529 college savings plan and UTMA
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If you have established accounts for the benefit of children during your life, you will want to ensure someone is named to control those accounts after your death. This is an often-overlooked component of estate planning. Accounts for children are often established as either 529 plans or Uniform Transfers to Minors Act (UTMA) accounts.
What is a 529 Plan
A 529 Account is established under Internal Revenue Code Section 529 as a savings vehicle for a child’s education. Each state has its own state-sponsored plan. An account owner (typically a parent or a grandparent) sets up an account for the beneficiary. The account owner or any contributor then gifts after-tax dollars to the account. The account grows tax-free, and distributions for qualified educational expenses are not taxed as long as they meet the definition of qualified expenses. Qualified expenses include tuition, fees, books, supplies and equipment. Room and board can also be included.
How does an UTMA Account Differ
States also have their own UTMA laws. Typically, a parent or grandparent establishes an account, for a child, names a custodian of the account and makes a gift to the account. The child is the legal owner of the account, and the child’s Social Security number is used to open the account. However, the custodian manages the assets for the child until the child reaches the age of termination. The age of termination varies by state. For instance, in California and New Jersey, the age of termination may be as young as 18, while in many states the age of termination is 21. Some states, such as Florida, allow the age of termination to be extended, possibly up to age 25, under certain circumstances.
Key Differences
A 529 plan must be used for qualified educational expenses, or the earnings on the withdrawal are subject to incomes tax along with a 10% penalty. An UTMA account can be used for any purpose, not just educational expenses.
Each state has caps on the amount that can be contributed to the state’s 529 plans for a beneficiary. In Massachusetts, that is $500,000, and in New Hampshire the amount is $650,580. However, there are no limitations on contributions to an UTMA account.
In addition, any type of property can be given to a custodian under UTMA, not just financial accounts. For instance, real estate and art can be held under an UTMA designation, although a trust is often a better option for these types of assets. Also, 529 plans are limited to the types of funds the plan offers. While an UTMA custodian can invest in specific stocks and bonds, the account owner of a 529 plan cannot.
Naming your Successor
It is important to identify a successor to control the accounts after your death. Otherwise, the accounts will be inaccessible until a successor is named. The financial institution where the account is held may even require your estate to be probated so that a representative of your estate can name a successor.
For the 529 plan, you will need to name a successor account owner. The successor account owner will be able to change the beneficiary of the plan, choose which of the plan’s funds to invest in, decide how the funds are to be used, and withdraw funds if there is no designated beneficiary.
Regarding the UTMA account, you will need to name a successor custodian of the account. The successor custodian will be able to make investment decisions, make distributions to the minor child, and transfer the account to the child when the child reaches the age of termination.
Reach out to the financial institution that manages the 529 plan or UTMA account to name a successor. If you have a trusted financial advisor, they may be able to assist you with this.
