When a gift is made to a minor, defined as an individual under eighteen (18) years of age, there are unique issues to consider.
Since a minor lacks legal capacity to own assets, the Uniform Transfer to Minors Act (UTMA) was created to protect assets that are gifted to minors. The Act details when minors can receive outright control and ownership of assets managed by one or more custodians on behalf of the minor child.
One of the primary advantages of establishing a UTMA account is that funds deposited and invested in the account are exempt from having to prepare and file a federal gift tax return for transfers by gift of up to $17,000 per child for 2023, and up to $34,000 per year for split gifts made by parents to their child.
This gift may be in the form of cash, stocks, bonds, or other financial assets. Both income and capital gains earned on assets transferred to a UTMA is taxed at the minor’s rate. Since a minor’s income tax rate each year is usually lower than the donor’s income tax rate, this often results in income tax savings for the family.
However, please consider that using a UTMA account for a child can make the recipient of a gift less eligible for needs based scholarship opportunities and upon the attainment of the age of majority, the assets on the account must be transferred to the recipient.
While the custodian of a UTMA account must distribute the balance of funds held in the account to the minor upon the child’s attainment of the age of majority, lifetime gifts and testamentary bequests that involve substantial assets are often best distributed using a trust-based estate plan, instead of a UTMA, which mandates the distribution of all assets held in the account, in order to protect the assets from being spent or dissipated soon after the child attains the age of majority.
For example, a trust distribution schedule may provide as follows: 20% of the trust corpus is distributed to the beneficiary at age 30; one-half of the remaining balance is distributed at age 35; and the remainder of assets invested in the trust is distributed to the beneficiary upon the attainment of 40 years of age. The theory here is that the recipient of the gift would come into their gifted or inherited assets over a period of time, instead of in one lump sum. This would allow the child to achieve greater financial maturity, knowledge, and experience about managing, investing, and spending assets which are often transferred to them by their parents and grandparents.
It is important to note that during the time period when assets are invested in a trust, the trustee has the full legal authority to make distributions to or for the benefit of the beneficiary of the trust for their health, education, maintenance and support.
Please also note that trusts established for minors may contain specific provisions to protect and insulate both lifetime gifts and inheritances from divorces, lawsuits and bankruptcy creditors of a child throughout the life of a child.
Asset Protection Trusts can also be designed so that upon the passing of a beneficiary, the assets invested in the trust can distribute to the children of a beneficiary, ensuring a blood-line distribution of inherited assets trust assets, and to siblings of a beneficiary if the beneficiary passes away with no lineal descendants.
What happens if you or a loved one suffers an illness, injury, or becomes incapacitated and unable to temporarily or permanently handle financial and health care decisions?
Many people erroneously believe if an incapacitated individual is married, their spouse is immediately able to step in and handle their financial, health care, and legal affairs. Similarly, a parent has no legal authority to handle the financial and health care decisions of a child, once the child attains the age of majority – eighteen years.
Without a valid power of attorney, an interested party would have to petition the Orphans’ Court where the incapacitated person resides to raise a Guardianship proceeding. The judge would then hear testimony in order to decide who should be designated as legal guardian for the incapacitated person. These formal and public Guardianship proceedings are expensive, time-consuming, and the outcome is definitely not assured with respect to who will become appointed as guardian.
In fact, a judge has no obligation to appoint the spouse or parent as legal guardian and may appoint a professional guardian or another person who the incapacitated person would not have wanted to serve as his or her legal guardian. For example, the judge may determine that the spouse or parent has an inherent conflict of interest since spouse and parents are often the beneficiary of the incapacitated person’s assets. Further, the judge may decide that a professional guardian or another person has more knowledge and experience handling such matters.
Who should you select and legally designate as your Financial and Health Care Power of Attorney?
In the vast majority of cases, clients designate their spouse to serve as their Primary Power of Attorney, and one or more of their children as Successor Power of Attorney.
While these selections may seem reasonable and suitable, experience has shown that based upon the circumstances and family dynamics, this order of appointment may need be best in all cases. For example, clients often need to use their Powers of Attorney when they are elderly and unable to make prudent decisions. In many cases, the spouse of an incapacitated person may also be suffering from an illness or incapacity at the same time. In such case, while a son or daughter may desire to step in and help out with bill paying, health care decision making, and managing financial investments, the adult child may quickly discover that they are unable to take control of the decision making process until they can prove that the other spouse is not able to serve as the Primary Power of Attorney.
In such cases, the Successor Power of Attorney would be required to prove that the Primary Power of Attorney is unable to discharge his or her fiduciary responsibilities. Therefore, a doctor who is familiarly with the incapacitated person would be required to write a letter stating that mom or dad is unable to handle their legal, financial, and health care decisions.
While this process may appear simple and a straightforward, questions often arise when a person legally appointed as Primary Power of Attorney is unable to discharge his or her fiduciary responsibilities. Will the doctor write the letter? Will the letter be clear and unequivocal? Will each of the third parties you have to deal with accept the letter? Unfortunately, these issues which often arise are not easy hurdles to overcome.
One option to overcome this issue is to appoint a spouse and adult child to serve as Co-Agents under the terms of an up-to-date Financial and Health Care Power of Attorney.
The Social Security Administration recently issued the 2023 Cost-of Living Adjustment (COLA). Social Security and Supplemental Security (SSI) beneficiaries will receive an 8.7% COLA for 2023.
COLA notices are typically mailed out to retirement, survivors and disability beneficiaries, SSI recipients, and representative payees instead the month of December.
