A properly designed Florida ITF account or gift-giving plan can help minimize estate and income taxes, and it can also remove property from the reach of the parents’ creditors. Lifetime gifts to children reduce the size of the parents’s taxable estate and thereby reduce the amount of inheritance subject to high death tax rates. Gift giving may also reduce the parents’ lifetime income tax. If a child is in a lower tax bracket than the parent, a gift program will transfer income from the parent to the child’s lower tax bracket.
Gifts of non-exempt assets to children provide significant asset protection if the gifts are not reversible under fraudulent transfer statutes. Property titled in the name of a child is not subject to execution by a parent’s judgment creditors.
The most common method of gifting assets to a minor child is through a custodial account for the benefit of the child. The Florida Uniform Transfers To Minors Act (“FUTMA”) explains how someone can open a custodial account for a minor. A custodial account for a minor child is created when the adult titles the account in the adult’s name “as custodian for (minor’s name) under the Florida Uniform Transfers To Minors Act.” An example would be “Homer and Marge Simpson as custodian for Bart Simpson under the Florida Uniform Transfers To Minors Act.”
Money in a custodial account is considered to be property of the minor child, not an asset owned by the custodian parent or grandparent. A judgment against the custodial parent may not be satisfied from the child’s assets in the custodial account. A judgment creditor’s writ of garnishment served upon a bank should not affect money held in the name of the judgment debtor’s properly titled custodial account. Creation and funding of a custodial account may be challenged as a fraudulent transfer if it is shown to be primarily intended to protect money from the parent’s creditor.
Custodial accounts are sometimes confused with other types of financial accounts established for the benefit of a minor child, namely “ITF”, “POD” or “TOD” accounts. An “ITF account” refers to an account at a bank or other financial institution where the owner has title to the money or other assets in trust for another person. A“pay on death” (POD) account or a “transfer on death” (TOD) account directs that the money is to be transferred to a named beneficiary upon the death of the account owner. ITF, POD, and TOD, accounts have the same effect and accomplish the same goal. The money is paid to named beneficiaries upon the owner’s death. These accounts are efficient estate planning tools because they transfer assets to beneficiaries without the necessity of a probate proceeding.
ITF, POD, and TOD accounts doe not provide any asset protection for the lifetime owner. Money in these accounts belongs to the owner during the owner’s lifetime, and the owner has the right to withdraw money from the account during his lifetime. Just as the owner has complete access to the money, a creditor of the owner can also get the funds to collect a judgment. A judgment creditor may garnish money held in a ITF, TOD, or POD account to execute a judgment against the owner during the owner’s lifetime. A creditor of the designated beneficiary or heir shown on the account title may not garnish the account during the owner’s lifetime because the money does not yet belong to the designated beneficiary or heir and the owner may amend the death beneficiary.