Alternatives to the Uniform Gifts to Minors Accounts
Varnet, Theresa, The Exceptional Parent
This month's column expands on Randy Neumann's Financial Planning column on Uniform Gifts to Minors Accounts (UGMA) in the March 1997 issue. Depending on the state you live in, these accounts may be referred to as Uniform Transfers to Minors Account (UTMA).
While I agree with Randy that the UGMA or UTMA offers families a relatively easy means of saving for a child's future, these accounts are not generally appropriate for children who may require future government assistance or who may be in need of a guardian. Most government assistance program -- such as Supplemental Security Income (SSI), Medicaid, or those provided by state rehabilitation, mental health or mental retardation agencies -- restrict benefits and services to people who are disabled and have virtually no assets. If a person with a disability who has assets m his or her name transfers these assets to a trust at majority (18 or 21, depending on the state), there is often a five-year waiting period before he or she will be eligible for government assistance. Any loss of government benefits substantially reduces the real value of the GMAA or UTMA assets. An exception to the waiting period requirement is the OBRA '93 "payback" trust, which allows a person with a disability to transfer assets to an OBRA Special Needs Trust without a five-year waiting period. (For more information on OBRA '93 trusts, see "Financial Planning," October 1996.)
My second concern about using UGMA/UTMA, is that the funds may trigger the need for a guardianship of the estate or a conservatorship when the beneficiary reaches age 18 or 21 and gains access to the funds. If the person is disabled and unable to handle or her financial affairs due to a physical or mental impairment, he or she may require a guardianship once the funds become legally available. Guardianship of an estate can be an expensive and intrusive means of protecting a person with a disability (For alternatives, see "Financial Planning," March 1997).
There are alternatives to the UGMA that allow parents to save for their child's future.
During their lifetime, parents can make gifts to an irrevocable trust that includes "Crummey" withdrawal powers. A "Crummey" power (see box) is language in a trust which allows this gift to qualify for the standard $10,000 per year gift tax exclusion The use of irrevocable trusts with "Crummey" powers is a complicated area of law. Families should consult with an attorney familiar with tax law, estate planning laws and government benefits. The trust should be written as a supplemental needs trust, which limits distributions to funds for purchases of goods and services not otherwise available from government program.
However, use caution. If the beneficiary of the trust becomes eligible for needs-based government benefits, the Crummey power may disqualify the beneficiary for such programs as Medicaid and SSI. The government looks at gifts as assets, whether they were tax-exempt presents or not. There may be other options available including adding other children's names. Your gift is then to the children's trust, not to one of the children. Who actually uses its assets is inconsequential to the IRS. But remember, each child named must sign a Crummey power letter. Though the legal paperwork stipulates that all have access, the family understanding is that one child will benefit. Make sure, however, that your other children not only understand the purpose of the trust, but will adhere to your wishes.
Another variation on the above is the use of an irrevocable life insurance trust with special needs language. Just as with the trust above, disbursements should be limited to funds for purchases of goods and services not otherwise available from the government. …