Advanced Underwriting Consultants

Question of the Day – November 15

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client wants to take care of young beneficiaries with her life insurance policy.  What’s the best way for her to do that?

Answer: In a perfect world, our clients would always create trusts to manage and distribute money for the benefit of young beneficiaries.  However, trusts cost money and substantial effort to create.  They are also costly and time-consuming to administer.

For many, trusts can be created inside of last wills to take care of children.  Such trusts are called testamentary trusts.  Some of our clients still are not candidates to create those because of the effort and cost involved.

To help create practical choices for taking care of money for young family members, the state governments came together to essentially create simplified trusts.  The first set of these rules were the Uniform Gifts to Minors Act (UGMA).  Since UGMA and its variations were enacted, the state governments came up with a new, improved version of the rules called the Uniform Transfers to Minors Act (UTMA).

Together, UGMA and UTMA accounts are referred to as custodial accounts.  Custodial accounts name a minor beneficiary and a custodian, who is likely to be a responsible adult.

Naming a custodial account the beneficiary of a life insurance policy might be the best practical choice when a client cannot or will not create a trust for the beneficiary of a minor.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – August 30

Ask the Experts!


Here’s the question of the day.

Question: Does an UGMA or UTMA account have special tax rules similar to an IRA or 529 Plan?


Answer: No.

For the most part, UGMAs and UTMAs don’t have any special tax rules; the accounts are merely a way of holding property, not a separate tax entity. Unlike 529 Plans and IRAs, there is no tax deferral. If an UGMA or UTMA owns a bank CD, the minor would have to report and pay tax on interest earned each year. If the account owns stocks or mutual funds and trades or sells them, tax would be due on any capital gains in the year of the sale or trade.

On the other hand, if the account owns a non-qualified deferred annuity (NQDA) and does not take a distribution, there is no taxation of earnings inside the contract. Likewise, if the account holds stocks and does not sell or trade them, there’s no current taxation.

The use of UGMA or UTMA assets does not affect taxation. For example, income earned by the account and used for college expenses is still subject to income taxes, unlike a 529 Plan. But the account is not subject to special penalties either; withdrawal from the account will incur no special penalty if the money is used for non-education purposes or prior to age 59 1/2 as in the case of, respectively, a 529 Plan or an IRA.

The UTMA or UGMA account gives no protection from penalties otherwise due. For instance, if the account holds a NQDA and money is withdrawn, the earnings portion will be subject to the 10 percent penalty for distribution prior to age 59 1/2. The fact that it’s in a custodial account offers no exemption from the penalty. This fact should be carefully considered prior to using a NQDA in an UGMA or UTMA.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.