Individuals receiving SSI benefits will see an increase of their monthly benefit to $914.00 per month (the benefit is currently $841/month). In general, in order to be eligible for Social Security Disability benefits, an adult must be unable to engage in Substantial Gainful Activity (SGA). A person who is earning more than a certain gross monthly amount is considered to be engaging in substantial gainful activity. The Social Security Administration has also adjusted SGA threshold for 2023 to $1470 per month (the SGA threshold is currently $1,350/month).
COLA Fact Sheet
For more information on all 2023 COLA see Social Security’s 2023 COLA Fact Sheet:
The size of estates have grown today where middle class families are leaving substantial bequests to their children.
As a result of significant inheritances being transferred to children, coupled with the fact that we live in a very litigious society, the trend today is toward establishing trusts for children to keep inheritances intact and in the bloodline.
There are a number of asset protection and tax planning benefits to consider when leaving assets to family members in a trust.
Some of the most important reasons are detailed as follows:
(1) Assets inherited by your children which are administered and invested in a properly designed Asset Protection Trust will be protected from the spouses of your children in the event of divorce;
(2) Your Asset Protection Trust can include specific language designed to provide financial protection for your children from their creditors in the event of a lawsuit, bankruptcy, tax lien, or other financial hardship; and
(3) Upon your child’s passing, all assets held in your Asset Protection Trust can be distributed, either outright or in further trust, to your blood relatives (usually your grandchildren), instead of to the spouses of your children, who depending upon the marital status of your children at your death, may or may not be your in-laws at that time.
When your assets continue intact for the benefit of your children and grandchildren, from one generation to the next, we call this estate planning strategy “multi-generational planning.” Unfortunately, when individuals only have a Will, their estate plan usually dies when they die.
When utilizing an Asset Protection Trust, your inheritance can provide significant financial benefits to your children and grandchildren, while being protected and insulated from the potential claims of the creditors, predators, and divorcing spouses of your designated beneficiaries.
In fact, Asset Protection Trusts can provide flexibility and control over the assets during your children’s lives, so that the trustee you select can provide your children with broad access to the income and the principal of their APT. This is an important factor since many clients do not want to transfer assets to to their children at death in a manner which is a “gift with strings attached” or “rule from the grave.”
An APT also allows clients to achieve their estate planning desire of making sure that upon the death of their child, either before or after the client’s passing, trust assets, (which may substantially grown in value during their child’s lifetime), are ultimately distributed to their grandchildren.
In most cases, we often recommend that assets continue to be managed in trust for the benefit of grandchildren until an age when the client believes their grandchildren will be financially responsible to receive their inheritance outright. Of course, during the period when assets are managed in an APT, the trustee can have broad discretion to distribute both income and principal from the trust to the beneficiaries as needed for their health, education, maintenance and support.
Another significant benefit of an APT is that if one or more of a client’s children die without leaving children of their own, then the funds held in their trust can be distributed to the surviving brothers and sisters of a deceased child, ensuring a blood-line distribution of your assets to surviving family members.
Without a multi-generation APT, if your son or daughter dies, their entire inheritance, (including the growth and appreciation of all assets earned during the life of a child), may pass directly to your son-in-law or daughter-in-law, who may later get remarried and ultimately distribute your hard earned assets to a complete stranger, instead of your grandchildren.
Since some clients would not want to disinherit their son-in-law or daughter-in-law, in such cases, the assets held in an APT, or a portion of the trust, may be earmarked to continue during the lifetime of an in-law, providing them with access to trust assets when needed for their health, maintenance, and support, but not to the next spouse of your in-law or to a nursing home to pay for their long term care expenses in the future. Upon the passing of an in-law, the trust provisions can be designed to distribute the remaining trust principal to grandchildren, or other designated individuals and/or charitable beneficiaries desired by the client.
These days, in a challenging economy, we hear a lot about adult children in their late 20s or early 30s moving back in with their parents because of unemployment or underemployment. However, what happens when older parents opt to move back in with their financially stable children?
A weakened economy altered the family dynamic in the early part of the century. At that time, we were used to a mom, dad, 2.5 children, a dog and a cat. But today, families take all shapes, and many times, that means moving Mom or Dad in with you.
There could be benefits such as round-the-clock childcare, added income from chipping in for rent or household expenses, and helping prevent loneliness. However, for those thinking about moving back in with their adult children, there’s plenty to consider.
Before moving in, it is often important to discuss many concerns and commit to them in writing. If it seems silly or troublesome to ask a family member to sign a binding agreement, then type up your understanding of the arrangement, date it, and send by an email with your signature. This will provide the terms of the agreement, should any conflicts ever arise. In fact, conflict often arises when other children wonder about the arrangement and the impact it may have on their inheritance.
When planning your arrangement, be sure to carefully consider homecare needs such as regular upkeep, maintenance, repairs, social arrangements, transportation, and the potential need to add an addition to your existing home.
Additionally, if the parent will be taking care of a grandchild, and will be receiving payments for this task, it is important for the families to follow any applicable labor and tax laws.
If at all feasible, families may wish to try to build a separate living space for their live-in parent. This ensures there would be minimal conflict with daily living arrangements, which could easily cause major stress over time for both parents and their child and other family members. If building an add-on is impractical, then a parent should at least have some private space, as the parent likely had his or her own private space for years and may feel stifled without privacy.
While there may be some challenges associated with bringing a parent into their adult child’s home, it may be well worth it in the long run. Adult children offer a great safety net for aging parents, and such an arrangement allows the adult children to return the favor of years of childcare, support, and unconditional love.
