Should You Leave Money for Your Kid With a Will or UGMA?

Your money isn’t only for you—and that’s a good thing, when you’re using money to make your family’s life brighter. You’re used to supporting your family in big and small ways, from picking up their favorite snacks to saving up for milestones like a college education or a wedding. You might want to pass on some of your money to your child one day as an inheritance.

While a will is a traditional way to leave money to your children, other giving structures might help give your kids a financial boost...while you’re still alive to see them enjoy it. Both a will and a Uniform Gifts to Minors Act (UGMA) account can be great ways to set money aside for your kids.

Will vs. UGMA: How They Work

A will and a UGMA account are both ways to put money aside for your child in the future, but these options operate very differently.

As a basic refresher, your will is a legal document stating your wishes for how to distribute your belongings after you pass away. A will can also let your loved ones know your preferences for a funeral or memorial service, who should take care of your children or pets and who you’d prefer to execute your estate.

UGMA accounts are custodial accounts available in every state. The accounts can hold cash, investments and financial securities for a minor. An adult such as a parent opens and manages the account until the minor comes of age. Any contributions you (or anyone else) put into a UGMA become the child’s property. A UGMA offers some tax advantages on investment earnings compared to regular taxable brokerage accounts—the first $1,250 of earnings is exempt from federal income tax, and the next $1,250 is taxed at the child’s income bracket (which is usually lower than the parent’s).

Reasons to Prepare a Will

When you have a baby, getting your will in place will often take priority over most other financial plans. Saving for college or opening other accounts for your child are great goals, but they can generally wait until you have a valid will first.

Your will is the main opportunity for you to name a preferred guardian for your children. A will doesn’t establish legally binding guardianship, but the courts prefer to respect a parent’s wishes for their child when possible. You probably want to have input into who will care for your child if something happens to you, and your will is an important place to do it.

A will is also vital because it ensures the legal system will have a record of your wishes if you pass away. If you don’t have a will, courts follow state law to determine how to handle your estate. The probate process without a will can be expensive, lengthy and stressful for your family. Having a will can go a long way to avoid disputes and make sure your money and belongings go where you intend.

Remember to update your will regularly, especially when there are major changes in your family structure.

When a UGMA Might Be a Good Fit

Your children may face a whirlwind of milestones and opportunities in early adulthood. The median age many couples get married in the United States is 28 for women and 30 for men (LGBTQ couples tend to be a few years older—33 for women and 38 for men). The average age to give birth for the first time is just over 27 years old. The average first-time homebuyer is 33 years old. All this to say, your kids’ 20s and 30s may be a busy—and expensive—time.

Hopefully, when your children are in their 20s and 30s, you’ll have decades of your own life ahead of you. You may not even be retired by the time your kids are building lives of their own.

Putting money aside in a UGMA can be a way to give your kids a financial gift while they are still young. You might consider using this account as a place to give a portion of their expected inheritance. Advantages can include that the money is available for big milestones, you can be there to offer advice and you can see the results of your gift.

Here are some signs a UGMA might be a good fit for your family:

• You have funds to cover your lifestyle comfortably: If you’re giving money to children during your lifetime, make sure you cover your own expenses first, including both needs and fun expenses. It’s your money, so if you want to take a cruise on every ocean before you carve out a chunk of your estate for your children, that’s your prerogative.

• You want your child to receive a financial gift in young adulthood: In 10 states, you can set provisions for a UGMA to go to the child by age 25 (and up to 30 years old in Wyoming), but generally your child will take control of the account between 18-21 years old, depending on your state.

• You’re comfortable with your child having full financial freedom: Once your child takes control of a UGMA account, they can use the funds however they want. Consider whether you’d be OK with knowing they spent a gift differently from how you’d choose.

• You want a tax-advantaged way to grow investments for your child: A UGMA account can come with some tax advantages compared to investing in your own accounts. If you’d like to manage and grow an account specifically for your child, a UGMA might be a great option.

You don’t need to give to your children in only one way. Both your will and accounts like a UGMA can play a part in your overall estate and gifting plans for your kids. Make sure your will is up to date and consider talking with a financial advisor to work out an inheritance plan that reflects your wishes.

Fabric by Gerber Life and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.