If you're considering establishing an annuity account for a child in your life, you have a few options. Although children can't exactly own an annuity until they are an adult, there are ways to set up accounts for them to access later in life. A minor annuity is typically set up in a way that they can access it when they turn a certain age.
Federal laws offer guidelines for individuals setting up accounts for minors. Let's take a look at these acts to see what the proper steps are for opening an annuity for minors.
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What is the UGMA?
The Uniform Gift to Minors Act was established for adults to be able to open funds for minors that they could access in adulthood. Under this act, a lawyer is not required to file paperwork nor does the court need to be involved. It creates a straightforward way for adults to contribute to an annuity while retaining custodial ownership of annuity funds.
What is the UTMA?
While the UGMA is strictly about monetary accounts, the UTMA covers more assets. The Uniform Transfer to Minors Act facilitates the transfer of material assets such as real estate and artwork, as well as patents, to a minor upon the death or relinquishment of the owner of the property. It is usually enacted as part of the child's inheritance.
How Do Structured Settlements Work for Minors?
Another way that minors can be taken care of financially is through a structured settlement. When an adult is severely injured or killed in an accident, a civil lawsuit usually results in a structured settlement for the individual or their dependents. They are established as an annuity by structured settlement annuity companies to give the recipient a steady flow of money to take care of basic needs such a food, shelter and clothing.
It is set up to ensure that the money in the settlement is not squandered on useless things all at once. The goal of a structured settlement is to have some money left for the minor when they reach adulthood in addition to maintaining their basic present needs.
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Important Things to Know About an Annuity for Minors
As with any money, it is important to know the regulations surrounding its movement. There are certain tax laws and codes that apply to an annuity for a child as well. Let's see all the effects an annuity has on both beneficiaries and custodians.
Funds Placed in an Annuity for Children
Upon creating an annuity for minors, you must realize that the funds placed into the account are irrevocable. The only person who can take those funds out of the account is the beneficiary. If you find yourself needing those funds later in life, even if you're the custodian of the annuity, you may not be able to retract any deposits from the account.
Tax Regulations Surrounding an Annuity for Minors
If you are the custodian of an annuity for a child, any funds in the account are considered part of your taxable estate until the beneficiary reaches the maturity age specified on the account. The income on the account is taxed according to the "kiddie tax" rules on a child's tax return. A parent or guardian is responsible for filling out the tax papers and filing the return (the minor can sign when they turn 14).
Negative Effects of Annuity for Minors
When a minor decides to apply for college and fills out the FAFSA to receive federal financial aid, any assets that are in the name of the child will be considered by the government as potential payment for tuition. If there is an annuity in the child's name, it can lessen the amount of federal aid if the child has reached the age of maturity on the annuity.
However, if the funds are transferred to a custodial 529 college savings plan, the impact on the FAFSA is much less. In 2009-2010, the federal government's treatment of 529 college savings plans became more favorable toward students filling out the FAFSA.
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Good Start for Children
There are many ways to help your children and grandchildren get ahead as adults. Don't let the regulations and laws of an annuity for minors intimidate you. They are a great investment and not the only one to consider. Always be sure to do your research and find the best fit for your child.
With over seven years of freelance writing experience across a variety of genres, I have quite a bit of education and research to share with those looking for financial guidance. My personal experiences, including two house purchases, two paid off car loans, home refinance, and a Home Equity Line of Credit process, give me the practical knowledge to assist with large financial decisions. Meanwhile, budgeting everyday necessities for a family of seven focuses my expertise on daily savings. In addition, I have written financial articles for a top ranking finance site, Go Banking Rates.