In this episode of the Good Steward Law and Wealth Podcast, host Ledby Jennings walks listeners through the most effective ways to gift money to minor children within an estate plan while maximizing tax benefits and protecting the assets. He begins with a relatable anecdote about the tooth fairy to illustrate the question of who truly owns money given to kids. The discussion then covers three primary vehicles: (1) Uniform Transfers to Minors Act (UTMA) accounts – how they work, state‑specific age rules, the annual gift‑tax exclusion ($19,000 per individual, $38,000 for married couples), the kiddie‑tax thresholds, and the downside that UTMA gifts are irrevocable; (2) 529 education savings plans – their tax‑advantaged growth, state income‑tax deductions (e.g., up to $10,000 in Arkansas for married filers), qualified expenses now including K‑12 tuition, the ability to roll over up to $35,000 to a Roth IRA, and the flexibility to change beneficiaries; (3) Trusts – how they protect assets from creditors, divorce, and bankruptcy, can set age‑based access limits, but offer no direct tax advantage. Jennings proposes the optimal structure: a revocable trust that owns a 529 plan, providing succession planning, trustee control, and the ability to adjust beneficiaries or roll over funds. He ties these strategies to broader tax planning, explaining how lifetime estate‑tax exemption ($13.9 million per person) and gift‑tax exclusions can be leveraged to reduce future estate‑tax liability. Practical advice is given for parents and grandparents to fund these accounts up to the annual exclusion limits, emphasizing the stewardship principle of using tax‑efficient gifting to benefit the next generation. The episode concludes with a call to action to schedule a consultation with Good Steward Law.
Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.
Welcome back to the Good Steward Law and Wealth Podcast. Glad to have everyone here today. And today we're going to talk about planning and gifting to minor children and how are the best and most effective ways to do that, especially within your estate plan. Um, we'll kind of think on it. This, um, brought up a story when, you know, kids and various things lose their teeth, sometimes the tooth fairy brings them money and pays them for that, those teeth. But I got to thinking, you know, whose money is that? You know, who are you giving it to? Is it actually your young kids now, or is it money that you gave them that you're going to manage for them. This is kind of an unusual example, but a lot of people wonder about that because they want to make gifts to their kids. They want to provide for them, maybe set up accounts for them, but they don't want to give this money or any money to their kids when they're young and underage. They want to make sure it's given to them in a responsible manner. And what a lot of my clients want to do is they want to do it in a way that helps them with taxes as well. So I have a lot of people come in and say, hey, how can we give money and get tax benefits today but provide for my kids with some flexibility. And that's what we're going to talk about today. What are the various ways that you can give to your kids while they're underage? You know, maybe you have some extra money right now, or maybe your parents, you know, their grandparents are wanting to make some gifts right now and give to them. That's what we're going to talk about today. So one of the common methods that you may have heard of is a UTMA account. I think that stands for Uniform Minor Trust Act. It was an act that was passed that allowed the creation of accounts. Basically, it's like an investment account that you can put money into until the child turns 18. So it's not theirs. It goes to them. It grows for them. You can contribute to it, but they don't get it until they're 18 or 21. Each state varies in the age that you can get the account. Arkansas is actually on the low end. Not many people have 18. Most states have 21. My state is 18, but a lot of accounts you can contribute to this account until they're 18, but they still don't get it. It's still managed by you or whoever you name until they are 21. Even some states make that age go until they're 25. So that's why a lot of people like these accounts, because they can gift to it and not relinquish control to their kids while they're young and potentially irresponsible. So why do they— why do you even bother setting up these accounts? Well, like I said, it's a way to gift to your kids, but why Why not just create an account in your own name and put money in it? Well, it could have negative tax consequences down the road when you finally gave that account to the kids. You know, maybe that account is worth a good bit of money now and there would be gift tax consequences. Because if you gift it to them today, you could stay under the gift limit and not have negative gift tax consequences. And just as a reminder, we did episodes on tax and gifting, but the way the law sits right now is you can gift $19,000 to any individual without a gift tax tax. And if you're married, you