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Oxford Financial Group, LTD


Oxford Financial Group, LTD


Expert Perspective

News, research and market insights from our team of experts.


Current Issue | December 20, 2018

Things to consider as your children mature… at least chronologically!

By: Scott Simmons, J.D., LL.M., Wealth Strategist

Joyfulness. Apprehension. Responsibility. These are just a few of the feelings experienced the first time a parent sees their child. As children age, these parental feelings are supplemented by the practicalities of everyday life. Children exemplify Newton’s First Law of Motion. An object in positive motion remains in positive motion unless acted on by an unbalanced force. As children mature, what are the unbalanced forces for which parents should be on the lookout?

Birth to 18

Children receive gifts of money. Whether a small birthday check or a maxed out annual gift of $14,000, the funds need to be deposited somewhere. Many parents utilize a Uniform Transfer to Minors Act (UTMA) account. These accounts are simple to open, use the child’s social security number and one parent is listed as the custodian.

One commonly overlooked matter is that this is the child’s money and can be spent only for the child’s benefit. Because of this, most states require the termination of UTMA accounts at age 21.i The custodian relinquishes control and is required to turn over the funds to the child. This is certainly an unbalanced force causing a parent concern if the account has accumulated a substantial amount.

Hence, UTMA accounts are more appropriate for funds that will actually be used for the child’s benefit, rather than accumulated. This is particularly true if a parent is concerned about turning over a lump-sum of money when the child turns 21. Alternatives to UTMA accounts entail some additional complexity in return for greater parental controls. For annual exclusion gifts to children, consider instead a Qualified Minor’s Trust or an Irrevocable Gifting Trust with Crummey withdrawal powers.

There are two types of Qualified Minor’s Trusts allowed under the Internal Revenue Code, 2503(b) and 2503(c).ii When properly drafted, each allow for annual exclusion gifts into them even though the child is not presently allowed the money. A 2503(b) trust requires the annual distribution of income to the child. In addition, contributions to this type of trust likely requires the use of a portion of the donor’s applicable exclusion amount. For these reasons, as well as the increased use of Crummey trusts, the 2503(b) trust is not commonly used.

The 2503(c) trust is similar to UTMA accounts since the funds must be distributed to the child at age 21. However, a parent can include provisions in the 2503(c) trust requiring the child to exercise their right to receive the proceeds within a 30-60 day window. If the child declines or fails to exercise this right the funds continue to be held in trust according to its terms. Thereafter, the trust will no longer be eligible to receive annual exclusion gifts.

Irrevocable Gifting Trusts with Crummey powers of withdrawal (Crummey trusts) are an ideal vehicle for receipt of annual exclusion gifts while avoiding these required distributions of income and principal. As annual exclusion gifts are contributed to the Crummey trust, notice of the child’s right to withdraw the contributed fund must be given to the child and remain open, typically for a period of 30 days. Once lapsed, the funds may no longer be withdrawn and there are no restrictions on how long the assets can be held in trust.

Identity Theft
The world has changed rapidly in this area. Thirty years ago, little thought was given to providing a copy of a child’s birth certificate when signing the child up for youth sports. Now it is not uncommon for youth sports clubs to have specific policies regarding access to and retention of this personally identifiable information. Colleges and universities no longer use social security numbers as identifiers but rather create their own unique student ID numbers. Today a birth certificate and a social security number can be a gateway to healthcare, tax refunds, credit cards, bank accounts and loans. Recent scams include efforts, some successful, to obtain W-2 information from employers as well as hacking of health insurers and even the IRS itself. In fact, identity theft has increased to the point that the Federal Trade Commission has created a website to help individuals report and begin recovery from identity theft.

Why is this important to a parent with a minor child? Imagine the child’s reaction upon discovering that their credit report is raising the cost of auto liability insurance, keeping them from renting an apartment or getting a job. Federal law authorizes and the Federal Trade Commission recommends that every individual review their credit report annually at Parents should also review their minor child’s report no later than age 16. The Federal Trade Commission has provided additional steps for parents to follow at Safeguarding your Child's Future.

Ages 18 to 26

In lieu of making gifts to the vehicles described above, another option parents choose is the utilization of 529 plans as the recipient of annual gifting. 529 plans are unique in that they allow a donor to cram five years of annual gifting into a single year.iii The offset is that no additional gifts of any type can be made to the recipient for the next five years. 529 plans enjoy tax benefits allowing funds to accumulate without taxation. Distributions for “Qualified Educational Expenses” to an eligible educational institution are income tax free as well.iv

What options are there if a beneficiary on a 529 plan is not attending an eligible educational institution or will not need the funds? The parent as owner of the account has the ability to change the beneficiary to another “member of the family” as defined by U.S.C. § 529(e)(2). To avoid any possible gift or generation-skipping tax concerns, the newly-listed beneficiary should not be a generation lower than that of the previous beneficiary.v

The Family Educational Rights and Privacy Act protects the privacy of a student’s educational records. Until a child reaches age 18, the parent controls whether this information can be released. However at age 18 parents are no longer automatically allowed access to their child’s educational records. The child may sign a waiver in order to allow his or her parents to continue to have access to protected educational records including grades.

