There are different ways to transfer assets to the various people that are on your inheritance list, and there is some type of solution to address any objective. With this in mind, we will look at estate planning for minor children in this post.
A testamentary trust can be simply defined as a trust that is contained within a will. It will not go into effect until you pass away, so you can change the terms or remove it from your will at any time if things change.
You could use this type of trust to provide for a minor child if you were to pass away before the child reaches the age of majority. If you are a relatively young parent and you do not have a significant store resources that could be conveyed into the trust, there is another option.
Term life insurance is affordable because it has no cash value. It would serve as an emergency income replacement vehicle if the unthinkable was to take place.
You could make the child the beneficiary of the testamentary trust and name the prospective trustee as the beneficiary of the life insurance policy. In the event of your death, the insurance proceeds would be used to fund the trust.
UGMA and UTMA Accounts
The Uniform Gifts to Minors Act (UGMA) originally emerged in 1956, and it was reworked in 1966. It allowed for the creation of custodial accounts for minors that could contain stocks, bonds, mutual funds, and other securitized instruments.
In 1986, the Uniform Transfers to Minors Act (UTMA) was adopted, and it essentially mirrors the UGMA with one big difference. A UTMA account can hold the same instruments, but it can also contain real estate and other types of tangible physical property.
A custodian administers the account on behalf of the child beneficiary until the child reaches the age of majority. The earnings are subject to taxation, but they are taxed at the child’s tax rate up to a point.
There is no tax on the first $1050 in earnings, and the second $1050 would be taxed at the child’s tax rate. Earnings that exceed $2100 a year are taxed at the parents’ tax rate.
One of the child reaches the age of majority, the assets can be used for college tuition, but they can actually be used for any purpose. When it comes to college, the assets would be looked upon as the property of the student for student aid purposes, and this is less than ideal.
If you are going to set aside money for a minor, and it is definitely going to be used for education, you would be better off with a 529 account. The earnings would accumulate tax-free, and distributions that are used to cover approved educational expenses may be tax-free as well.
You can change the beneficiary if you have a 529 account, and it should be noted that you can take withdrawals for any reason. However, if distributions that are not used for qualified education expenses are taken, there is a 10 percent penalty, and they would be taxable.
For student aid purposes, the assets belong to the parent. This is a major advantage over the custodial accounts if the resources will be used to cover education expenses.
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