Parents often want to ensure their children have the resources to pursue their potential and lead fulfilling lives. To achieve this, financial support may start at a very young age, allowing for a longer growth horizon and, in many cases, serving tax and estate planning purposes. However, once a child reaches the age of majority, they may not always be in a position to manage assets responsibly. In these cases, parents may wish to adjust how gifted assets are structured to better align with their family’s long-term goals.
While a minor’s ownership of property is limited until they reach the age of majority in their state (typically 18), several mechanisms exist to transfer assets while ensuring proper management. Uniform Transfers to Minors Act (UTMA) accounts allow assets – whether obtained through a gift, personal injury award, or earned income – to be overseen by a custodian until the UTMA termination age (often 21), at which point control shifts fully to the child. 529 plans offer greater flexibility in ownership but restrict how funds can be used, particularly for educational expenses. Perhaps the most protective option – though also the most complex and costly – is a trust, as grantors have almost complete flexibility to craft the trust’s language to align with the contributor’s intentions regarding the control and ultimate distribution of the funds.
In cases where an original gift to a minor no longer aligns with the family’s goals, parents may consider restructuring or redirecting the assets. One option is to spend down UTMA assets on non-essential expenses for the child, such as summer camps or a car, while avoiding expenses like food and housing that fall under the parents’ legal support obligation. Parents could also transfer UTMA assets into a UTMA 529 plan, which limits the child’s ability to use funds for non-educational purposes. In some cases, converting UTMA assets into a 2503(c) trust may provide additional safeguards by granting the beneficiary a brief window (usually 30 to 60 days) to withdraw funds upon reaching age 21. If the beneficiary does not exercise this right, then the assets can remain in trust for continued protection and oversight. For parents who have already made a gift through an irrevocable trust, including a power of appointment provision may offer added flexibility, permitting distributions to be redirected to another individual or adjusted based on changing circumstances.
Ultimately, the key point is that gifting assets to a child can be a powerful way to provide for their future, but flexibility is crucial. Parents often reconsider their approach as their child approaches adulthood, and advisors can play a key role in helping them anticipate potential risks. By choosing flexible savings options from the outset or, when necessary, adjusting previously funded UTMAs or trusts, advisors can help ensure that gifted assets serve their intended purpose: supporting the child’s future in a way that aligns with the family’s long-term financial and estate planning goals!
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