double that number, so $38,000. So you and your wife could gift your kids— kid— $38,000, each of your kids $38,000 without tax consequences. So that's an important thing to keep in mind. But that's why it's important is when you create these UTMA accounts, you can do a completed gift. So gift it today, you know, throughout that gift tax exemption, and it's taxed to them at a beneficial rate. So they call it the kiddie tax, and I think that number. So say you gift a good bit of money to an account and it makes income. As long as that income's under $1,350, then there's no income tax. Now that's the first $1,350. The second $1,350 is taxed at that child's rate, and maybe if your kid's underage, they aren't making any income, so that rate very well could be zero. But anything over that, so over $2,700, would be taxed at your personal rate. So if it's an amount that's not making a bunch of income and it's under $2,700, then you can get some income tax benefits from doing that. So that's why you hear about a lot of people creating UTMA accounts, and your advisor or bank even could guide you in how to set those up. Now, some of the downsides to this type of account is once you set it up, it's an error. It's a completed gift, so it's irrevocable. It's set in stone. You can't change it. So they're going to get that money that you put in there when they're 18. And the reason I don't like that is it locks us into something in the future that we can't predict. We don't know what's going to happen with our kids. Are they going to be responsible at 18? Um, what are they going to use it for? You know, anything could have happened in their life that makes this money not a good thing to go to them when they are 18. Um, but it does have advantages. So that's one account to think about. Now the other account, and this is probably my favorite, um, way to leave kids money, is a 529 account. So you've probably heard of a 529 account. Uh, basically it is an account that pays for their education. Um, 529, at least from the code that set it up. But usually each state has their own 529 plan, but any advisors can also create the accounts for you, like Edward Jones, Ameriprise, whoever it is, Charles Schwab. They have, uh, 529s and are custodians of that. But the purpose of a 529, like I said, is to pay for education, but it's also tax-advantaged. So when you gift to those UTMA accounts, there's not always advantages, but a 529, you get a state income tax deduction when you gift to that account. I was looking to see what Arkansas's exact number was. I think if you're married, you can, you can get a $10,000 income tax exemption up to that if you're gifting to a 529 account. But even then, the money grows tax-free in the account, and then when they take it out, use it for education, it's not taxed either. So basically it's a tax-advantaged account similar to an HSA, but you have to use it for education when you take it out, because if you don't, then there's penalties for taking it out and you have to pay the taxes on it. So if it's used for education, it's a really valuable account. Now some people wonder, well, what if they don't? Or, well, first, what types of education can it be? And the law has been expanded throughout the years. It now— originally it just included college, Now it also includes vocational. It can include housing at college. It can include supplies like books, computers, whatever it may be. It can even include K-12 tuition. So now it even covers, you know, if you go to private school, it covers school from the time you're kindergarten through high school. So if you fund a 529 account with enough money, it can pay for your school for your entire kid's life. Uh, there are limits on how much you can pay K through 12, and I think those vary by state, but it can pay for that. Um, now what if you don't use it for school? So what if you create a 529 for your daughter and either she doesn't go to college or maybe she goes to college on full scholarship, doesn't need the money? Well, you can roll it over, one, to a Roth IRA. So she could take that money that she didn't use and put it in a retirement account for herself. Um, now there are limits on that. I think the number is $35,000 is the maximum you can roll over to a Roth IRA. But say you did that, she rolled over the $35,000 to the IRA, and there was still money left in there. You maintain the power to change the beneficiaries as well. So just because you set up a 529 for the benefit of your daughter doesn't mean you can't change it to also the benefit for your son, um, even grandsons, even people that aren't related to you. You can change the beneficiary. So there's really no risk in overfunding a 529 because you can always change the beneficiary and roll portions of it over to a Roth IRA. Um, so that's why it's my favorite account, because you get the tax advantages and there's a ton of flexibility in there. Um, now that's— so the first account that you can set up for minors, a UTMA. The second is a 529. The third is a trust. And obviously we talk all about trust, uh, on this podcast, and that's what I I