The Pennsylvania laws governing the rights of minors (children under the age of 18) to own property can be confusing. While minors may own property, their legal ability to exercise rights in the property, such as entering into contracts for sale, mortgages, or other dispositions may be limited or disallowed completely if a formal trust is not established, naming an adult to make such transactions on behalf of the child. Furthermore, many people are uncomfortable making outright gifts to children under the age of 18 for lack of maturity and experience managing finances.
Establishing a trust can be costly and unnecessarily restrictive. A more cost-effective alternative, The Pennsylvania Uniform Transfers to Minors Act (PUTMA), located at 20 Pa.C.S.A. § 5301, et seq, permits a person or his or her legal representative to transfer assets for the benefit of a minor, while naming an adult Custodian who has the power to manage those assets until the minor reaches the age of majority. For purposes of PUTMA, the age of majority is age 21; however, the Act allows for the Custodian to manage the property until age 25 if the transfer is made by a Will, a Trust, as an Irrevocable Power of Appointment, or under a life insurance policy.
Provisions to establish a Custodian under PUTMA can be incorporated directly into the transferor’s Will, Trust, or life insurance beneficiary designation by including the statutory wording: "as custodian for (name of minor) under the Pennsylvania Uniform Transfers to Minors Act." Absent any similar language, if property is transferred to the minor, and a trust was not established, the PUTMA will generally apply. Custodian designations may also be changed by filing a Change of Ownership form with most financial institutions who manage PAUTMA accounts.
The types of property that may be contributed to a PUTMA account are listed in 20 Pa.C.S.A. § 5309, and include the following:
1. An uncertificated security or a certificated security in registered form;
2. Money paid or delivered to a broker or financial institution;
3. The ownership of a life or endowment insurance policy or annuity contract;
4. An irrevocable exercise of a power of appointment or an irrevocable present right to future payment under a contract;
5. An interest in real property;
6. A certificate of title issued by a state or the Federal Government which evidences title to tangible personal property; and
7. An interest in any other type of property as long as the words above are used and the custodian acknowledges receipt of the custodial property.
While administration of a PAUTMA is not as regulated and scrutinized as that of a formal trust, the Custodians are not without specific required standards for their fiduciary duties. All assets are to be used for the benefit of the beneficiary. Custodians may be called upon by the beneficiary’s guardian, parent, the Court, or even the beneficiary him or herself if over age 14, to provide an accounting of the assets. If the assets produce enough income to require tax returns, they will need to be filed.
There are tax advantages to establishing a PAUTMA. For income tax purposes, the first $750.00 of growth in the account of a beneficiary under the age of 14 is tax exempt. The next $750.00 of growth in the account of a beneficiary under the age of 14 is taxed at the child’s income tax rate. Any growth over $1,500.00 is then taxed at the parent’s income tax rate. The growth in the account of a beneficiary age 14 and over is taxed at the child’s rate only. Also, transferring assets to a PAUTMA removes the property for purposes of federal estate taxes, provided that the transferor is not the Custodian, and it has been at least three years since the funds were transferred. Furthermore, property may be added to the PAUTMA account at any time, allowing for planned savings over a number of years.
There are also some disadvantages to the PAUTMA. First, unlike a trust, which can allow a trustee to determine how assets are distributed to the child for as long as the Grantor desires, once the assets are distributed from a PAUTMA account, the beneficiary is in complete control of the property. Also, if the purpose of establishing a PAUTMA account is to save for college, a state-sponsored 529 Plan may be more appropriate because all of the growth is federal income tax free, and the PAUTMA may be counted as available assets for the purposes of the child’s financial aid.
While there are several vehicles that enable a donor to transfer property to a minor, a PAUTMA account is one of the most simple and flexible ways to both protect the minor and protect property, both during lifetime and upon death. An Estate Planning attorney can advise you on which method is appropriate for your situation, and draft the documents necessary to accomplish your asset transfer goals.