Minor Beneficiaries – UTMA?
Can an IRA owner name a UTMA account, to be set up upon death of the IRA owner, on an IRA beneficiary form? If so, what are the pro’s and con’s?
Can an IRA owner name a UTMA account, to be set up upon death of the IRA owner, on an IRA beneficiary form? If so, what are the pro’s and con’s?
Permalink Submitted by mk foss on Mon, 2010-06-28 17:57
An IRA owner can set up a UTMA account. Usually the beneficiary designation would go like this:
One-fourth to my grandson Malachi Gordon but if he is a minor, the beneficiary is Monica Gordon custodian for Malachi Gordon under the UTMA of California.
The only problem with using an UTMA account is that all of the IRA benefits are available when the child is no longer a minor. An advantage is that the custodian can make decisions over the account that the child does not have the legal capacity for – like moving the account to another institution.
A trust can accomplish the same thing but also retain control after the child is no longer a minor. A conduit IRA or a trusteed IRA is used for this purpose.
Permalink Submitted by Dennis Prout on Tue, 2010-06-29 17:52
We are working with a young family with three children age 6 and under. The total of all retirement accounts is about $10,000. A trust feels like overkill for this amount. But, if a trust is the better option, could we have a will written that would create a trust for the minors upon death of both spouses, and somehow name those trusts on the beneficiary form(s)?
Permalink Submitted by Bruce Steiner on Tue, 2010-06-29 21:21
Mary Kay: neither a conduit trust nor a trusteed IRA is likely to make any sense. The problem with the conduit trust is that if the beneficiary lives to life expectancy, which happens 50% of the time, nothing will be left in the trust. All of the assets that had been protected against the beneficiary’s potential creditors (including spouses) will no longer be protected, and all of the assets that would have been kept out of the beneficiary’s estate for estate tax purposes are thrown into the beneficiary’s estate. For the problems with the trusteed IRA, see my article on this subject in the September 2009 issue of Trusts & Estates: http://www.kkwc.com/library_cat/uf_trusteed_IRA.pdf.
Dennis: a trust (so long as it’s a fully discretionary trust) is generally better in the sense that it provides more control and better protection against potential creditors (including spouses) and keeps the benefits from being included in the beneficiary’s estate. You can create a trust or trusts to receive IRA benefits either under the Will or in a separate trust instrument. For more on trusts as beneficiaries of retirement benefits, see my article on that subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf. But I agree that trusts are overkill in this case. A $10,000 IRA divided among three children is $3,333 per child. It’s not practical to administer a trust for $3,333. A custodian under the Uniform Transfers to Minors Act is a more practical solution for that amount, notwithstanding that the minor gains control at age 18, 21 or 25 (depending on state law), and it won’t be as well protected against creditors or kept out of the children’s estates.