September 2001
Uniform Transfers to Minors Act: How to Help Your Grandchildren and Avoid Federal Estate Taxes

This month’s column is primarily directed to grandparents. Those wishing to avoid federal estate taxes may also benefit, as well as those individuals who want to provide gifts to children, regardless of the relationship.

Utah’s Uniform Transfers to Minors Act can facilitate making gifts to grandchildren without actually allowing them to possess your gift until they become “adults.” Depending on how you make your gift under the Act, this means your grandchildren must reach 18 or 21 years of age.

Utah Law generally defines a minor as one who has not yet reached 18 years of age. However, under the Act, a “minor” means an individual who is not yet 21 years of age. This permits you to extend the time period before a minor can take possession of your gift.

Throughout this discussion, any minor may receive gifts, irrespective of whether or not such minors are grandchildren. They could be nephews or nieces or just friends.

By now you may be asking, why do we need an “Act” to make gifts to minors? In fact, you do not need the Act. But the Act provides protections for your gifts and may allow you to avoid federal estate taxes.

To learn how the Act helps, let us consider the following examples. First, assume you want to make annual gifts to a grandchild for his or her education. You could put the money in a piggy bank and hope it stays there until your grandchild attends college or some other educational institution.

I suspect that such money, particularly as it increases in amount over the years, would not remain in the piggy bank. Also, it would not gain any interest. Most likely, the money would be spent on video games, clothes, cars, and just about everything other than education.

Instead, you could deposit the money in the bank, a bank that pays interest. But how do you prevent your grandchild from withdrawing the money and using it as though it had been in a piggy bank? Or, who should pay the income taxes on the interest earned?

The Act provides an easy solution to these issues. First, you should establish an account with a financial institution, perhaps a bank, and designate the financial institution “as custodian for [grandchild] under the Uniform Transfers to Minors Act.”

Second, assign the grandchild’s social security number to this account for all tax purposes. All interest earned will become income to the grandchild. Since the grandchild’s income will generally be less than required for payment of income taxes, no taxes will be owed.

Also, your grandchild generally will not be able to obtain your gift until he or she reaches 21 years of age. The “custodian” of your gift, usually the financial institution, has discretion to use some or all of your gift for the grandchild’s benefit. Also, your grandchild, upon reaching 14 years of age, may petition the court to order the custodian to use for the grandchild’s benefit part or all of your gifts.

While this method of giving gifts to your grandchildren has attractive features, it is irrevocable; you cannot regain control over your gifts nor withdraw them. Once you deposit money into a custodial account under the Act, it is 100% vested with your grandchild. The only remaining step is for your grandchild to actually take possession of your gift or the gift is used by the custodian for your grandchild’s benefit.

By making a gift to your grandchild under the Act, you are also reducing your estate for federal estate tax purposes. Since your gift is irrevocable and you no longer have any control over your gift, it is clearly outside your estate.

You could, perhaps, set aside some money for your grandchildren and retain control over it. But, any such money that was intended for your grandchildren would be part of your estate for estate tax purposes. Giving money under the Act, however, avoids those estate taxes.

There are of course other mechanisms beside than the Act which avoid estate taxes while also transferring gifts to your grandchildren. When planning on how to make gifts to your grandchildren or other minors, you should contact an Elder Law Attorney. To locate an Elder Law Attorney, check with the National Academy of Elder Law Attorneys at (520) 881-4005, or your local Yellow Pages.

YOUR QUESTIONS: Do you have a particular question that you would like answered? To better serve the readers of the Utah Spirit, please direct your questions in writing to Michael A. Jensen, Elder Law Attorney, PO Box 571708, Salt Lake City, Utah 84157-1708, or by e-mail at: mike-spirit@utahattorney.com. From time to time, I will attempt to answer some of those questions.