By Kathleen B. Vetrano, Esquire
King of Prussia, PA, and the Philadelphia Main Line
Frequently parents choose to set aside assets for their children for the purpose of increasing the children’s financial security, for providing a college savings plan, and/or for tax planning purposes. Before the passage of the Uniform Transfers to Minors Act, (UTMA), formerly known as the Uniform Gifts to Minors Act, a trust or guardianship was required. These methods were unwieldy and expensive for all but large gifts. The UTMA provides a way to diminish the administrative expense and complexity while preserving certain federal tax benefits for the transferor. In Pennsylvania, the Pennsylvania Uniform Transfers to Minors Act (PUTMA), 20 Pa. C.S.A.§§ 5301 to 5320, provides an inexpensive easy mechanism for giving property to minors. Under this Act, the custodian can invest the funds, and apply them as needed for the minor’s support or education.
It is simple to make an UTMA gift because there is no trust involved. For minors under 14 years of age, the first $750.00 of earnings is tax-free. Earnings between $750.00 and $1,500.00 are taxed at the child’s rate. Earnings above $1,500.00 are taxed at the parents’ rate. All earnings for recipients 14 years of age and older are taxed at the child’s rate. The minor actually owns the property transferred under the PUTMA. The transfer is irrevocable and the custodial property is indefeasibly vested in the minor. The custodian is the individual who holds, manages, invests and dispenses the property during the child’s minority. The funds can be used as needed for the minor’s support and education; however, the custodian must deliver the property and interest, to the child when he or she reaches the age of twenty-one.
The downside to the PUTMA is that the minor child, in Pennsylvania, must receive all of the property at the age of twenty-one. There can only be one custodian, and the transferor should not be the custodian. If the transferor serves as the custodian of the PUTMA, the funds being transferred will be included in the transferor’s taxable estate for federal estate tax purposes.
There are other “gifting” programs that have the specific purpose of providing for education expenses from high school through graduate school. Some permit a change of beneficiary, which is not possible with a PUTMA. Others penalize you for withdrawals. A relatively new option is a “ qualified state tuition program” which makes the contributor eligible for the federal gift tax exclusion. Neither the donor nor the beneficiary realizes any taxable income while the contributions are being invested. There are significant limitations to this option. Another alternative is the “education individual retirement account” which like the qualified state tuition program must be used solely for education. A considerable disadvantage to this plan is that the annual contribution limit is restricted to $500.00.
PUTMA, unlike a trust for support or education, is a very convenient and effective way to make gifts to children. Its use, however, should be limited to situations where the transferor is agreeable to having the property and interest turned over to the child at the age of twenty-one.
