Thursday, January 11, 2007

Funding Allowances with a UTMA

The Uniform Transfers to Minors Act (UTMA) or the earlier Uniform Gift to Minors Act (UGMA) allows a parent to give a gift to a child and have custodial rights for that gift until the child turns 18. Once a UTMA is established, the funds belong to the child. At age 18, the funds of the UTMA account transfer completely to the child. A benefit of a UTMA is that the first $850 of income is exempt from taxes. To maintain this tax benefit, the funds must be used for the child and for other than required support expenses.

Fund Allowances with a UTMA

After reading the regulations, I believe a legitimate use of a UTMA, that maintains the tax benefit status, is to fund the child's future allowances. In addition, the UTMA allowance account could be designed to be zero before he goes to college.

For example, if a child's allowance per week is equal to twice his age, he will receive $17,784 in allowance through the age of 18. To fund $17,784 of allowance would require putting $9,195 at birth and earning 5% interest. In each succeeding year, the child would receive a weekly allowance equal to twice his age. The child can spend this money as he chooses. In his 18th year, the UTMA account would be depleted to zero.

Net, $8,589 of interest would be earned tax free and used to fund the allowance. This allows an initial contribution of $9,195 to yield $17,784 in total allowance over 18 years. The table below shows how the UTMA account would be grow and the be depleted by allowance payments over 18 years.


AgeYearly
Allowance
UTMA
Account
Birth0$9195
1$104$9,655
2$208$10,028
3$312$10,311
4$416$10,499
5$520$10,587
6$624$10,570
7$728$10,444
8$832$10,202
9$936$9,838
10$1,040$8723
11$1,144$8,722
12$1,248$7,958
13$1,352$7,045
14$1,456$5,978
15$1,560$4,748
16$1,664$3,347
17$1,768$1,767
18$1,872$0


For more financial topics on previous and future generations, check back every Thursday for the Crossing Generations segment.


Photo Credit: morgueFile.com, Daniel T. Yara

This is not financial, saving or parenting advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

2 comments:

Anonymous said...

your rss feeds cut off. They have for the past few days.

Super Saver said...

Thanks for your comment. As part of the site upgrade for 2007, I changed the RSS feeds to be partial versus full. I have received comments from several readers about this. So I will be changing back to full feeds.