For each minor or young adult to whom you leave property through your WillMaker will, you must decide which management approach to use: the UTMA, a child's trust, or the pot trust. This article helps you decide which is best.
As a general rule, the less valuable the property involved and the more mature the child, the more appropriate the UTMA is, because it is simpler to use than a child's trust or pot trust. There are a couple of reasons for this.
Because the UTMA is built into state law, banks, insurance companies, brokerage firms, and other financial institutions know about it, so it should be easy for the custodian to carry out property management duties. To set up a child's trust or pot trust, the financial institution would have to be given a copy of the trust document and may tie up the proceeding in red tape to be sure the trustee is acting under its terms.
Also, a custodian acting under the UTMA need not file a separate income tax return for the property being managed; it can be included in the young beneficiary's return. However, in a child's trust or a pot trust, both the beneficiary and the trust must file returns.
Because the UTMA requires that management end at a relatively young age, if the property you are leaving is worth $100,000 or less— or if the child is likely to be able to handle more than that by age 21 (25 in Alaska, Florida, California, Nevada, Oregon, Pennsylvania, Tennessee or Washington)—use the UTMA. After all, $100,000 is likely to be used up before management under the UTMA ends.
Generally, the more property is worth, and the less mature the young beneficiary, the better it is to use the child's trust, even though doing so creates more work for the property manager than does the UTMA. For example, in a child's trust, the property manager must keep the beneficiary informed, manage trust assets prudently (meeting the requirements of state law) and file a separate tax return for the trust each year.
However, if a minor or young adult stands to get a fairly large amount of property—such as $100,000 or more—you might not want it all distributed by your state's UTMA cutoff age, which is usually 18, 21 or 25. In such circumstances, you may be better off using the child's trust. Under the child's trust, management can last until an age you choose, up to age 35.
Choosing an age for a particular beneficiary to get whatever trust property has not been spent on the beneficiary's needs will depend on:
As a general rule, the pot trust makes sense only when you have two or more children and they are young and fairly close in age. For instance, if your children are ages two and 20, and you specify that the pot trust should end when the younger child turns 18, the 20-year-old would have to wait until age 36 to receive the property. However, the pot trust option is available to you as long as any of your children is under age 25.
Like the trustee of a child's trust, a pot trust trustee must invest trust assets following the rules set out in state law, communicate regularly with the trust beneficiaries to keep them informed, and file annual tax returns. The trustee of the pot trust also has the significant added responsibility of weighing competing claims from the children when deciding how to spend trust assets.
The property management features offered by WillMaker—the UTMA, child's trust and pot trust— provide the property manager with broad management authority adequate for most minors and young adults. However, they are not designed to:
To learn more about preparing third-party trusts for people with disabilities, read Special Needs Trusts: Protect Your Child's Financial Future (Nolo) by Kevin Urbatsch and Jessica Farinas Jones. For other situations described here, consult an experienced estate planning attorney.