Parents Are Rolling UTMA & 529 Plans into a Trust Due to These Tax Credits

Posted by Tyler Phelps, Vice President of Eastern Point Trust Company on Mar 25, 2016


The Shortcomings of Traditional College Saving Plans

Before trusts became a cost-effective tool for parents to save their child’s future education costs, accounts such as UTMA/UGMA and 529 plans were heavily used. 529 plans are the result of federal legislation that allowed parents to set money aside for college. However, time has shown that the high fund cost, limited investment selection, extra fees imposed by the states and restrictions of investment changes materially undermine the performance of 529 accounts. Fortunately, there is a simple, affordable, and prudent solution to their dilemma – college savings trusts.

Using Trusts to Save For College Expenses

Trusts are great tools for parents or grandparents with a desire to jumpstart their loved one’s future by saving for college expenses and beyond. Trusts can:

  • Protect assets from creditors
  • Limit the use of money for specific purposes beyond education (while the grantor is living or deceased)
  • Be named as the beneficiary of life insurance policies, 401k plans, IRAs, brokerage accounts, bank accounts, and more
  • With a properly drafted trust reserve the student’s eligibility for student aid and maximize their FAFSA awards, grants, and scholarships
  • Earn up to $600 in LTCGs, tax exempt, as of 2016

The student reaps the benefits of the college savings trust without any of the negative financial aid implications that UTMA, UGMA, and 529 plans carry. It gets even better! The trust can also safeguard the student’s eligibility for both of the federal educational tax credits, when properly drafted (like a Kiss Trust).

Parents can benefit from these educational tax credits

 The American Opportunity Tax Credit:

  • Can be utilized throughout a student’s first four years of college while pursuing an undergraduate four-year degree
  • Is worth up to $2,500 toward tuition, course-related books, supplies, and equipment
  • Can be refundable up to 40%, or $1,000, even when the student owes no taxes for the given year

Learn more about the American Opportunity Tax Credit.

The Lifetime Learning Tax Credit:

  • Can be claimed for an unlimited number of years while the student is pursuing a postsecondary degree
  • Is worth up to $2,000 toward tuition, course-related books, supplies, and equipment
  • Can’t be used with the American Opportunity Tax Credit (which is usually a higher value)

Learn more about the Lifetime Learning Tax Credit.

Problems for Parents with UTMA Accounts

Get Started

Take advantage of these tax credits while benefiting from the control provided for by a College Savings Trust. With a Kiss Trust, you can create an educational trust for your child, grandchild, or family and friends for a one-time fee of $49. TrustWare™, brought to you by Kiss Trust, hands anyone the power to build unique trusts without the help of an attorney, saving you time and money. Get started today, or chat with our support team to learn more!

Start a Kiss Trust today for just $20 (which is regularly $49) click here for more information.

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Tags: College Savings, UTMA

What Happens To an UTMA Account When a Child Plans To Skip College

Posted by Aimee O'Grady, Child Savings Specialist on Mar 11, 2016


Not all beneficiaries will attend college, but they will still have access to the funds in their UGMA/UTMA account.   

Key Takeaways
  • Beneficiaries have unrestricted access to the funds in UGMA/UTMA Accounts.            
  • Custodians can withdraw funds if they are used to benefit the beneficiary, including converting into an irrevocable education trust for the sole use of the beneficiary.
  • Withdrawal of funds by the parent or custodian after the minor is of legal age is not allowed.

A Parent’s Worst Nightmare

An UGMA/UTMA account is an easy savings tool for parents to open for their children. The beneficiaries own the assets the moment the account is created and can access the money as soon as they are of legal age, often 18 or 21. Most UTMA and UGMAs, or custodial accounts, are opened as a way to save for higher education anticipating that the beneficiary will attend college. But what happens if they choose not to?


It's Their Assets… It's Their Choice

Simply put, the beneficiary of an UGMA and UTMA account can use the funds at their discretion, making them quite unpractical as a college-savings plan. These are custodial accounts for minors, which means the custodian manages the money until the minor attains the age of majority. Once they reach the age of majority, beneficiaries have unrestricted access to the assets in the accounts to do whatever they want. They can register for higher education courses, buy a car or go on vacation, since there are no restrictions on how the money can be used.

