Decades ago when I left a Wall Street firm to launch an independent advisory firm in Doylestown, Pennsylvania, we gifted $100 in Uniform Transfers to Minors Act (UTMA) accounts to newborns in the community. It was a great way to boost the concept of saving for children, and of course great marketing for our firm. Despite my tight budget for the new firm, we managed to open more than a hundred of these accounts. Building relationships with these families was a rewarding experience in itself.
I am concerned by the limitations placed on the new Trump Accounts both in taxation and other operational aspects. It’s not that the new Trump Accounts are a bad deal, but rather that I suspect that if more people fully understood the details and restrictions, the traditional UTMA account would be a better choice.
TAX – The vast majority of these accounts in those years went into high-interest money market accounts. Parents today may not be aware of the periods in my generation where interest rates were high, the stock market was volatile and sometimes lost money, and most advisors recommended starting with a stable money market account before investing in stocks. The account balances were modest so the UTMA income was also modest. The total income of the child was reported annually on the child’s tax return, including UTMA earnings, and the rules governing this are known as the “kiddie tax.” In most cases the earnings did not meet the threshold to trigger tax. Today the first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s own rate, and anything above $2,700 is taxed at the parent’s marginal rate. For modest accounts that stay below the $2,700 threshold, the balance can effectively be withdrawn at any time with little or no tax consequence. Of course, that would not be true of larger accounts that hold appreciating assets like stocks. The total tax on a UTMA with $5,000 in investment earnings would be $641 for a family in the 22% bracket – a meaningful but not punishing amount. My anecdotal experience was that the majority of UTMA accounts escaped tax altogether. In contrast, the earnings on Trump Accounts will be fully taxable at withdrawal.
EMERGENCY ACCESS – The most consequential difference for my clients now is the emergency access issue. Trump Accounts prohibit all distributions during the growth period; for children under 18, no withdrawals are allowed under any circumstances, meaning a family facing a child’s serious medical expense cannot touch those funds regardless of urgency. A UTMA custodian, by contrast, can liquidate and distribute for any legitimate benefit of the minor, including medical care, with no IRS penalty. I see financial emergencies becoming more common for the majority of families, and less likely to occur among the wealthiest. Even my own children’s UTMA accounts were tapped for emergencies during difficult times. We tried to save when times were good, and were thankful for whatever resources we had when times were tough. I went through multiple years of disability as the family’s primary income earner. If not for savings, including UTMAs, accumulated in good years, we might have been homeless.
FLEXIBILITY – Another concern is overall flexibility. UTMAs allow contributions by any person or business at any amount. The custodian, not necessarily a parent or guardian, has wide flexibility in determining how and where the account is managed and what vehicles are used. As mentioned, in the years of double-digit money market rates and extreme stock market volatility, this flexibility was widely appreciated. In contrast, Trump Accounts carry strict limitations on who can be the custodian, what investments are allowed, who can contribute – my firm would not be eligible to do what we did for the community – and what institutions can offer the accounts.
CITIZENSHIP – UTMAs are available to any minor. The $1,000 seed deposit for Trump Accounts requires U.S. citizenship, a meaningful exclusion for the immigrant families I serve, many of whom may not qualify. A few clients with international businesses do not have Social Security numbers for their children, so they would not be eligible at all. Given the growing number of international business owners and immigrant families I serve, this is an important restriction.
There is one distinct advantage of Trump Accounts over UTMAs: the possibility of receiving an initial seed deposit. If eligible when Trump Accounts launch this summer, it certainly makes sense to claim those funds. But beyond that, it is difficult in my eyes to recommend continued use of a Trump Account over a UTMA. If I had young children today I would open the Trump account to access the seed deposit and then do the rest of the child’s savings in a UTMA for a child’s savings not intended for education.