family savings

Gifts to Minors: LLCs Can Protect Them from Creditors and Predators

You’ve decided to fund a Uniform Gifts to Minor Account, but have you thought about how to make sure that legacy will be secure?

Uniform Gifts to Minor Accounts are very popular for parents and other relatives when establishing financial accounts for minor children. They are a means of making a “controllable” gift to a minor, but they come with some caveats that anyone considering them should understand.

When are These Types of Gifts Used?

For example, say you have a family with young children and you want to utilize the $15,000 per person annual gift exclusion. With this exclusion, anyone can gift up to $15,000 per year to as many people as they like without having to report the gift to the IRS. (For more, please see The Perplexing Tax You May Never Have to Pay.)  This will allow parents to set up a gift account as described below.  Each year, Mom and Dad together give $30,000 to these special accounts so when the kids reach adulthood, they have a source of capital to start their lives.

This is accomplished by creating a custodial account at a financial institution for the benefit of the minor child. These accounts are generally managed by the parent, although another person can be designated as the custodian. Such a custodial account can be established under the state’s Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA).

A Transfer vs. a Gift

The differences between the UTMA and the UGMA relate to the types of investments that can be held in each account and the dates in which each account terminates and is turned over to the child. Generally, the UGMA authorizes cash, bank accounts, stocks, bonds and mutual funds. The UTMA broadens these holdings to include real estate and other property, such as limited partnership and LLC interests.

Caveat: Suppose by the time the minor attains the age set forth in the state law for termination of the custodianship (as early as 18 under the UGMA and as late as 25 under the UTMA) the account has grown to a substantial sum, say, hundreds of thousands of dollars or more. Would the donor-parent feel comfortable turning over such a large sum without any controls to the child? What can be done to retain control of the funds beyond the statutory age for termination?

Protect Your Gift with an LLC

When parents first establish gift accounts, the beneficiaries are young. The parents have no way to know how fiscally responsible their children will be once they reach the age for distributions.  When the age for distributions is attained (18 or 21, as the case may be), Mom and Dad may feel the child is not yet mature and responsible enough to receive such large sums. 

For maximum asset protection, the solution can be setting up the gift account as a Limited Liability Company (LLC), instead of just depositing the funds into the account directly. And, depending on the donor’s objectives, that LLC can be established as a domestic account or an international account. In either case, placing the gifts into an LLC strengthens the protection immeasurably as control of the LLC vests with the manager, who is the parent. Without an LLC, any funds deposited directly into the account would be exposed to creditors and predators of the child. The LLC will be governed by a customized operating agreement containing a number of protective provisions. The identity of the members of the LLC is determined by the circumstances.

When to use an international LLC: If substantial continuing protection of the funds (from future creditors as well as future creditors and predators, including civil suits, divorcing spouses, bankruptcy, IRS liens, etc.) is desired, the solution should be internationally based. The asset protection laws internationally are generally more protective than those in the U.S. This LLC would be completely owned by the custodial account and managed by an overseas management company, which would be operated by the personnel of an international trust company. In this scenario the parent gives up all control of the money to someone they hire. This strategy is employed so that creditors and predators of the children cannot reach the assets. The manager of the LLC makes distributions to the children when there are no creditors.

When to use a domestic LLC: But if the goal is merely to keep control of the funds from the child, the answer can be simply to create a domestic LLC.  The LLC could be structured as a domestic member-managed LLC. This scenario is typically structured with a parent serving as the 1% managing member and the custodial account established being the 99% non-managing member.

In either case, the specialized operating agreement can provide that no member distributions can be made to any member before a certain date, and that the manager is engaged at least until then. There are additional protective provisions incorporated into the governing documents that can provide extraordinary levels of protection.

In Conclusion

In many instances it will be appropriate to implement the above-discussed additional controls and protections of the child’s custodial account. Only an attorney experienced in this area of the law should be used to implement this type of sophisticated planning.  

About the Author

Jeffrey M. Verdon, Esq.

Managing Partner, Jeffrey M. Verdon Law Group, LLP

Jeffrey M. Verdon, Esq. is the managing partner of the Jeffrey M. Verdon Law Group, LLP, a Trusts & Estates boutique law firm located in Newport Beach, Calif. With more than 30 years of experience in designing and implementing comprehensive estate planning and asset protection structures, the law firm serves affluent families and successful business owners in solving their most complex and vexing estate tax, income tax, and asset protection goals and objectives.

Most Popular

Planning to Sell Your Home in Retirement? Downsize Costs Along With Space
Budgeting

Planning to Sell Your Home in Retirement? Downsize Costs Along With Space

In this hot real estate market, consider the costs of buying and selling a house along with the expenses associated with your new digs.
November 13, 2020
What Biden Will Do: 24 Policy Plays to Expect From the Next Administration
Politics

What Biden Will Do: 24 Policy Plays to Expect From the Next Administration

The Kiplinger Letter forecasts President-Elect Joe Biden’s biggest priorities -- and the likelihood of progress on them.
November 19, 2020
The 13 Best Healthcare Stocks to Buy for 2021
Kiplinger's Investing Outlook

The 13 Best Healthcare Stocks to Buy for 2021

Most of the best healthcare stocks for 2021 will have some sort of ties to COVID, whether it's producing a vaccine or cure, or benefiting from the vir…
November 20, 2020

Recommended

Can You Think Your Way to Wealth?
retirement

Can You Think Your Way to Wealth?

Having the right outlook on life can help you on your path toward financial success. Here’s how to develop a wealth-building mindset for yourself.
December 2, 2020
Joe Biden’s Student Loan Plan: What’s in It for You?
student loans

Joe Biden’s Student Loan Plan: What’s in It for You?

The future of student loan debt could look quite a bit different, if President-elect Joe Biden gets his way (and Congress cooperates). From loan forgi…
December 2, 2020
An Uncomfortable Truth About Aging and Retirement Planning
retirement

An Uncomfortable Truth About Aging and Retirement Planning

It happens to us all eventually: We slow down a step or two as we grow older. If you’re managing your money on your own, there will come a day when it…
December 1, 2020
My Student Loan Relief Is Set to Expire, What Now?
student loans

My Student Loan Relief Is Set to Expire, What Now?

Millions of student loan borrowers are in for a rude awakening after Dec. 31. The ability to suspend loan payments is coming to an end, so you need to…
December 1, 2020