Client Compass, Divorce Law Monitor

Planning for Your Children’s Financial Security

June 5, 2020


Last month I reviewed how to approach the extremely important decision of choosing a guardian for your minor children. Let’s now look at some vehicles for ensuring financial stability for your children in the event of your passing, which is particularly important if you are divorced. The options outlined below may already be familiar to you; hopefully, this information can help get you started on deciding which may be a good fit for your circumstances. Keep in mind any special considerations, such as setting aside money specifically for education or medical expenses, your child’s age and ability to manage money, or any special needs for which you need to account. Weigh these in conjunction with the ease and expense of setting up and administering each option.

Establish a Trust. A trust is undoubtedly the best vehicle for managing and protecting your children’s assets. A trust can be structured in numerous ways to accommodate your specific intentions. The trustee you name can provide asset management and decision-making in accordance with the parameters you specify.  Distributions of trust assets to your child can be limited to specific purposes like education and health expenses, or you can give the trustee broad discretion in determining the appropriate use of the trust assets. Assets held in trust may be protected from your child’s creditors and can also protect a child from irresponsibly squandering the funds.

Once established, you and anyone else can gift assets to the trust during life or at death. If the trust is revocable, you, as the creator of the trust, can change the trust terms or revoke the trust altogether at any point. However, a trust is a complicated legal document that should only be prepared by an estate planning attorney.

Establish an UTMA account. The Uniform Transfers to Minors Act (“UTMA”) allows gifting to a minor without the need for a guardian or trustee. With an UTMA account, property is distributed to a designated custodian of the account, who can collect, manage, and invest the property on behalf of the minor, or use the property for the minor’s benefit. When the minor child reaches a designated termination age, the account distributes to the child outright, unless he or she chooses to establish a trust to receive the assets (in Massachusetts, the termination age is 21; this varies by state).

An UTMA account is easy to set up and fund at any bank, or you may simply state in your Will that gifts to a minor child will be paid to an UTMA account, which will be established after your death. An UTMA account can be used for any type of tangible or intangible property, there are no restrictions on how the account assets are used, and a custodian’s management of an UTMA account involves no court oversight, making it a relatively flexible option. But there is no guarantee that the account beneficiary will choose to transfer the assets to a trust or invest them responsibly when the account terminates. So, while an UTMA account may be a convenient option, without any spendthrift protection, it may not be appropriate for assets of significant value.

Fund a 529 Plan.  529 plans are extremely common and can be used for qualified educational expenses only.  This type of investment account is simple to set up online through several different companies, and anyone can contribute to it. The account is managed by a designated investment company that makes all investment decisions based on the projected time when the funds will be needed. Whereas any gift up to the annual federal exclusion amount (presently $15,000 per recipient, per year) will not trigger a gift tax liability, an additional benefit of a 529 plan is the ability to front-load the plan with five years’ worth of annual exclusion gifts in one year.

Distributions can be made from the 529 account income-tax free and no tax is paid on capital gains, interest, or dividends within the account. There is no deadline to use the funds. Of course, since a 529 plan can only cover educational expenses, it serves a limited purpose as part of your long-term planning. It should also be noted that if the beneficiary of the account does not use the funds for qualified education expenses, the funds can be rolled over to qualifying family members of the original beneficiary without any tax consequences, or to any other beneficiary with a 10% penalty and a tax on distributions at the new beneficiary’s income tax rate.

This provides a quick overview of just a few of the options available to you. If you are divorced, be sure to consult the provisions of your Judgment of Divorce or Separation Agreement to be sure you have met your obligations to your children there before engaging in any of these strategies. Further, there may be sophisticated tax or estate planning strategies that would best serve your needs. Consult with an estate planning professional to explore all your options in detail.

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