Business News & TipsAlan S. Moore / L’Observateur / October 7, 1998Under the new laws, the value of an estate that is exempt from the federal estate taxes rose to just $625,000 this year from $600,000. Thisamount will increase gradually each year until it reaches $1,000,000 in 2006.
If last year’s changes provided you with only incremental relief, now might be a good time to review your estate planning strategies. One wayto shift wealth out of an estate while also setting money aside for minors is to establish a custodial account under the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors (UGMA).
BENEFITS OF “GIFTING” ESTATE ASSETS TO MINORS UTA/UGMA accounts are easy to set up. You can obtain the necessary formfrom your Legg Mason Financial Advisor. With a custodial account you may “gift” cash, investments , or other property worth up to $10,000- $20,000 if you are married to a child, grandchild, or other minor beneficiary each year without being subject to the gift tax. Last year’stax act indexed these amounts to inflation, but indexing doesn’t begin until 1999 and will only increase in $1,000 increments.
Income generated by the account is taxable to the beneficiary. The first$700 of unearned income is not taxed. For children under the age of 14,the second $700 is taxed at the child’s rate. Which is typically lower thana parent’s, and any amount in excess of $1,400 is taxed at the parent’s rate. For children 14 and older, all unearned income in excess of the first$700 is taxed at the child’s rate.
The UTMA/UGMA account is held in custody by an adult, usually a parent or other relative, until the child reaches the age of majority, either 18 or 21 (or, in some cases, 25). While the custodian controls the account and canmake expenditures for purposes that benefit the beneficiary directly, the gift is irrevocable and must be turned over to the child to be sued however he or she wishes once the specified age is reached.
Please note that tax laws governing UTMA/UGMA accounts vary by state.
Check with your Legg Mason Financial Advisor for guidelines.
A FEW CAVEATS While an UTMA/UGMA can help you reduce the value of your estate while “sharing the wealth” with the next generation, there are a few points to consider before you proceed.
Name someone other than yourself as custodian. Otherwise, if you wereto die while the child is still a minor, the value of the account would be attributed to your estate-defeating your original objective.
If the account holder is college bound, any money in his or her name might limit the amount of financial aid offered. In general, financial aidregulations specify that students contribute 35% of their own college costs, while parents are required to contribute only 5.6% of their assets. For tax purposes, remember that children under 14 pay tax on investment earnings at their parents’ rate. If you are gifting money to ayoung child, consider assets that produce minimal income.
(Alan S. Moore is a financial advisor in the New Orleans office of LeggMason Wood Walker, a diversified securities brokerage and financial services firm.)
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