A planning reminder should be to discuss taxes with all clients who have significant UTMA or UGMA accounts for minor children. The new tax law changed the Kiddie Tax forcing unearned income of minors to be taxed at the same rate as trusts & estates. This means that as soon as the child has more than $12,500 in unearned income they will be subject the highest marginal tax rate and even LTCG and dividend income will he taxed at a higher rate sooner.
2018 Trust Tax Rates On Capital Gains & Qualified Dividends
| $0 to $2,599 |
0% |
| $2,600 to $12,699 |
15% |
| $12,700 and Over |
20% |
Thus passive investment income of minor children can now easily be taxed at a higher rate than if the income was the parent’s as the parent will hit the higher tax rates at much higher income thresholds.
Depending on the child’s age parents could consider alternatives including:
• Converting to 529 plans
• Spending down or using the account balances for the child’s needs
• Shifting investments to longer hold term/non-current payout assets
• Depending on the child’s net worth and age determine if they could be self supporting
• Life insurance
If this issue applies this should be part of the annual discussion with the client’s tax professional.