am— my legal background is in— is I draft trusts for people and almost always set up a trust, um, for kids. That's why parents come in wanting a trust for them. Now, the good thing about a trust is it can, uh, protect the kids. So whatever you leave to them in a trust is protected, like I've said, but from creditors, divorce, bankruptcy. And you can also put, um, age limits on when they can access money. But there's not really any tax advantages to it. So within a trust, most of the trusts I draft are created from revocable trusts, and they don't come into play till the parents are gone. And what we're really talking about today is how do you provide for your kids while you're living? So one good way to do that is a combination of a 529 plan and a trust. So you can create, buy a 529 plan, or create or open a 529 plan in the name of your trust. So then it is still for your kids, but it's owned and managed by your trust. And the reason you want to do this is it provides succession for the account. So within your trust, you've likely set up, you know, successor trustees that will take over if you're unable. You've set up successor beneficiaries, all that. So there's always going to be a trustee managing your trust, meaning if that trust owns a 529, they can then manage the beneficiaries, manage how the benefits are distributed, all that. So that, you know, you set up that 529 in the name for your daughter, but it's owned by your trust, then your trustee can decide when they make the distributions for education, when they roll it over to a Roth for her, or when they change the beneficiaries. Maybe it's for your kids, your grandkids, great-grandkids. So then it really takes the risk off of overfunding a 529 because you set up generational beneficiary succession within your trust. So if I could design the perfect way for someone to leave money to their kids or grandkids and provide for them while they're living, it would be create a revocable trust and then open a 529 in the name of that trust. That's kind of a foolproof way to provide for the kids. Always think about how do you encourage parents or grandparents to give and set up these types of accounts for kids. A lot of times they just do it out of the goodness of their heart. They want to provide for them. But everyone wants tax help. You know, you want tax advantages. So one tax advantage is, like I mentioned, in the 529, you get income tax deductions. So a good thing to go to parents or grandparents and say, hey, you're paying into the government every year on taxes. Why not pay some of that money to the kids or grandkids instead of the government? And that almost always is a way to encourage people to set up 529s because they're going to pay the money somewhere one way or the other. Why not to their kids' and grandkids' education? The other thing is estate tax. Not many people have estate tax issues because like I said, the exemption right now is $13.9 million per person. So if you're married, multiply that by 2. You have to be worth over that much money to have an estate tax issue. But like I said, I've said before, the exemption changes depending on who's in office. Right now the exemption is as high as it's ever been, but, you know, 20 years ago I think it was as low as $300,000. So people did have an estate tax issue. And one way to solve for the estate tax is to make gifts during your lifetime to lessen your net worth and get those assets out of your name, essentially. So you can like make gifts if you're over the estate tax exemption, you can make gifts to someone else to get it below the estate tax exemption, and that saves your estate from paying estate taxes. So one way to do that would be fund 529 accounts for your family members, and that lessens your state tax, um, liability. And I, I usually encourage clients, if they have extra money, gift all the way up to the maximum gift tax exclusion into these 529 accounts, which is, like I said, $19,000 per year per individual. Um, and even if you go over that in any given year, then there still may be no gift tax owed because it comes off your lifetime exemption, which is that same $13.9 million number. Again, that goes a little in depth on things, but we did a whole episode on, uh, gift taxes and estate taxes. So go listen to that and you'll kind of see how gifting into 529 plans, UTMA, or trust play with the estate and gift tax exclusions and how advantageous it can be within your estate plan. So this is just one example to show you how important estate planning is when done holistically. When you're thinking about gifts, you're thinking about financial planning, but you're also thinking about succession and providing for the next generation. And we always say do it in a tax-efficient manner because that's what being a good steward of our wealth is, and doing it in a way that protects the kids and provides for them. So thank you all for listening to the Good Steward Law and Wealth Podcast, where we consider everything a gift, and it is our job to do be the best with what we've been given.
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