One of the benefits of these custodial accounts, however, is that they can be converted into irrevocable trusts. Prior to the age of 18, assets in UGMA/UTMA accounts may be withdrawn by the custodian and used for circumstances that benefit the beneficiary. Therefore, it is allowable for the funds to be converted into an irrevocable education savings trust.


UTMA Conversions Are Allowable, Easy, and Affordable

Prior to the UTMA or UGMA beneficiary reaching the age of majority, the custodian of the account (usually the parent or grandparent) has the ability to transfer the custodian account assets into an irrevocable savings trust for the sole use of the beneficiary.  This is often done by parents when they suspect assets put aside for education-related expenses could be frittered away by young beneficiaries who currently have no intention to currently attend school or have money management problems.

The advantage of converting UGMA and UTMA accounts into an education savings trust are:

  1. Defer access to assets until future date(s) or event(s) if beneficiary does not attend school
  2. Education Distributions can be made directly to the University
  3. GPA performance incentives are available
  4. Graduation incentives available
  5. Prevent use of funds for unrelated activities
  6. Preserve or maximize FAFSA considerations
  7. Ability to issue distributions as loans
  8. Minimum GPA requirement can be elected
Best of Intentions

Custodians be cautioned:  It is not allowable for custodians to withdraw assets from a UGMA/UTMA account for purposes other than those benefiting the beneficiary. Liability issues could result, regardless of how the custodian feels about the beneficiary’s decision to not attend college.

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Tags: College Savings, UTMA

Your Children May Be Endangered... By The Very UTMA Account Intended To Help Them (But, A Trust Can Help)

Posted by Ned Armand, President of Eastern Point Trust Company on Feb 24, 2016

Trust Funds with HEMS provision can deter or guide beneficiaries with substance abuse problems

You don't know it yet, but unfettered access to assets in a UGMA/UTMA custodial account for minor who could develop substance abuse issues can destroy a lifetime of savings.

Key Takeaways
  • A dependency issue can threaten to deplete assets in a custodial account.   
  • Parents and custodians of UTMA UGMA accounts can transfer funds to a supplemental needs trust or Health education maintenance and support trust if it is in the best interest of the beneficiary.                                    
  • Assets of supplemental needs trusts or (HEMS) health education maintenance and support trusts can use the funds in the account for rehabilitation programs for the beneficiary.

Substance Abuse Threatens UTMA Assets

A UTMA/UGMA custodial account is opened when children are still very young to transfer ownership and/or build wealth for later years, and well before any display of irresponsible behavior or substance abuse issues arise. When children become the legal age of 18, or in some states as old as 18, they gain unfettered access to potentially large sums of money. Parents who have witnessed irresponsible behavior are often deeply concerned about the assets in the custodial account being spent foolishly.

You Can Still Preserve The Funds

While parents can't go back in time to select better savings plans for their child, there are still some options available to them to help preserve the wealth in the account. Before adolescents turn (the age of majority) 18 or 21, parents have the ability to remove custodial assets so long as the intended use will benefit the beneficiary. If parents are concerned about the funds being spent recklessly, they can open a trust fund keeping the minor as the beneficiary. A trust fund would then allow the parents to set certain restrictions on how and when the assets are distributed. This is permissible since it is in the best interest of the beneficiary and the assets remain for the sole benefit of the youth.

Treatment Expenses Can Be 

If the beneficiary encounters drug or alcohol abuse issues before turning the age of majority for UTMA/UGMA’s, parents have the right to transfer the funds to a Supplemental Needs or Health Education Maintenance and Support Trust (HEMS). A trust with these provisions will allow the use of funds to help the adolescent with rehabilitation programs or other drug and alcohol control resources.

Know Your Options

The use of comprehensive trust and trustee services allow for parents to withhold assets for children until they demonstrate financial maturity or help in the treatment of substance abuse expenses if they encounter issues with drug and alcohol abuse during their formative years.  These services are now available easily and affordable with online trustees such as Kiss Trust.

Tips On How To Maximize The Effectiveness  Of Your Bad Behavior Penalty Elections

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Tags: Irrevocable Trust, UGMA, UTMA

True Story: Can a trust fund provide protection where an UTMA can't?

Posted by Ned Armand, President of Eastern Point Trust Company on Feb 19, 2016


A diagnosis of mental illness is always tough on both the patient and the close friends and family members.  While it may come as a relief to finally have professional recognition of a problem, the certification that the problem exists can be difficult to handle.  As advanced as our society has become, those with certain mental illnesses still find themselves stigmatized and forced to the fringes of human interaction.

