In my previous article, I covered accounts that many frum families utilize to save for their futures. This included a discussion on managing cash flow, planning for retirement, and other ways to invest for various goals.
In this piece, I will cover accounts that may not be top of mind, but can be extremely beneficial for frum families with a range of wealth, lifestyle, and personal circumstances.
UTMA/UGMA Account: A Uniform Transfers to Minors Account (UTMA)/Uniform Gifts to Minors Act (UGMA) is a custodial account that provides a straightforward way to transfer financial gifts to minors without the complexity of a formal trust. The specific type of account, UTMA vs UGMA, depends on your home state. These accounts are useful for parents, grandparents, and guardians to give money to a child and invest on their behalf. When the child reaches the age of majority, which differs by state, they gain full control of the account and can use the assets however they choose.
This is a wonderful way to save for a child’s financial future. Contributing birthday gifts, bar/bat mitzvah presents, and other monies over the course of nearly two decades, can lead to the child entering the adult world with a meaningful financial cushion to start a business, buy a home, or help pay down student debt.
I always ensure that clients realize there are no tax benefits to these accounts. Additionally, there are no parental controls, which do exist with certain trust accounts. If the child is irresponsible upon reaching the age of majority, the funds still belong to them, and they can spend it as they please.
I consider this account type a lower priority item compared to accounts that save for your own future. If you do not have enough funds saved for your retirement, it will be challenging to find a family member to support you during these years. It’s far more important to ensure you are securing your own financial future before giving to kids and grandchildren.
529 College Savings Account: A 529 account is the optimal way to save for a child’s college tuition. The money is invested, grows tax-deferred, and if the funds are used for qualified higher education expenses no tax is paid on the gains from these investments. Furthermore, some states offer an in-state income tax deduction or credit for residents who contribute to their home state’s 529 plan.
While this is a very useful vehicle, for many frum families it is a low priority item. The big concern is affording yeshiva tuition in elementary and high school. Paying for college tuition has far more options, including scholarships, financial aid programs, going to a cheaper school, going overseas to university, and taking out student loans. Yeshivas offer fewer options and it’s important for parents to focus on affording these near-term tuition expenses before focusing on college.
While I suggest 529 accounts to many clients, I also emphasize that given all their financial obligations, it is much lower priority than various other goals.
Revocable trust: A revocable trust, also known as a living trust, is a legal document that allows you to manage your assets while you’re alive and potentially avoid probate upon your death. You can change or cancel it at any time while you’re alive and competent. A revocable trust also allows for an element of privacy when managing assets after the owner’s death. There are no tax advantages to utilizing a revocable trust, however, the other benefits still make it useful for many families.
To set up this type of account, you must first speak with an experienced trust and estates attorney to determine if/how a revocable trust is suitable for you and your personal situation.
Irrevocable trust: An irrevocable trust cannot be easily changed or dissolved by the creator. This means that once assets are transferred into an irrevocable trust, the creator, or grantor, gives up ownership and direct control over them. The assets are then managed by the trustee for the benefit of the specified beneficiaries.
There are many uses for irrevocable trusts, including protecting assets from creditors, minimizing estate tax liability, bypassing probate, qualifying for Medicaid benefits, or supporting a beneficiary with special needs.
Like a revocable trust, consulting with an experienced trust and estates attorney to set up and correctly execute this type of account is a requirement. It is also important to hire a competent financial manager who can work with the attorney and who understands the terms of the trust, can execute the strategy correctly, and appreciates the responsibility of acting in a fiduciary capacity. Cutting corners when it comes to trust planning will inevitably lead to mistakes, potentially flushing lots of money down the toilet due to errors, missed opportunities, or forfeiting the benefits.
Donor Advised Fund (DAF): A DAF is a charitable giving vehicle that allows individuals to deposit assets in a public charity account for donation to charity over time. The donor gets an immediate tax deduction when making the contribution to the DAF and can still control how the funds are invested and distributed to charity. A DAF can be opened at a variety of brokerage firms or at some nonprofit organizations.
While many frum families give donations directly to charity, I have seen many people utilize a DAF. They are extremely useful for someone holding a security with no cost basis or a highly appreciated stock. If that person needs to contribute a large amount of money, say to a building campaign, instead of donating cash they can take a highly appreciated security or those with no cost basis and move them directly to a DAF. This allows the donor to circumvent the tax liability from selling these positions, gives them the tax deduction for their donation, and benefits the charity of their choice.
Health Savings Account (HSA): An HSA is a tax-advantaged savings account paired with a high-deductible health insurance plan. An HSA is a rarity in that it is “triple tax free.” This means that it allows you to set aside money on a pre-tax basis to pay for qualified medical expenses, the funds can be invested and will grow tax deferred, and if used to pay for qualified medical expenses you don’t pay tax on the gains. However, you must be covered by a qualified high-deductible health plan through your employer in order to open and contribute to an HSA account.
What’s important to you? Every family has its list of priorities. This is especially true within the Orthodox community, where spending patterns and communal obligations impact how we manage our finances. Readers should take the time to reflect on what is important in their life from a religious and familial perspective. Then work with their team of trusted advisors to utilize the right accounts to achieve those goals. Understanding the types of accounts that are available to you, and funding those accounts accordingly, is foundational to effectively managing your funds and reaching your financial goals.
