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If you are planning your estate as the parent of a dependent child, you should definitely address the child in a will. You should nominate a guardian to care for the child after your passing, and this in an absolute must.
A guardian will look after the ward’s day-to-day needs on a personal level, and you could give a guardian the right to manage the child’s inheritances.
We should point out the fact that the probate court would step in to appoint a guardian if you do not name one in your will.
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You could alternately use a trust to provide for your minor child when you are planning your estate, and this is more efficient some ways. One option would be a revocable living trust, which is a comprehensive estate planning tool.
There would be no loss of control of the assets, because you would act as the trustee while you are alive and well. You would name a successor trustee to step into the role after your passing, and your heirs would be the beneficiaries, including an underage child.
After your death, the trustee would administer the trust, and they would be bound by instructions that you record in the trust declaration. The trustee would use the assets for the benefit of the child, and direct distributions to the beneficiary could commence when they reach adulthood.
A testamentary trust is another type of trust that can be used for inheritance planning for minor children. This is a trust that is contained within a will, and it would go into effect after the death of the grantor.
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The Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA) were passed to allow for the creation of custodial accounts for children. A UGMA account can hold financial products like stocks, mutual funds, and bonds.
In 1986, the UTMA was recommended as an extended version of the UGMA. It gives an account holder the ability to convey real estate, motor vehicles, collectibles, and other types of property into a custodial account that will be inherited by the child.
At this point, all the states in the union except South Carolina have adopted the Uniform Transfers to Minors Act, so the expanded investment options are available in Ohio.
With either type of account, a custodian that is named will manage the assets until the child reaches the age of majority.
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This is a possibility, but a 529 account may actually be a better choice if the purpose of the account is confined to college savings. The funds in this type of account can only be used for educational expenses, and you can take back the money yourself at any time if you choose to do so.
The tax advantages are more significant when you have a 529 plan. Investments can grow free of taxation, and withdrawals that are used for approved educational purposes are not taxed.
On the other hand, UTMA and UGMA account income above $1100 is taxable. The first $1100 above the initial threshold is taxed at the child’s rate, and income that exceeds $2200 would be taxed at the parents’ rate.
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Life insurance is the perfect income replacement vehicle when you are planning your estate as the parent of a minor child. You can make a trust the beneficiary of a life insurance policy, and a custodial account can also contain life insurance, so this can be part of the plan.
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