Speaker 1 (00:02.53)
Welcome to the Physician Family Financial Advisors Podcast, where physician moms and dads turn today's worries about taxes, investing, and extra money into a comfortable feeling of financial security. I'm Ben Otley.
And I'm Nate Rennecke. Today's question is, are utmas a no-no for physician mommies and daddies? Kind of a fun name there, Ben. Yeah. So Ben, let's start by defining what an utma is. So what is an utma?
You're welcome.
Speaker 1 (00:33.125)
UTMA stands for Uniform Transfer to Minors Act, which is a law that creates an account type that allows people to make gifts to minors without intervention. so basically it's a kind of a trust account or an account that holds money for children. You've also heard of it called maybe a UGMA or a custodial account.
And so when I was touching up on my UTMA accounts before we recorded, I found that this law was created in the 80s. So some people can hear about this UTMA account and they assume, you know, that it's used, you know, very often, but sometimes you have to remember that we, as a country, we kind of inherit these accounts and some of them don't go away and some of them are replaced. So we're trying to figure out today, is the UTMA still good for physicians to use?
So how might it help physicians in the process of giving their children money?
Yeah. So the big draw on these UTMAs is that there's a tax advantage to them. And the tax advantages used to be a lot stronger, but over time, as people do, they abuse the tax code. And so we lost a lot of the benefits that go with UTMAs and they've been severely watered down by Congress since then. So essentially the first $1,050 of earnings in a UTMA account, and by earnings, mean like realized gains or dividends or interest.
The first $1,050 are tax free. The second $1,050 are taxed at the child's ordinary income tax rate. Beyond that though, it gets punitive because any earnings beyond that are taxed at the parent's top marginal tax rate, which can be quite a bit actually.
Speaker 2 (02:18.366)
So just some quick math there, roughly, if you have a big enough UTMA that earns enough money, earns enough money, you're essentially avoiding getting taxed at the physician's rate, which let's say worst case scenario is 40%. So at best, an UTMA can save, a large UTMA could save a physician 800 bucks a year.
yeah best or a little less than that but yes we're talking about eight hundred dollars a year at best
Okay, okay, got it. Okay, and so there's kind of a big caveat here that we need to go over, which is what happens, you you use this up now for several years, you get a little bit of tax break. What's the catch? Kind of what happens when your child becomes an adult?
Yeah. So the tricky part about UTMAs is that when your child reaches the age of majority and the age of majority, can be age 18, can be age 21, can be 24 or 25 because UTMAs are very dependent on the state in which the UTMA is established. So, but basically when your child becomes an adult, then that money becomes theirs. Like they can lay their hands on it. They can spend it on whatever they choose to.
I mean, it is flat out their money and that is okay if you have a child at 18 or 21 that is making decent decisions, but it could also be kind of a curse, especially my mind goes to if it's a Utma large enough to really get this tax break, there's a good amount of money in there that your child's just gonna get.
Speaker 1 (04:03.754)
Yeah, we're talking about probably the right size account to get the benefits. It's going to be somewhere between 20 and 40 thousand bucks.
Mm-hmm. Trying to imagine myself getting $40,000 at 21.
I can't tell you what I would have spent it on, but all I know is that the adult brain is not fully formed until the age of 25, and I think mine wasn't fully formed until I was 35.
Okay, so best case scenario is a few hundred dollars a year, which is hey, that's real money. But, you know, why do people hear about the utmost? What's other than a little bit of tax breaks? Why would people someone use them or what's the right way to use
I think it is a tax breaks is why we're hearing about them. you know, people on the internet talk about UTMAs as a way to save taxes and specifically the way they talk about it is putting money in your kid's UTMA account so that you can save taxes. it's the real problem with these things is the putting part, know, putting the money into the UTMA. So,
Speaker 1 (05:12.96)
Many physicians will say, Hey, I want to put money in my, my kids, UTMA account. want to save for them for their future or whatever it happens to be. And so they tuck money away into UTMA. And the problem with that is you're putting money in the child's name that the child does not know about. You're, basically giving them money and you're giving them large amounts of money. And most children are not prepared for this. And the thing that I dislike about this particular strategy is a you're giving kids money and I think kids should earn money.
And B, you're not telling them about it. So there's some, some sneaky business here and see it's all done in the name of a tax break. But I think really, if you're, if you're doing this right, which is parenting your children with money, the right way to do it is to teach them how to get their own money, you know, teach them how to earn it, teach them how to invest, you know, teach them how to set up a small business or teach them how to get a job, you know, show them how to save, show them how to spend, show them all this stuff. And so I kind of feel like the UTMA thing is like,
It's like chickening out. It's like abandoning your post as a parent by sneaking money into the accounts. I think if you're doing this in a forthright fashion, you're teaching your kids to save that a UTMA is okay because it's the kids money at that point. You know, it's money that they earned, that they, that they save, that they put away. And as a result, they deserve the tax break. But unfortunately, you know, a three year old doesn't have the capacity to earn money. And so if you're doing this the right way,
You're most likely doing this with a 14, 15, 16 year old kid, maybe older than that, when they have the ability to earn money. So of course, they could make money around the house. You could set them up with a job, washing the dog or walking the dog or dishes or mowing or whatever you're comfortable with your own home. It's a way for them to earn cash on their own. So they got some skin in the game. They have a stake in the outcome.
