How Do Trust Funds for Children Work - When Is a UTMA Account Not Enough?

When you want to give money to a child or grandchild, you have two main tools: a UTMA account and a trust. Here’s how each option works and how to choose the right one.

Why plan for minors?

Children can’t legally own property until they come of age.

Money set aside for a minor doesn’t automatically go straight to them. Without a clear plan, a court may appoint a conservator to hold the funds until the child reaches adulthood. Planning now gives you control over when and how the child receives the money and helps protect the gift from creditors and misuse.

UTMA: Simple gifts with a clear handoff

Use the Uniform Transfers to Minors Act for straightforward, smaller gifts.

The Uniform Transfers to Minors Act (UTMA) lets you open an account for a child and manage it until they reach the age of majority (18 or 21 in Arizona)A.R.S. § 14‑7659. Here’s how it works:

• Open the account: Name yourself or another adult as the custodian and title the account “John Doe as custodian for Jane Doe under the Arizona UTMA.”
• Manage the funds: Invest and spend the money prudently on the child’s education, hobbies or necessary expenses. Keep detailed records.
• Hand over control: When the child reaches 18 or 21, the custodian must transfer the account to the child. From then on, the child has full control and can use the money however they wish.

UTMA accounts are inexpensive and easy to set up, which makes them perfect for modest gifts like birthday money or contributions toward a laptop. However, they don’t allow you to set conditions or delays beyond age 21.

Trust funds: Control and protection beyond age 21

Create a trust when you need structure, long‑term guidance or asset protection.

A trust is a legal agreement where you appoint a trustee to hold and manage assets on behalf of the child. Trusts give you several advantages:

• Customizable distributions: You decide when and how the child will receive money. For example, you might distribute funds for college and then provide the remainder at age 25 or 30.
• Asset protection: A trust can shield assets from creditors, lawsuits and divorce proceedings. A spendthrift clause prevents the child from pledging their future inheritance to lenders.
• Flexibility: Trusts can hold real estate, business interests, insurance proceeds and investment accounts. You can name successor trustees and adjust instructions as circumstances change.
• Professional management: A trustee can handle investments and recordkeeping, relieving family members of the burden.

Setting up a trust requires legal advice and involves fees. But if you plan to leave a sizable inheritance or want to ensure the money is used wisely, a trust is often the better choice.

Comparing UTMA and trusts

Evaluate the differences before you decide.

• Age of control: UTMA funds must go to the child at 18 or 21A.R.S. § 14‑7659. Trusts allow you to delay distributions until the child is older or reaches specific milestones.
• Ease of setup: UTMA accounts require only a bank or brokerage form. Trusts require formal drafting and possibly ongoing tax returns.
• Asset protection: Trusts shield the child’s inheritance from creditors and divorces. UTMA assets become the child’s property once handed over.
• Tax considerations: UTMA income is taxed to the child and may be subject to the “kiddie tax.” Trust income is taxed at trust rates if retained; distributions shift the tax burden to the beneficiary.
• Flexibility of distributions: Trusts let you set conditions and incentives. UTMA accounts pay out automatically when the child comes of age.

Real‑world scenarios

See how families use these tools.

Steps to set up a UTMA or trust

Ready to act? Here’s how to get started.

Setting up a UTMA

1. Pick a custodian you trust to manage the funds.
2. Open a UTMA account at your bank or brokerage using the child’s Social Security number.
3. Deposit money or transfer securities into the account. You can contribute at any time.
4. Use the funds strictly for the child’s benefit and keep receipts.
5. Turn the account over to the child when they reach the specified age.

Setting up a trust fund

1. Meet with an estate‑planning attorney to draft a revocable or irrevocable trust tailored to your goals.
2. Name a trustee and one or more backup trustees. Provide clear instructions on when and why they may distribute money.
3. Transfer assets—cash, real property or life‑insurance proceeds—into the trust. Title the assets in the trust’s name.
4. Update beneficiary designations on accounts and policies so that funds flow into the trust, not directly to the child.
5. Review the trust at least every three to five years or after a major life event.

Next steps

Protect your child’s inheritance with the right strategy.

• Decide how much you want to give now and how much to hold for later. Think about education, housing and emergencies.
• Talk to an attorney if you’re considering a trust, especially if you want creditor protection or delayed distributions.
• Coordinate beneficiary designations on life insurance and retirement accounts so money flows into the trust instead of to the minor directly.
• Review your accounts and trusts annually to ensure they still reflect your goals and the child’s changing needs.

FAQs

Key sources

• UTMA statute and guidelines: A.R.S. § 14‑7659