Often, as parents or grandparents plan lifetime gifts or for disposition of property interests at death, they struggle with deciding whether to employ a trust to manage the transferred assets for the benefit of their loved ones. Depending on the kinds of assets being transferred and their values, trusts may be ideal, even essential, arrangements to provide proper management and protection for the beneficiaries. By creating a trust and selecting a trustee with whom the transferor is intimately familiar and has confidence, the transferor can feel comfortable that the beneficiaries’ reasonable needs and desires will be in good hands. Trusts are very flexible legal arrangements that allow someone to precisely define how the transferred assets should be managed, by whom, and for how long. For these reasons, trusts are commonly used for gift and estate planning purposes.
Sometimes, the value of the transferred assets might not justify the costs of creating and administering a trust. A trust is a separate taxpaying entity that may require obtaining a taxpayer identification number from the Internal Revenue Service, preparing and filing trust income tax returns annually, and paying professionals, including accountants and attorneys, to help with its administration. Especially if the transferor does not intend for a long-term trust arrangement and prefers that the assets to be transferred be managed by a third party for a relatively short period of time, after which the beneficiary should have access to and control of the assets, the costs associated with creating and maintaining a trust will not be warranted.
For those instances when a trust arrangement is not practical, one option has always been a custodial account or arrangement. Like most states, Ohio has adopted a version of the Uniform Gifts to Minors Act referred to as the Ohio Transfers to Minors Act. This law allows a transferor to designate a custodian to hold legal title to the property to be transferred to a minor as the beneficial owner. Custodial arrangements for minors may be created by lifetime gifts or by way of gifts upon death. One may even designate a custodian for a minor beneficiary of a retirement plan benefit, including an individual retirement account. Pursuant to Ohio law, which allows for such arrangements, before April 6, 2017, custodians were permitted to hold property for the benefit of the minor beneficiary only until the beneficiary attained the age of twenty-one. When the beneficiary reached age twenty-one, the custodial arrangement was to be terminated, and the custodian was required to personally transfer title to the custodial property to the beneficiary.
While the custodial arrangement is in effect, however, the custodian has complete control of the custodial property, similar to a trustee, with authority and responsibility to manage and invest the property and to decide how to spend or use the custodial property from time to time, for the benefit of the beneficiary. The restriction to age twenty-one for custodial accounts pursuant to the prior law did not appeal to parents and grandparents who felt that those situations requiring property management for a young person required oversight beyond age twenty-one.
The Ohio legislature addressed this concern by allowing a transferor to provide that a custodial arrangement remain in place until the beneficiary reaches age twenty-five. Effective for Ohio custodial arrangements created after April 6, 2017, the transferor may require that the transferred property be subject to the control of the custodian until the beneficiary attains age twenty-five.
This change in the law is significant. It now allows some transferors to forego the use of a trust arrangement if they are comfortable with turning over control of the gifted property from the custodian to the beneficiary at age twenty-five versus age twenty-one under prior law.
Each situation is unique, and the factors in each circumstance must be carefully weighed and considered. Still, the ability to employ custodial arrangements for beneficiaries until age twenty-five has certainly provided greater flexibility and better options to transferors.
If you have any questions, please contact Mo Bidar at 216-621-7860.