Trust? 529 Plan? UTMA? Which Account Is Best for Your Young Child?

The answer for families with significant wealth is often all three; read on to find out why.

Especially at the beginning and end of the year, many parents (and grandparents) consider if/how/when to fund accounts that benefit the family’s younger generations. But then they might be caught between two instincts:

#1. To set the children up for success by opening an account for them.

#2. Resistance due to the loss of control over the funds and the child’s privacy. Banks require a child’s Social Security number to set up an account. This drives many to use their existing accounts and within those earmark funds for children.

Oh, but wait… there’s another conflicting instinct to contend with: indecisiveness. There are a dizzying number of options out there. How do you select the best one? Should I open a custodial account? Or, a 529 plan? Perhaps establish a trust? We typically advise clients that there are many ways to open an account for the benefit of a young person, and they all make sense for different reasons. The following is a quick summary of the types of vehicles we recommend most often to clients. Please note that the choices are not mutually exclusive.


  • The major benefits of setting up a trust and naming your children beneficiaries are control, privacy, potential tax savings and asset protection from creditors. You, the grantor, can decide how your children/grandchildren will interact with your wealth, over a long period of time. Trusts allow for the most customized distribution terms and the ability to choose at which age(s) the beneficiaries can access the funds and for what purpose. Access to the funds (and the amount) can be staggered — for example, at ages 21, 30 and 45. Interestingly, the name/title of the trust can be quite generic and not include the names of the children it will benefit.
  • Trusts are a bit more complicated to set up and administer. The trust document must be drafted by an attorney; you need to name a trustee to administer the trust (you and your children can be co-trustees along with a corporate trustee such as LNW); and annual tax returns are required. For many high-net-worth families, the great flexibility and control provided by a trust far outweigh the extra effort involved.

CUSTODIAL ACCOUNTS — UTMAs (Uniform Transfer to Minors Act)

  • Big benefits are ease of setup and simplicity. UTMAs are opened much like an individual bank or investment account, except that an adult custodian needs to be on the account until the child reaches age of “financial majority,” often age 21.
  • A potential disadvantage is that the child is legally entitled to the account at a relatively young age, generally 21 years – no ifs, ands, or buts.
Setup Requires a legal trust document and account opening. Simple application and account opening at a financial institution or investment firm. Simple application and account opening. Plans are sponsored by individual states.
Costs Setup costs and ongoing trustee / administration and investment costs, including annual tax return filing. Little to no setup costs, but ongoing maintenance/ investment costs depending on financial institution. Typically maintenance, administration and investment costs (can find lower cost options in certain states).
Control “Trustee” has control (parent should not be trustee) and corporate trustee is recommended. “Custodian” could be parent, although that would include the accounts in your estate. “Owner” can be parent and account would not be included in estate in most cases.
Investment Choices Flexible Flexible Limited to options in particular state plan.
Age of Distribution Flexible as you designate age of distribution in trust document. 18 or 21 in depending on the state (there is an “age 25 UTMA” option but annual exclusion gifting ability is lost). No set age, but qualified distribution only for enrolled student.
Income Tax Benefits No No, accounts are taxed at trust tax rates. Yes, grows tax-free and distributions are tax-free if used for qualified expenses.
Distribution Terms Determined by trust document, can provide a flexible definition for education. Limited: Only the Custodian can withdraw funds for the child’s costs, but once the child is over 21 (or 25 if elected) the account is controlled by the child. Qualified higher education expenses including college tuition, room, board, fees, books. Up to $10,000 per beneficiary per year can be distributed for K-12 enrollment or tuition.


  • There are many advantages to 529 Plans, including tax savings. Established for college costs and recently expanded to include $10,000 annually for K-12, 529s grow tax-deferred AND receive tax-free treatment on withdrawal if you use them for qualified education expenses. Pretty cool!
  • A disadvantage: if the child doesn’t attend college and wants to use the money for something else. However, the child does not control the funds; the account owner does. And you as account owner can switch beneficiaries at any time. You can even name yourself as beneficiary! If funds are withdrawal for non-education or education that does not qualify, there will be 10% penalty and also tax due on income and capital gains.

Saving toward specific goals with some or all of these accounts can provide both peace of mind and financial benefits. Whether your goals for children or grandchildren are purely about college funding or more broadly about funding business endeavors or a house purchase, getting the young person involved proactively is paramount. Be sure to prepare them so they are also invested in their education, future career, or any other family value you want to pass on. Engage them early about the family history that led to funding these accounts as well as the nature of ongoing decisions relating to these accounts.

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