And, you know, to show them how to open a bank account, show them how to write a check, show them how to save, show them how to not spend and to spend on things that that match your values. You know, these are all things that you can do. And I think that that is kind of a yes, yes for UTMA instead of a no-no. Yeah. And I think a no-no for UTMA is giving the kids the money.
Speaker 2 (07:31.636)
Right. It sounds to me like the real benefit here, obviously, you know, there's a little bit of a tax benefit, but the real benefit is to use it as a teaching tool. And I hear physicians ask all the time, kind of, how do I get my child started in investing? And this would be a decent way if it was their money and they could learn how to place an investment. But
Again, if you just do this, which I hear mostly from, from parents with really good intentions, uh, that they just want, it's weird thing. I don't really know why, but they want to hide the money. Um, and it be this huge gift to surprise at age 18. And I just don't think while their heart is in the right place, I don't think it's going to have the impact that they hope. I mean, it would be a great surprise, but there was no lessons learned.
So, if you're doing it the right way with the earned money, that means your child is earning money. What's the very best way is to somehow wrap the Roth into this? Can you talk about that?
Yeah.
Speaker 1 (08:43.214)
Yeah, so I can tell you a story about what I did with UTMAs. So I started off teaching my kids about money when they were four, in age-appropriate ways. And over a period of time, I gave them earning opportunities, and they saved some of their money, and they spent some of their money, and they shared some of their money. But the part that they saved, we opened up a bank account, just straight up bank account, and we put that money in the bank account in a UTMA registration.
And then when that money got to be an appropriate size and when, my kids are ready for, for talking about investing, um, I sat him down and helped them fill out an account application using a paper and pen, you know, printed it out. They filled out the envelope, they liked the stamp, they wrote the checks, they did all this stuff. So you can imagine that this is not a six year old, right? I mean, this is, this is a kid who's 14, 15, 16 years old. It has the ability to, uh, write a check, you know, so these are.
people burgeoning on the edge of adulthood, we opened up an account and then we, you know, I talked to them about mutual funds and how to invest. talked about index funds and then we popped their money into the UTMA. And then, you know, the money grew and didn't grow a lot because it wasn't in there very long. And then when, when they got their first job, what we did is we cashed out that UTMA and we opened up a Roth IRA with their money.
And so then, you know, they had to fill out the Roth IRA application, know, rinse, repeat the whole story, but all along they've got skin in the game. so now about once a year we'll sit down and we'll look at those Roth IRAs and like, dad, I can't believe how much money's in here. There's like, I don't know, $6,000 in here. Right. And they're stunned. And I'm like, you know, what's cool about this? And she'll say, what? I say, this is all your money. You earned every nickel that's in this account. You earned and save this amount.
And then I'll say, you know what's interesting to me? And they'll say what? I'll say, this is only a fraction of what you actually earned. You didn't save everything that you made, you spent a bunch of it. And so that allows them to imagine what it would be like if they had saved more or if they had saved less so they can see the consequences of their actions over a longitudinal timeframe.
Speaker 2 (10:49.006)
I really like that. You know, I think that minors today, see, you know, if they, let's say they do get interested in money for some odd reason, like I was when I was young, it feels like it's all or nothing. It feels like you're either investing everything or spending everything. And once you get older, you start to mature, you realize that this is a long process and it's just part of life is to save something every month. And
that is just the first step in showing them how much power there is in that and that you made, you know, funny money as a kid and it's already 6,000 bucks before you're even off to college. Right. So I really like that. Seems like a good tool if used the right way, like many other tools. But other than that, it's it's not I just wanted to put a cap on what this money is used for. It seems like it's for the child and
I would not recommend it be used for college. It's mostly just a tool for investing and teaching your children to save.
Is there money? Is there money? So I say it's a no-no for physician mommies and daddies, but it's a yes-yes for physician kiddies, if it's their money.
Yeah, great.
Speaker 1 (12:06.382)
All right. I'm I don't have to re-record that one because that's a lot of mommies and daddies and kids. Well, folks, I hope you've enjoyed this episode and keep your questions and comments coming. can visit us at physicianfamily.com slash podcast. can email us at podcast at physicianfamily.com or you can call us and leave us a voicemail at 503-308-8733. Again, 503-308-8733.
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