UTMA, 529 or a Trust? What Should I Use to Save for My Child’s Future?

If you have children, you understand how important it is to save for your child’s long-term future. You want to set your kids up for success, and it is only natural to want to use best tools to help you achieve that goal. In this vein, there are three popular options that could help you ensure your children’s future financial success: the UTMA, the 529, and the trust. Today, we review these options in order to help you understand which one might be best for you and your family.

The UTMA

UTMA stands for the Uniform Transfers to Minors Act. This Act is a federal law that allows children under the age of majority to receive gifts without any help from a guardian. While the gifts can come in the form of money, they can also come in the form of property, paintings, patents, and royalties.

Importantly, the UTMA allows minors to avoid tax consequences on the money held in their account. If you decide to use the UTMA to gift money to your child, you will also appoint a custodian whose job is to manage the account until your child is of legal age. Also of note is that the funds in a UTMA are part of the donor’s taxable estate until your child turns 18 and takes control of the assets.

The 529

The 529 is specifically designed to help individuals save for college. When you put money into a 529 account, the money is free from tax consequences. When it comes time to withdraw money for your child’s educational expenses, you can also take that money out without suffering tax consequences. While many parents use a 529 to cover college expenses, you can also use a 529 to pay for private school for your child while he or she is younger. The 529 can go toward tuition, as well as room and board, required supplies, and additional fees that a school might impose.

The Trust

Establishing a trust is a third popular option for saving for a child’s future. If you put money into a trust, you name a trustee whose job is to take care of the trust’s assets. You can then direct that trustee to use the trust in the specific way you intend for it to be used. For example, you can instruct your trustee to only distribute funds to your children for educational purposes, or to distribute funds according to a set timeline.

Assets in trusts are typically protected from outside creditors. The trust also allows for significant flexibility, as the trustor (the person funding the trust) has total power to decide the terms on which the trust operates.

Which Option Should I Use for My Child or Children?

There are several things to keep in mind as you decide which tool to use for your kids. We recommend thinking through the following questions:

What is your goal with the account?

Keep in mind that a trust allows for maximum flexibility, meaning your goal can be as specific or broad as you want it to be. A 529, on the other hand, is limited to educational spending, while a UTMA lets your child have total access to the funds when they become of legal age.

How much control do you want over the account?

Once you appoint a trustee for your trust, you cede control to that person or entity. However, the trustee still has a fiduciary duty to operate the trust according to your wishes. With a 529, you as the parent are the owner of the account, and you have total control over how to use the funds. For a UTMA, you can name yourself as the custodian, as long as you understand that this means that the money will be part of your estate when you die.

What tax benefits are you looking for?

Trusts are often subject to the same taxes as individuals. The federal government sets trust income tax rates, which are important to keep in mind if you are considering setting up a trust. The 529 carries significant tax benefits, as it both grows tax-free and can be used without tax consequences. For money in a UTMA, the government will not tax the first $1,300 in the account. The next $1,250, however, is taxed at a child’s rate (which should be lower than the normal rate).

How much do you want to prioritize an easy set up?

Trusts are relatively complex in terms of set up and maintenance. It requires time and effort to retain an attorney to draft a trust document, name a trustee, and file annual tax returns. A 529 and a UTMA, on the other hand, are relatively simple to both set up and maintain.

Are You on the Lookout for Your Boulder Estate Planning Attorney?

Figuring out the right plan for you requires thoughtful planning and careful execution. By hiring an experienced Boulder estate planning attorney, you can ensure you choose the right option for your family’s needs. When it comes to your kids, you want to make sure you are making the most informed decisions possible, and a high-quality Boulder estate planning attorney can help keep you on the right track.

At Braverman Law Group, we understand that family values often lead the way in terms of deciding what to prioritize in your estate plan. As a parent, you want to take any steps possible to ensure your kids’ financial success. Our firm of Boulder estate planning attorneys understand this desire and are well-poised to advise you on how to best achieve your goals. We have the right combination of experience, empathy, and engagement with our client community to know how to represent your interests well.

For a free, no-obligation consultation with one of the Boulder estate planning attorneys at our firm, give us a call today at (303) 800-1588. If you prefer, you can also fill out our online form to tell us about your legal issue and have a member of our team reach back out to you as soon as possible. Our firm covers estate planning, trust administration, special needs planning, Medicaid planning, and more.