Give Your Grandchild a Gift That Can Last a Lifetime

Birthday parties, holiday gifts and vacations: For many people, being a grandparent is an
opportunity to share accumulated wealth with a grandchild. But have you considered
giving your grandchild a gift that can last a lifetime?

Each state has adopted a Uniform Gift to Minors (UGMA) Act or a Uniform Transfer to
Minors (UTMA) Act. These acts allow individuals — parents, grandparents, other
relatives and even friends — to set up a custodial account for the benefit of a minor.

UGMA/UTMA accounts are not difficult to set up, because they don’t require complex
paperwork or trust documentation. There’s no limit on the amount of money you may
contribute (although, keep in mind that if you give more than $11,000 as an individual or
$22,000 as a couple to a child in a year, your gift may be subject to federal gift taxes).

And in most states, securities, insurance policies and annuity contracts, real estate, and
other types of property can be contributed to an UTMA account (although real estate and
other types of property cannot be contributed to UGMA accounts).

While the funds in these accounts are the property of the minor, the custodian (who can
be a contributing relative) is responsible for managing the assets until the child reaches
the designated age of majority, typically either age 18 or age 21. At this time the assets
pass directly into minor’s control.

One of the greatest benefits of an UGMA/UTMA account is the tax savings they can
potentially offer. For example, if you save for a child’s future by depositing money in a
taxable account in your own name, any income generated by that account will be taxed at
your highest marginal tax rate — in some cases up to 35%. But if you save for a child by
depositing money in an UGMA/UTMA account, some or all of the income generated can
be taxed at a lower federal income tax rate. For the 2005 tax year, if a child is under age
14, the first $800 in investment income is not subject to tax; the next $800 in investment
income is taxable at the child’s tax rate (in many cases 10%); and any investment income
in excess of $1,600 is taxed at the parents’ highest tax rate. After a child reaches age 14,
all of the investment income is taxed at the child’s rate.

This can sometimes result in a significant income tax savings. Consider an investment of
$10,000 that generates $1,000 in taxable investment income over the course of the year.

If you hold these assets in your name, and your top marginal tax rate is 25%, you’ll pay
up to $250 in federal income taxes on that income. If those assets are in an
UGMA/UTMA account for a child who is younger than 14, however, the federal income
tax bill will likely be only $20 (no taxes on the first $800 and 10% on the remaining
$200). Please note, however, that state income taxes can still apply depending upon your
state of residence. I always advise people to consult with their own qualified legal, tax,
and financial advisor prior to making any financial decisions.

We can help you set up an UGMA/UTMA account and transfer the appropriate cash
and/or securities into it; we can also give you other options for gifting.  Please contact me for more information. To schedule a complimentary meeting, either in person or by telephone, please use the use the CONTACT US link and let me know.

I look forward to meeting you!