Health Insurance
The Affordable Care Act provisions allow for children to remain covered under a parent’s job-based plan until the child turns 26. This generally is the case whether or not the child is living at home, married, claimed as a tax dependent or in school, but the employer’s plan terms should be consulted. If the parents have a Marketplace plan, coverage for children generally continues through December 31 of the year the child turns 26. In addition, the parent continues to have the ability to exclude from gross income under an employer’s cafeteria plan the premium cost for a child under age After age 26, children will need to purchase their own health insurance coverage.

Liability Insurance
When children are in college, to what extent does a parent need to be concerned about their own liability for a child’s actions? Does the child drive a car titled in the parent’s name? If so, liability potentially follows the owner of the car. A frank discussion with your child about not allowing others to drive the vehicle may be in order. In addition, notify your insurance carrier that your child is in college. If they will not be using a car at college, a discount may be available to lower a parent’s premium.

If your child has a car titled in their own name, they need their own policy. However, a parent potentially remains liable for the child’s actions if the parent is claiming the child as a tax dependent. Is your child making additional money by driving others around in a ride-sharing arrangement like Uber or Lyft? Discuss with your agent whether a commercial policy is needed.

Are a child’s contents protected at college? For children residing in a college dorm, the parent’s homeowner’s insurance policy may provide coverage for the property, but the total benefit could be reduced. For expensive items, consider whether to schedule items. The security considerations at home are likely better than the security arrangements in a dorm. The liability coverage offered under a parent’s homeowner’s policy may extend coverage to the child. If your child is renting or living off-campus year round, separate rental insurance and liability coverage should be considered.

Parents may wonder, “Is my child still covered under our umbrella liability coverage?” Personal umbrella liability coverage generally protects all household members. While policies may be different, it is not uncommon for a child to remain covered under a personal umbrella liability policy if they remain a tax dependent, part of the household and live at college during the school year. In any event, a review of the terms of the current umbrella liability policy should be undertaken with your agent.

Estate Planning
As children reach the age of majority, a modification of decision-making authority takes place under the law. Whereas, before the parent had the ability to act on behalf of their child, now the child has the ability to speak for themselves. This is true regardless of tax-related dependency elections. Therefore if a child is injured or in an accident, the parent is no longer automatically entitled to information or able to handle their finances. Therefore, every child upon reaching age 18 should execute the following estate planning documents at a minimum:

  • Will
  • Durable Financial Power of Attorney
  • Healthcare Power of Attorney
  • Living Will

In addition parents should review their own estate planning, paying attention to the distribution terms set forth in revocable documents. Are there concerns if children are slated to receive their share of the estate in a lump-sum at the age of 25? Parents that are concerned about lump-sum distributions can amend revocable documents and stretch that distribution over a longer period of time. In addition, review the agents listed on Powers of Attorney and Living Wills. While a friend or family member may have been listed when the children were minors, parents often prefer that adult children now be involved in those decisions.

Life Insurance
Does my child need life insurance? Have you cosigned loans for your child? Unlike Federal student loans, private student loans are not discharged if the student passes away. What would be the impact on your finances if you were required to pay those sums back? In addition consider the impact of a genetic marker on the child’s ability to purchase life insurance in the future. With increased ability to detect genetic probabilities of illness, purchasing life insurance before any symptoms manifest in the parent may prevent your child from becoming rated for premium purposes.

Newton’s First Law of Motion explains why parents, particularly those with teenagers and young adults, continuously need to help children dodge these “unbalanced forces”. Reviewing these matters as your child matures, at least chronologically, will provide stability and prevent any unnecessary deviations from the straight-line trajectory of you and your children’s personal and financial well-being.

i Florida and California have created methods to extend the UTMA accounts for their residents until age 25. Florida requires the custodian to provide the minor written notice within 30 days of turning 21, notifying them of their right to withdraw the entire account. Illinois allows a custodian to transfer all or part of the custodial property to a qualified minor’s trust absent a court order. 760 Ill. Comp. Stat. § 20/15(a-5)
ii 26 U.S.C §2503(b) & (c)
iii 26 U.S.C. § 529(c)(2)(B)
iv 26 U.S.C. § 529(c)(3)(B)
v 26 U.S.C. § 529(c)(5)(B)
vi IRS Notice 2010-38

The above commentary represents the opinion of the authors as of 3.16.17 and is subject to change at any time due to market or economic conditions or other factors. This information is not intended to serve as tax or legal advice. As always, tax and legal counsel should be engaged before taking any action.