Some parents or grandparents decide to open up UTMA (“Uniform Transfers to Minor’s Act”) bank accounts for their children or grandchildren. But there are two major problems with doing that. First, the child or grandchild cannot use the money in the account until they are age 18; second, they can take all the money at age 18.
UTMA accounts are owned by the child, not you. That means that as soon as the child reaches age 18, they have the legal right to deal with the money in the account any way they want. Of course, the problem is just that. How many 18-year-olds will want to invest or reinvest the money for their future needs? Isn’t it just as likely that a teen with a chunk of money would want to buy a large Harley? Worse, since you are simply the custodian of the money for the child, if you mess up and lose money, the child can sue you! Suppose you decide to invest the money in a family business and that business goes bankrupt. Even if you gave the child the money in the first place, you could be sued by the child and could be liable for losing it.
People who want to make sure their beneficiaries avoid probate will often put their property into the names of their children as well as themselves. That way, when the person dies, the property passes to the child and will not have to go through probate. Sounds like a good idea, but it has consequences that are not.
Let’s say you put a child’s name on your home with you. Simply doing that exposes you to the child’s creditors. More troubling, putting real property in the name of a child can cause tax disadvantages to the child. Suppose you purchased your home for $50,000 twenty years ago. Your home is now worth $500,000. If you put your home into the name of your child, the child’s tax basis in the home is the same as yours, $50,000. That means if you die and the child wants to sell the home, they will owe tax on the difference between $50,000 and $500,000. On the other hand, leaving the home to your child through your will or trust allows the child to take the interest in the home at “date of death” value, or $500,000. That way, if the child sells the home for $500,000, there is no tax.
So, how do you take care of your child or grandchild? Use the vehicle of a will or a revocable living trust to pass the property to the child or grandchild when you die.
But, how do you avoid the problem of having property pass to a 21-year-old? By making sure in your will or trust that the child has to reach a certain age to have access to the property.
If, for example, you are concerned that the children or your grandchildren will waste money left to them at a young age, it is a simple matter to hold the property for them in trust until they reach an age where they are less likely to waste it. The majority of my clients set up trusts to hold the property, whether it is real property or cash, in trusts for the child that the child can access when they are 25 or 30-years-old.
I had one client who decided their child would not have access to brokerage accounts until he was 55. When I asked, really, age 55? The parent said, “well, my son cannot save any money, so I want to give him the money for his retirement.” Strange, but hard to argue with the logic.
What about leaving property to estranged children or grandchildren by mistake? I saw a statistic the other day that did not surprise me, but was disappointing. Apparently, 66% of the population does not have a will or a trust. Without a will or a trust, you have no say at all about where your property goes on your death. Courts may very well give that property to estranged wives, husbands, children or grandchildren. So, while you may rely on one grandchild who has taken care of you and wish to give all your property to that grandchild when you die, if there are other beneficiaries, like children or other grandchildren, those beneficiaries will have a claim on the property at least equal to the claim of the one grandchild you wish to reward.
Unless you put your intentions in writing in the proper way, you have no control over how your property is distributed on your death. And apparently, 66% of you have no control over your property.
The solution is a simple one – get a will or a trust. Specifically designate the person or people you wish to have your property when you die. Put that property into a further trust for the child or grandchildren until they are old enough to wisely use it. And, gain peace of mind knowing your property is going to go to the loved ones you have chosen. I tell my clients that creating a will or a trust is your last act of love and affection for your loved ones.