When Allison’s daughter, Summer, was diagnosed with bipolar disorder at age 15, Allison knew that the young woman would need a lot of help and support to deal with the diagnosis, the treatment and the daily medication regimen needed to keep her on an even keel.  Unfortunately, as a single mother, Allison didn’t have as much time as she would have wanted to attend to her daughter’s needs and give her all the support necessary to protect her fragile psyche and keep at bay those who would seek to prey on her perceived vulnerability.

In her up cycles, Summer was a vivacious, articulate, engaging and charming young woman who could light up a room.  But when that cycle ended and she entered a down phase, she would spend hours at a time in bed or in a living room chair, lost in dark thoughts and tears.

As part of her divorce settlement, Allison had insisted that her ex-husband make regular payments into an UTMA, or Uniform Transfer to Minors Account, to pay for Summer’s college expenses.  He had done so faithfully, and Allison was relieved to know that at least she wouldn’t have the worry of coming up with tuition, fees and living expenses to deal with on top of everything else.  When she turned 18, the entire amount of the UTMA would be hers to do with as she chose. While that prospect gave Allison some pause, she knew that she’d raised her daughter well and trusted that she’d make good choices.

The first semester went great, with Summer getting acclimated to life in the city, making new friends and enjoying her classes.  As winter turned to spring, though, Summer moved off campus into an apartment with new “friends” on a hand shake arrangement and began to slide into a down cycle.  After disclosing to her new roommates, about her hefty UTMA account they devised a scheme to take advantage of her vulnerability convincing Summer that she owed unreasonable sums of money to them for past room and board.  And threatened to have her arrested if she did not make good on her debits immediately.

As the account rapidly dwindled Summer only became more depressed. Rather than seeing her therapist and getting her medication adjusted, Summer withdrew, her grades plummeted and she soon quit going to class. 

When Summer finally revealed the situation to her mother Allison, Allison was frantic and immediately contacted several trust companies in an attempt to preserve what was left of her daughters account, however it was too late.  Within a few short weeks, her “friends” had all but completely exhausted the money in Summer’s UTMA account and moved on.

Summer did manage to get through the hard times, and her faculty advisors, wracked with guilt at having not seen her plight, petitioned the art school for additional money to help her continue her schooling.  She managed to finish school, but all the money from the UTMA was gone, and she had a very difficult time supporting herself with her art alone after school, ending up in a series of “small” jobs which kept her bills paid but also kept her from pursuing her dream.

If Allison had chosen to put Summer’s college savings into a third-party managed education trust, such as those offered by Kiss Trust through Eastern Point Trust Company (rather than an UTMA), Summer’s false friends would never have been able to wreak the havoc they did.  With controlled distributions tied to things like successful course completions, finishing school and other milestones, a Kiss Trust encourages positive life choices.  The trust also allows the grantor to build in penalties such as suspension of benefits for bad behavior, failure at school, alcohol or drug abuse issues and the like.  A third-party managed trust is a far more secure way to handle the large (or even not so large) sums of money that can become available to a young person upon attaining their majority.


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Tags: Trust Fund, UGMA, UTMA

How UTMA/UGMA Custodial Accounts Impact Student Financial Aid Eligibility

Posted by Aimee O'Grady, Child Savings Specialist on Feb 16, 2016


Parents should understand how UTMA and UGMA accounts could impact FAFSA eligibility for their children before they commit to a custodial account.

Key Takeaways

  • All assets belonging to a minor impact financial aid
  • Both minor and parental assets are recorded on the Free Application for Federal Student Aid
  • Assets belonging to a minor are weighed differently than assets belonging to parents

Convenience Can Cost You

UGMA and UTMA accounts are established by parents and guardians while their children are still young. These accounts are quick and easy to set up and serve as a depository for monetary gifts received over the minor’s lifetime.  They can also serve as college savings plans, since while students advance through school their savings accounts grow. During the child’s senior year of college, as students begin the financial aid process to help alleviate some of the financial burden of college tuition, they are surprised to see the role UGMA and UTMA accounts play and the impact that custodial accounts have on financial aid eligibility.

