect a student's financial aid award. According to FAFSA, adult custodians who choose to return to school are not affected by this provision.
Basics of Trust Funds
A trust is a legal arrangement in which property is held for the benefit of a third party without the assets' owners having any say in the matter. "Inter Vivos" trusts, sometimes known as "living trusts," are established during the "grantor's" lifetime. It is the grantor's responsibility to establish and fund the trust. The grantor "puts aside" (i.e., "assigns") assets (such as money, property, securities, or other valuables) for the benefit of the beneficiary (or beneficiaries).
The Benefits of Trust Funds
Trust funds' adaptability is an important advantage, making them suitable for various situations. Except as prohibited by law, its terms are flexible enough to accommodate most situations. Payments from an "incentive trust" are made upon the recipient meeting certain goals you set. For example, you could require them to earn a degree from a four-year university within five years and maintain a specific GPA.
Disadvantages of Trust Funds
One major drawback to trust funds is the money they cost. They're time-consuming, and the trustee could be held liable for mistakes. Trustee firms typically receive compensation for their services. If you have a straightforward trust fund, you may choose to hire a professional asset manager.
Conclusion
The uniform Transfers to Minors Act (UTMA) is a piece of legislation that ensures minors have the legal right to accept gifts without the involvement of a legal guardian or trustee. Cash, patents, royalties, properties, and works of art are only some possible forms of property that might be donated. Until the minor reaches the age of majority, the account in question can be managed by the donor or another person designated by the donor. Also, the presents are exempt from taxation for the minor up to a certain value. The Uniform Transfers among Minors Act (UTMA) removes the necessity for a guardian or trustee in cases when a juvenile receives a gift of money or property. Setting up a UTMA account at a local bank is a simple and efficient option.
