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Charleston Estate Planning & Asset Protection Blog

Tuesday, February 6, 2018

Is a Gift Trust Right for Me?

When people want to give assets in the future to someone who is a minor child now, they usually look at these two primary options:

Both options have advantages and disadvantages. If you are looking at these financial devices, you are best served by engaging the services of an experienced wills and trusts lawyer.

Advantages of a Gift Trust

A gift trust, or trust fund, will allow you, within certain boundaries, to control when the recipient gets the assets. Let’s say that you are setting up a gift trust for your eight-year-old grandchild. Not being impressed with the money management skills of the child’s parents, you have concerns about the financial priorities she will learn from them. You also want to make sure they cannot get their hands on the money you have set aside for your granddaughter.

With a gift trust, or trust fund, you can set any restrictions you want on the money or other assets of the trust, as long as the limitations do not violate the law or public policy. For example, you can say that she will get 25 percent of the money when she graduates from college and the rest when she turns 30 or earns a graduate degree, whichever comes first. You cannot, however, say that she will not get the money if she marries someone who was not born in America.

Disadvantages of a Gift Trust

It costs more to set up a gift trust than a UGMA. An irrevocable trust will have to pay taxes on some of its earnings and file tax returns. Trust fund tax rates tend to be higher than personal income tax rates. If you use a professional trustee, you will have to pay for their services.

Advantages of a UGMA

UTMAs are easy and inexpensive to set up and manage. You can walk into a bank or brokerage firm and open a UTMA account in a matter of minutes.

Disadvantages of a UGMA

When you transfer assets to a UGMA, it is irrevocable. If the child later falls out of your good graces, you cannot undo the transfer to take back the assets or give them to someone else. You also cannot tailor the hoops she must jump through to get the money, other than the age, which can be no later than age 21 in South Carolina. And when she is 14, she can petition the court for an accounting.

The Bottom Line

You should evaluate, based on the facts of your situation, whether a gift trust or a UGMA will do a better job of meeting your needs, but you do not have to select just one. It is possible to use both a gift trust and a UGMA. In fact, even though UGMAs are sometimes called “poor man’s trust funds,” wealthy people often use both financial vehicles. If you are planning to gift a relatively modest amount, a UGMA might be your best option. With a more substantial amount, however, a gift trust might be worth the expense and ongoing management.

Estate planning items like UGMAs and trust funds are complex, and should not be DIY projects. You should talk with a wills and trusts lawyer in South Carolina to protect your legal interests. Schedule a consult with one of our South Carolina community property trust attorneys to ensure your estate goals are appropriately met.

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Wiles Law Firm, LLC helps clients with their estate planning needs in Charleston, South Carolina and the surrounding areas such as West Ashley, Summerville, North Charleston, Mount Pleasant, and John's Island.

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