Can a Minor Child Have a Deferred Annuity?

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Minor children cannot legally sign a contract or own investments such as stocks or annuities. Direct ownership of an annuity is impossible because of this. However, there is one option that allows you to purchase or give an annuity to a minor child. You have to make the transaction in compliance with the Uniform Gift to Minors Act or the Uniform Transfer to Minors Act.

UGMA Vs. UTMA

Both the UGMA and the UTMA are custodial accounts that allow parents to gift children funds or assets from the moment of birth. An adult is the custodian of the account. UTMA assets transfer to the child when he reaches a specified age set by the state; in many cases it's 21, but it can extend as far as age 25. The UGMA normally ends and the assets transfer to the child at age 18. The custodian can remove funds only for the benefit of the child, which does not include parental responsibilities such as food, clothing and shelter.

Application

There are steps you follow when making the child the owner under UGMA and UTMA rules. You list the child as the annuitant and chose an appropriate beneficiary, most of the time it's the estate of the child. Normally the person gifting the annuity is the custodian. When you list the owner, you use the child's Social Security number but list then list the custodian’s name. It might read, for example, "Mary Jones, custodian for Billy Smith under the Michigan Uniform Transfer to Minors Act." In this case, the adult is the custodial owner. Later, ownership transfers to the child when she reaches the age of majority.

Amount of Gift

You can put any amount you wish into a UTMA or UGMA, but may end up using your gift tax exemption or paying gift tax if the amount is over the allowable annual gift exclusion, which is $13,000 for 2011.

Is an Annuity the Right Product?

When you put funds into an annuity, unless the child takes a substantially equal payment based on his life expectancy every year or becomes disabled, there's a penalty if he removes the funds before age 59 1/2. Some parents realize this and simply want their children to have funds for retirement. In that case, the deferred annuity may be the best possible product.

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