In an attempt to do your own mini-estate plan and avoid probate, you may have set up and transferred funds to special accounts for the benefit of children, grandchildren or other relatives. These could be set up under the Uniform Transfers to Minors Act (“UTMA”) or as Qualified Tuition Programs under Section 529 of the Internal Revenue Code (“529 Plans”).
You may even have set up an account under the Uniform Gift to Minors Act (“UGMA”). However that account would have needed to have been set up before 1998 when the Michigan UGMA statute was replaced with the Michigan UTMA statute.
Once you deposit funds into these types of accounts or re-register these types of financial instruments for the benefit of your beneficiaries, the accounts are generally no longer yours. They are considered completed gifts to your beneficiaries. If the gift is more than $13,000 to any one person in any given year, you have to file a Form 709 United States Gift Tax Return. That does not necessarily mean that you have to pay gift tax.
Except for certain 529 Plan gifts, the amount of your gift which is more than $13,000 to any one person in any one year would first offset your lifetime gift exclusion amount. This year, the exclusion amount is $5.12 million, but it is currently scheduled to go down to $1 million in 2013.
The good news is that the gift is gone; it is out of your estate. The bad news is that the gift is gone; it is out of your estate. With the exception of certain 529 Plans, you cannot withdraw the funds for your use or to pay your expenses.
You then continue to manage those funds for your beneficiaries under the terms of the agreement you entered into with the financial institution holding the funds. For UGMA and UTMA accounts, you can continue to manage the funds until the beneficiary is age 18, or in certain instances, up to age 21. The beneficiary is then an adult who miraculously gains all the wisdom and insight of adulthood and is entitled to receive the entire balance of the account to go to the University of Corvette.
With 529 Plans however, you continue to manage the funds even after the beneficiary is an adult. If your beneficiary does not need the funds anymore for education, you can pick another family member to be a beneficiary. One thing that you can do with 529 Plans that you cannot do with UGMA or UTMA accounts is take those funds back for your own use. To do that though, you would have to pay a 10% penalty tax on the amount of the withdrawal. This is the only provision of the Internal Revenue Code of which I am aware that allows a donor to take back a completed gift.
You can generally designate successor custodians of UGMA and UTMA accounts or successor owners of 529 Plan accounts for when you are no longer able to manage them because of your incapacity or death. This designation is usually made in the original account agreement.
But what happens if you did not designate a successor custodian or owner in the original account agreement? If your name is the only custodian or owner on these accounts with no named successor, upon your incapacity or death, your beneficiaries may not be able to access the accounts without a court order. In such instances, only your legal representative can name a successor custodian or owner.
During your incapacity, your legal representative would be your probate court appointed conservator. After death, your legal representative would be your probate court appointed personal representative of your estate. Even if you had no other probate assets, there would be probate court proceedings in those circumstances for the sole purpose of naming successor custodians or owners of these accounts.
The easiest way to avoid probate of these accounts in such circumstances is to just name a successor custodian or owner. This can be done in a number of ways. Many times, you can name a successor as part of your agreement with the financial institution which holds the account.
Another way to name a successor custodian or owner directly or as a back-up to your named successor in your account agreement is to have a comprehensive will or trust based estate plan which names a successor custodian and/or owner of these accounts. This could be included in your will, your financial power of attorney, your living trust or a separate document.
By properly naming successor custodians or owners for these accounts, in the event of your incapacity or death, you can be assured that the funds will be distributed to your beneficiaries in accordance with your wishes, without any undue delay and without any court involvement.
By: Matthew M. Wallace, CPA, JD
Published edited September 2, 2012 in The Times Herald newspaper, Port Huron, Michigan as: Children’s accounts might need probate court