Alternatives to the Uniform Gifts to Minors Accounts.

This month's column expands on Randy Neumann's Financial Planning column on Uniform Gifts to Minors Accounts (UGMA) in the March 1997 issue. Depending on the state you live in, these accounts may be referred to as Uniform Transfers to Minors Account (UTMA).

While I agree with Randy that the UGMA or UTMA offers families a relatively easy means of saving for a child's future, these accounts are not generally appropriate for children who may require future government assistance or who may be in need of a guardian. Most government assistance program -- such as Supplemental Security Income (SSI), Medicaid, or those provided by state rehabilitation, mental health or mental retardation agencies -- restrict benefits and services to people who are disabled and have virtually no assets. If a person with a disability who has assets m his or her name transfers these assets to a trust at majority (18 or 21, depending on the state), there is often a five-year waiting period before he or she will be eligible for government assistance. Any loss of government benefits substantially reduces the real value of the GMAA or UTMA assets. An exception to the waiting period requirement is the OBRA '93 "payback" trust, which allows a person with a disability to transfer assets to an OBRA Special Needs Trust without a five-year waiting period. (For more information on OBRA '93 trusts, see "Financial Planning," October 1996.)

My second concern about using UGMA/UTMA, is that the funds may trigger the need for a guardianship of the estate or a conservatorship when the beneficiary reaches age 18 or 21 and gains access to the funds. If the person is disabled and unable to handle or her financial affairs due to a physical or mental impairment, he or she may require a guardianship once the funds become legally available. Guardianship of an estate can be an expensive and intrusive means of protecting a person with a disability (For alternatives, see "Financial Planning," March 1997).

UGMA alternatives

There are alternatives to the UGMA that allow parents to save for their child's future.

During their lifetime, parents can make gifts to an irrevocable trust that includes "Crummey" withdrawal powers. A "Crummey" power (see box) is language in a trust which allows this gift to qualify for the standard $10,000 per year gift tax exclusion The use of irrevocable trusts with "Crummey" powers is a complicated area of law. Families should consult with an attorney familiar with tax law, estate planning laws and government benefits. The trust should be written as a supplemental needs trust, which limits distributions to funds for purchases of goods and services not otherwise available from government program.

However, use caution. If the beneficiary of the trust becomes eligible for needs-based government benefits, the Crummey power may disqualify the beneficiary for such programs as Medicaid and SSI. The government looks at gifts as assets, whether they were tax-exempt presents or not. There may be other options available including adding other children's names. Your gift is then to the children's trust, not to one of the children. Who actually uses its assets is inconsequential to the IRS. But remember, each child named must sign a Crummey power letter. Though the legal paperwork stipulates that all have access, the family understanding is that one child will benefit. Make sure, however, that your other children not only understand the purpose of the trust, but will adhere to your wishes.

Another variation on the above is the use of an irrevocable life insurance trust with special needs language. Just as with the trust above, disbursements should be limited to funds for purchases of goods and services not otherwise available from the government. The irrevocable insurance trust can be funded with a life insurance policy, subject to "split dollar payment provisions," which should avoid the potential problem of "gifting" to a beneficiary during a time when he or she is receiving governmental benefits. Split dollar payment provisions are complicated tax-avoidance vehicles that would take several columns to explain. The important point is that, because they are so complicated, anyone contemplating them -- or any other tax-planning strategy-should seek the help of experts in both the field of taxes and government benefits.

The use of an insurance policy called a "survivorship" or "second to die" policy is another possible tactic to use, providing an affordable means for many middle-income families to adequately fund their child's special needs trust without reducing their non-disabled children's fair share of the family's estate. Survivorship policies are generally less expensive than single life policies and provide assets to the trust when they are needed the most -- that is, upon the death of the second parent to the. Most families are not worried about what will happen to their child if one parent dies. Their concern is what will happen if both parents die. For many families, the survivorship policy addresses this concern.

Proceed with caution

Because of the government requirements, future financial planning is more complicated for the family who wishes to provide for their child with special needs. Our tax policies do not, unfortunately, encourage parents of special needs children to be able to provide for their child's future. This is an extremely complicated area of law. I cannot stress too strongly the importance of consulting with an attorney who is skilled in tax planning as well as knowledgeable about government benefits. The local or state ARC (formerly the Association for Retarded Citizens) may know of attorneys in your area who understand the very unique financial needs of parents with special need children. To identify such offices, contact the national office of The Arc: [phone].

"Crummey" Powers

Clifford Crummey was a crafty -- and wealthy -- father who wanted to both feed. a fund for his sons with a steady stream of income and to take the standard $1 0,000-a-year gift tax exemption. He understood that if he simply created funds for his children that they could not touch until a stipulated time, he would lose the tax exemption. With a lawyer's help, he created a letter that accompanied each gift, stating that his sons had access to each year's "gift" for 30 days only; after that, it was untouchable until the time he stipulated. During the 30 days, however, they could do what they wished with his $1 0,000 present. When Mr. Crummey died, the government went after his estate for the gift tax' exemptions he had taken, declaring that the letter was just so much paper -- a hoax -- because all parties understood the "gift" to be untouchable, and because, given the limited time period for access to each year's "gift," the resulting funds were actually a legacy. While the Tax Court agreed with the IRS, the 9th Circuit Court of Appeals sided with Clifford's heirs. Whatever the understanding the children had with their father, the Court said, he had legally established through his letters that the funds were "gifts." This decision also established the 30-day period as the shortest period of "access time" a giftor can set for the giftee -- no matter what their actual "understanding" is. This "Crummey Power" has