I was so excited when Erin, my first child, was born this past September. I was certain then, and still am, that there has never been such a brilliant or beautiful little girl. Like any new parent, I beamed with pride, but at the same time, I was apprehensive about what her future may hold.
Being that Erin is my first child, I started thinking about the necessity of planning for her financial future. How much will college cost and how will I pay for it? What if she follows in her mother's footsteps and decides to go to graduate school? What if Erin needs help with a down payment on her first home? It wasn't long before I found my head swimming. These issues that I had discussed time and time again with my estate planning clients suddenly became much more real and personal.
I know that by planning ahead, funds may be set aside now to be used in the future to pay for college tuition, start a nest egg, or pay for a down payment on a first home. For 2012, a person may give up to $13,000 to as many individuals as the person chooses without requiring the filing of a gift tax return. This means that a parent or grandparent may gift $13,000 to each of their children or grandchildren this year without paying any gift tax! Because funds are being given to a minor beneficiary, the strategy used to gift the funds is of utmost importance. Prior to making any financial gifts to a minor beneficiary, you should meet with an MH Estate Planning attorney to ensure your objectives are met.
Unfortunately some individuals do not understand that planning must take place before the gifts occur. Under Arizona law, a minor beneficiary is restricted as to how much money can be in their name outright. If a minor beneficiary receives too much money, the Probate Court will get involved by appointing a Conservator to manage the minor beneficiary's financial affairs. This person, who may or may not be familiar with the minor beneficiary, must report to the court every year until the funds are depleted or the minor turns 18. Conservatorships are time intensive and have extensive expenses associated with them.
A common strategy to transfer wealth is to create a Custodial Account with a financial institution for the minor beneficiary in which funds may be directly deposited. With this type of account, someone other than the minor beneficiary (such as a parent or grandparent) is the custodian of the account until the minor beneficiary turns 18 or 21 depending on State law. Prior to obtaining the requisite age, the custodian may use the funds for the benefit of the minor beneficiary. Families should be careful when using this strategy as the custodian must give control of the account to the beneficiary once the beneficiary reaches the prescribed age of 18 or 21. Once the beneficiary gains control, they have no restrictions on the use of the funds. Rather than use the funds to pay for educational expenses, a beneficiary could use the funds to take a trip around the world!
Yet another strategy is using a 529 Plan. These types of plans allow for funds to be used to pay for post-secondary schooling. Some plans allow for funds to be withdrawn to purchase school equipment, such as a new laptop, while others restrict the use to tuition only. If a family wants the money to be used for more than school related expenses, this type of strategy should not be used.
The most flexible and comprehensive planning strategy is to use an Irrevocable Trust with Crummey powers. The creator of the trust determines who will manage the funds, how and when the funds will be used and when, if ever, the beneficiary may take control of the funds. The creator may build incentives for beneficiaries or restrictions on the use of funds. If the creator chooses, the trust may be set up so that a beneficiary receives a distribution of $10,000 for obtaining a Bachelor's degree from an accredited college or university, or may restrict access to the funds if the beneficiary is suffering from substance abuse. There is no other strategy that provides for such customization. In my case, I do not know if Erin will need assistance paying for college or if she will be financially responsible at age 21, therefore I see the flexibility and customization of an Irrevocable Trust as being the best planning option available.
If you are thinking of planning for a minor beneficiary's financial future, please call us for a free consultation in which we can identify which strategy best meets your needs.
Contributed by MH attorney Katherine O'Connell