Impact on Financial Aid

FAFSA applications can be started on January of every year, where parents, college students, and students in their final year of high school can complete the Free Application for Federal Student Aid (FAFSA) until a specified date.  All assets, large and small, can potentially impact financial aid eligibility. Every asset belonging to the child (and the parents for that matter) diminishes the eligibility amount for grants and some scholarships.

Since assets in custodial accounts, such as UGMAs and UTMAs, belong to the minor, they are counted among the minor’s assets. The federal government treats assets belonging to a minor differently than those belonging to an adult. In 2016, the current financial aid formula requires that the minor contribute 20% of their assets to college costs annually prior to becoming eligible for financial aid; whereas parents must only contribute 5.6% of their assets. What this means is that UTMAs and UGMAs can hurt the minor's eligibility more than parent accounts.

Poor planning and the use of an inadequate savings account can cost thousands in lost grants, loans and other financial aid opportunities.  With the increased scrutiny financial aid officers employ since the federal takeover of the US student loan program, smart planning is imperative.  Luckily, other options such as specially formed irrevocable trusts help students and parents preserve positive treatment during the financial aid consideration process.

Learn more about navigating through the financial aid process and how we can help.

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Tags: Financial Aid, UGMA, UTMA

The Uniform Transfer to Minors Act (UTMA) Explained

Posted by Aimee O'Grady, Child Savings Specialist on Feb 12, 2016


The UTMA was created to help parents and guardians transfer property to minors, who are unable to invest in securities while underaged.

Key Takeaways

  • The UTMA was created to assist with property transfers to minors.    
  • The act permits custodians to use the funds to benefit the beneficiary.

History of the UTMA

While asset transfer to minors can be advantageous, especially with regards to estate planning, it is also rather risky. Most investors would prefer to not transfer valuable property to a minor for fear of mismanagement, or no management at all. In addition, third parties rarely deal with minors. To deal with this, in 1983, the United Law Commission announced the Uniform Transfers to Minors Act (UTMA). This was a modification to an earlier act referred to as the Uniform Gifts to Minors Act, which was formed in 1956. Today, every state and district has adopted some form of this act. 

What the Law Accomplished

During their 1983 meeting, the National Conference of Commissioners on Uniform State Laws revised and restated the Uniform Gifts to Minors Act (UGMA). The original 1966 Act was rearranged to include other forms of property and other forms of dispositions. The Act received a later revision in 1986.

The act permits a minor to receive gifts without the aid of a guardian or trustee. The investor acts as a custodian to manage the account, which protects the minor from tax consequences, up to a certain amount, until the minor reaches the age of maturity, generally age 18 or 21. Gifts under the UTMA can be money, real estate, inheritances or other property. Many investors elect to open UTMA accounts for their children because they can be opened quickly by filling out an application form and providing a social security number. The act even allows custodians to make payments on behalf of the beneficiary through the corpus of the gift.

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Tags: UTMA

7 Hidden Setbacks to UTMA and UGMA Custodial Accounts

Posted by Ned Armand, President of Eastern Point Trust Company on Feb 10, 2016


UTMA and UGMA accounts may look good on the outside, but parents should be aware of the many hidden disadvantages to these custodial accounts.

Key Takeaways

  • Custodial accounts have a number of limitations that could prevent your money from being used how you want                             
  • UTMA and UGMA custodial accounts can negatively impact a minor’s eligibility to financial aid
  • It is possible to roll UTMA and UGMA accounts into a Kiss Trust for minors


Explaining Custodial Accounts

UTMA and UGMA accounts are a popular option for investors to easily transfer large sums of money, real estate, or other inheritance to a minor without the need or expense of an attorney. While the accounts have some advantages, primarily their simplicity to establish, there are also a number of disadvantages that every investor (parent and guardian) should be aware of.


Disadvantages of UTMA and UGMA Accounts

While these accounts may have their advantages, here are the inconvenient disadvantages that could cost your child thousands in student loan debt:

  • By definition, these irrevocable trusts cannot be taken back by the Giftor. Once the assets are transferred to the minor, they belong to the minor. It is important for investors not to transfer funds that they may need to recover.
  • Regardless of the maturity level of the UGMA UTMA beneficiary, at age 18-21, depending on your state, the assets must transfer to the young adult at their request.
  • Assets in UTMA and UGMA accounts impact financial aid because the assets owned by the child are weighted more heavily than parental assets (according to Forbes, custodial accounts only make sense if you are certain your child will not need financial aid).
  • Money in a custodial account cannot be transferred to another child. The assets belong to one child only. This may impact families who are unable to give as much money to subsequent children as they were to for the first one.
  • Custodians have no control over how the funds are used, meaning that the child may use these assets for anything, even if the intent was to save for their education.
  • If the Giftor serves as the custodian and dies before the account matures, the assets in the account may be included among the custodian’s assets for estate tax purposes.
  • If the child dies prior to receiving the assets in the account, the accounts are dealt with according to the laws of the state, which may not be in your favor.
Know the Real Costs

