Two attractive financial options for some of our clients exploring estate planning options for their grandchildren can be found with the Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act. These are two college savings accounts which allow a grandparent to gift money to an account set up by the parent of a minor child as a custodial account. The account, in the name of the child, allows gifting without tax liability; such gifts are irrevocable, but you can keep control of the funds in terms of where it will be invested.
The Gifts to Minors Act is typically limited to investments towards certificates of deposit, life insurance and cash, while the Uniform Transfers to Minors Act allows you to invest in stocks, bonds, real estate and mutual finds. Both types of accounts should be managed by someone other than a parent; a parent would incur taxes on the account income.
The potential downside: When the child reaches the age of majority (18 in California), the child owns the account funds. This could jeopardize the child's eligibility for college financial aid, and may not be the age at which you want them to have access to the funds. An 18 year old is not likely to be the wisest money manager, as well.
If you are considering establishing a fund, or would like to explore your estate options, please speak with the estate planning attorneys at Gilfix And La Poll.