Comparison of 529 Accounts, Accounts Under Ohio Transfers to Minors Act, and Irrevocable Trusts
I often have questions from clients who want to establish an investment for their grandchildren as to what type of account they should establish. Basically, there are three types of accounts that individuals can establish for children and/or grandchildren. Those accounts are 529 Investment Accounts, accounts under the Ohio Transfers to Minors Act, and also an Irrevocable Trust established by the parent or grandparent for the benefit of the minor. We will review these various options and provide some thoughts on each of these types of accounts.
A 529 Account is an account whereby an individual can establish the account for the benefit of a beneficiary, who we will presume will be either their child or grandchild. The parent can be the owner, and the beneficiary would usually be the child or grandchild. The assets in the account will grow income tax free, and no income tax will need to be paid on the earnings of a 529 Account as long as the beneficiary uses the funds for qualified educational expenses, such as tuition and room and board. In addition, if an individual simply removes the funds from the 529 Account, then income tax will be paid on the earnings of the funds deposited into the account. The owner of the account can also change the beneficiary on the 529 account to another beneficiary as well.
The Ohio Transfers to Minors Account is an account that Ohio law allows individuals to establish, presumably for the benefit of a minor individual who we will say is either their child or grandchild. It allows the individual to set up this account so that it will terminate and the funds will be distributed to the minor when they reach the particular age that was selected by the owner of the account. That age can be between the ages of 18 and 25. That means that during this time, the assets in the account can grow, but they will not grow income tax free. In addition, when the beneficiary attains the age that was selected, the financial institution must distribute the assets to the beneficiary outright.
An Irrevocable Trust is a special trust in which an individual establishes a trust for the benefit of a beneficiary and deposits funds into an account that is established in the name of the Irrevocable Trust. The funds will be out of the individual establishing the account’s estate, and also, the individual establishing the account can put very specific provisions as it relates to the use of the funds in the account. For example, he or she can state that the Trustee may distribute income and principal to the individual for any reason, or for certain various reasons, such as health, education, maintenance, and support. The terms of the Trust then will determine what happens to the funds if the beneficiary passes away before the funds are completely used.
When trying to determine whether to establish a 529 Education Account, an account under the Ohio Transfers to Minors Act, or an account under an Irrevocable Trust, an individual must determine the specific purposes for establishing such an account and also determine how much they plan on putting into the minor’s account. The 529 Education Account and the account under the Ohio Transfers to Minors Act are much simpler to establish. Whereas, if an Irrevocable Trust is established, the formation is a little more complicated and costly but they have much more specific control.
Therefore, when trying to determine how you may establish an account for the benefit of a minor child or grandchild, you should contact your local estate planning attorney and financial advisor and make sure that you review all of the positives and negatives of establishing such an account before determining exactly what type of account you will establish.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
405 Chauncey Avenue NW
New Philadelphia, Ohio 44663
Phone: (330) 364-3472
Fax: (330) 602-3187