Before opening a savings account for a minor, it is important to review disadvantages, as well as the advantages and consider alternatives. Even the best intentions can come back to haunt parents who establish UTMA or UGMA accounts who are poorly informed. Many financial institutions open these accounts without advising the custodian of their drawbacks and limitations. If parents have UTMA / UGMA accounts already established, some financial institutions offer opportunities to roll custodial accounts into alternatives such as an custom irrevocable trust.


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Tags: Student Financial Aid, Financial Aid, UGMA, UTMA

How A Trust Protected UTMA Assets From Poor Choices (And How To Roll UTMAs and UGMAs Into A Kiss Trust)

Posted by Ned Armand, President of Eastern Point Trust Company on Feb 5, 2016


UTMA assets are not protected against poor decisions or frivolousness, but there is a way to protect assets with Kiss Trust.

Key Takeaways

  • Assets within an UTMA  and UGMA accounts are given to the minor at the maturity age of 18 or 21, which can leave room for misuse
  • UTMA  and UGMA accounts can rollover into an irrevocable trust to provide extra security for parents and custodians
  • Kiss Trust makes UTMA and UGMA conversions easy with our trust solutions

How A Trust Protected UTMA Assets From Poor Choices

The birth of a child is a huge event for any couple, and when Mark and Brittany welcomed Ashlynn to the world, they wanted to make sure that her life would be full of far less struggle and uncertainty than theirs had been. They had both come from humble backgrounds, and through many years of hard work Mark had established himself as a dentist with a thriving practice, and Brittany had found fulfilling work as an attorney.

Before Ashlynn was even born, Mark and Brittany began planning for her financial future. They looked at their options, and decided that a Uniform Transfer to Minor Account, or UTMA, was the best way to go. They started with a small deposit, just a few hundred dollars, and added to it on a regular schedule over the years. Family members who were so inclined also made contributions, and by the time Ashlynn was in her teens there were tens of thousands of dollars in the account.

Unfortunately, that’s also when the trouble began. Brittany got a job offer at a firm in another town, Mark sold his practice and they relocated. In the new town, Ashlynn made friends with the wrong sort of kids, and the usual adolescent straining at the rules was magnified into a series of small offenses. She was caught shoplifting at a mall jewelry store even though she had money in her purse to pay for the purloined goods. She and two other girls were caught smoking marijuana on school property after a basketball game and were expelled. It was soon clear that Mark and Brittany’s darling girl was heading down the wrong path despite their best efforts.

On her seventeenth birthday, Ashlynn announced to her parents that she intended to drop out of high school. She wanted to move to Chicago and start a band with some of the same school friends with whom she’d gotten in trouble. She knew about the UTMA, and knew that the day she turned 18 she’d have access to an amount of money that was now nearing six digits. She figured she could work odd jobs until then and support herself until her ship came in, then she’d use the money to launch her career.

Mark and Brittany were horrified. They knew that Ashlynn was making a poor choice, and that all the money they’d set by for her college education and to get her started in life was going to be squandered. But there was nothing they could do. By the terms of the UTMA, Ashlynn had completely unfettered access to the entire proceeds of the account at age 18.

If the parents had instead chosen to set up a Kiss Trust instead of an UTMA, they could have built in requirements for things like education and good behavior that would have helped ensure that the money they’d set-aside was used wisely. With a Kiss Trust, the creator can set milestones for dispensations, and build in penalties for poor choices such as failing to finish school, engaging in criminal activity or substance abuse. With a Kiss Trust in place, Ashlynn could still have made the same choices, but she wouldn’t have had unfettered access to a large amount of money to make such choices more appealing.

No one wants to think of their children growing up and making decisions that put their future in peril, but with a Kiss Trust rather than an UTMA, at least you can make sure they are only rewarded for steps down the right path. 

How To Roll UTMAs and UGMAs Into A Kiss Trust

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