• Opening An Account For Your Child: 529 vs. UTMA vs. Irrevocable Trust

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    If you’re expecting a child like I am, it may be time to start thinking about your options for opening an account for them.

    529 Plans are educational savings plans designed to help parents save for their children’s education. Some states offer tax incentives although California does not. One major advantage is that the funds grow tax deferred and withdrawals are tax free if used for education. However, if the funds are not used for education, there is a 10% penalty and all growth is subject to taxes.

    Another option which gives more freedom for how the assets are used is a Uniform Transfer to Minors Act or UTMA. This is sometimes referred to as a custodial account as it requires an adult custodian to be on the account until the child reaches the age of majority which is 21 in most states. Once the child turns 21, the funds in the account are legally theirs. This may be a drawback if the child is not mature enough to handle the assets at that age.

    For more control over the assets, parents can set up an irrevocable trust and dictate when and how the funds are distributed to their child. This requires a trust document to be drafted by an attorney and a separate tax return each year making it the most costly option. Parents potentially facing an estate tax may find this a useful tool to gift assets to their children. They can then pay for their children’s education separately reducing the size of their estate by both the gifts and education costs.

    So what is the best option for you and your child? It depends on your family, your goals and your estate size. In some cases, it may make sense to have more than one type of account. I encourage you to talk to a financial advisor about your individual situation.

    Video Produced By Evan Nelson

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