Planning Your Estate with Children
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Planning Your Estate with Minors and Young Adults

By: Berkeley E. Hamann
Senior Trust Officer, First Command Bank Wealth Management & Trust Services
July 16, 2021 | 4 min. read

What is the best way to provide for children in your estate plan? The answer depends on your goals and the individual circumstances of your beneficiaries.

Comprehensive financial planning should include not only the accumulation of assets during your lifetime, but the management and distribution of the remaining assets after your death. Planning your estate is important to ensure your financial wishes are carried out and your family is cared for as you see fit.

If you have children or grandchildren, there are specific financial strategies you can use to provide for them, whether they are minors, young adults, or even mature adults that need financial assistance. First, consider their financial needs and what your goals are for the funds you allocate to them. For example:

  • How old are the children/grandchildren? What are their needs?
  • Do you want them to receive funds outright or with certain restrictions?
  • Do you aspire to pay for their education, a home purchase or something else?
  • Is there a need to protect the assets they receive from a divorce or creditors?

Once you have determined the answers to these questions, there are several options for you to consider.

529 Plans

529 Plans are investment accounts designed specifically to pay for a child’s education expenses, including tuition, fees, books, room and board.

Advantages include:

  • Investment earnings are tax-free.
  • Up to $10,000 per year can be used for K-12 tuition.
  • You can currently gift up to $15,000 per year into the account. The IRS also allows you to make a one-time contribution up to $75,000 to a 529 Plan tax-free by treating it as if you had put in the money over five years.
  • Individual 529 Plan accounts can be transferred from one beneficiary to another eligible family member free of federal taxes.

The primary disadvantage to 529 Plans is that if the money is used for purposes other than education, withdrawals are subject to income taxes and a 10 percent penalty on the earnings. Because of this steep penalty, it’s important to confirm the money can and will be used for educational purposes.

Uniform Transfer to Minor Accounts (UTMAs)

UTMAs are individual bank or investment accounts often used by parents or grandparents to give assets to their children or grandchildren. The minor cannot personally access the account until they reach the age of 18 or 21 – depending on the state. However, the money can be used for the child’s benefit as directed by the account’s custodian, who is usually the child’s parent or grandparent. 

Advantages of UTMAs include:

  • They are relatively simple to open and easy to contribute to with little administrative hassle.
  • For income tax purposes, property held in a UTMA is treated as if it is owned by the child. This means the earnings are generally taxed at the child’s tax rate, which is normally lower than the parent’s or grandparent’s tax rate.

However, it’s important to note the following disadvantages of UTMAs:

  • Once the child or grandchild reaches adulthood, the account is transferred to them and the funds are not restricted in any way.
  • Gifts made to these accounts are irrevocable, meaning you cannot change your mind and claim the money back.

Custodial Roth IRAs

A Custodial Roth IRA is a retirement account set up for a minor with earned income. The account is managed by the custodian, and the funds are not available to the child until they reach the age of 18 or 21 – depending on the state. Earnings in a Roth IRA grow tax-free and can be withdrawn tax- and penalty-free after age 59½, or for qualified expenses such as paying for a higher education or to purchase a house.

Advantages of Custodial Roth IRAs include:

  • There is no minimum age to open the account.
  • Investment growth and qualified distributions are tax-free.

Contribution limits are the primary disadvantage to Custodial Roth IRAs. The following stipulations apply:

  • The child must have received compensation such as hourly wages, salary or self-employment income during the year that a contribution is made.
  • The 2021 annual contribution limit is $6,000, or the amount of the child’s annual compensation – whichever is less.

Trusts

If you will be leaving behind substantial assets, you may want to consider creating a trust. A trust is a legally binding relationship in which you transfer funds to a professional trustee to manage in the best interest of your beneficiaries. A trust can be tailored to your specific situation, may reduce income and estate taxes, and avoids probate expenses and delays. One disadvantage is that trusts do not provide tax-free growth.

Because trusts are flexible and customizable, there are many different ways to structure them based on your goals. Two common types are Pooled Trusts and Separate Trusts:

  • A Pooled Trust provides for several beneficiaries. This gives the trustee flexibility in distributing funds if there is a child with greater needs or if other circumstances arise where the funds need to be reallocated among the beneficiaries. The disadvantage to this type of trust is the potential for unequal distribution of funds.
  • A Separate Trust provides for each beneficiary. With Separate Trusts, you can specify instructions and restrictions for how the money is to be distributed for each child. Depending on the number of beneficiaries you have, administration and distribution costs for Separate Trusts may be higher than for a Pooled Trust.

You’ve spent a lifetime establishing financial security, and the decisions you make now will protect your legacy and your family. Learn more about wealth and trust management at First Command, and talk to your Financial Advisor to make sure you’re taking the appropriate steps to safeguard your assets and secure your loved ones’ futures.

Curious about estate planning? Additional article of interest include Estate Planning 101, Six Estate Planning Questions to Always Ask Your Attorney and Digital Assets in Your Estate Plan.


Prior to investing in a 529 College Savings Plan, you should compare the Plan with any 529 college savings plan offered by your home state or your beneficiary's home state and consider, before investing, any state tax or other benefits that are only available for investments in the home state's plan. Please read the Plan's Disclosure Document which includes investment objectives, risks, fees, charges and expenses, and other information. You should read the Plan Disclosure Document carefully before investing. For this and other information on any 529 College Savings Plan, contact First Command at 1-800-443-2104 or your Financial Advisor.

Please note that the availability of tax or other benefits may be conditioned on meeting certain requirements such as residency, purpose for or timing of distributions or other factors as applicable.

As with any investment, it is possible to lose money by investing in a 529 College Savings Plan.

Information provided is for general purposes only and is not intended to be a substitute for specific individualized tax or legal advice. Where specific advice is necessary or appropriate, please consult a qualified tax or legal advisor.

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