I am looking to open a trust fund for an 8-month-old baby boy. I would like him to have something when he gets old enough to retire, but I’m not sure where to start.

Karin Price Mueller/The Star-Ledger writes: Answer: Your two main choices would be starting a trust, or using an UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfer to Minors Act).

There are advantages to the UGMA or UTMA route, but if you do this, there will be no guarantee the funds would be used for the baby’s retirement.

Still, it’s worth considering.

“Opening this type of account is fairly simple and allows a donor to gift funds to the beneficiary and manage the account until the beneficiary reaches the age of majority, which is 21 in New Jersey but can vary by state,” said Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown.

The potential ease of the UGMA/UTMA account is offset with the lack of long-term control you can maintain over the use of the funds, he said. Once the beneficiary has reached the age of majority, the account must be placed in his name and he will have full control to use the funds.

“Since your stated objective is to earmark the funds for the beneficiary’s retirement, you may want to consider having a trust document drafted by an attorney,” he said. “The document can be drafted to name a trustee to oversee the trust assets and to ensure that they are used for your stated goal.”

Also important is how much you give, and how.  In 2013, the IRS allows you to give up to $14,000 per person without having to report that gift at all, and married couples can combine their gifts, which allows you to give up to $28,000 per recipient, said Victor Medina, an estate planning attorney with Medina Law Group in Pennington.

“If you gift more than the annual exclusion amount, you’ll have to file a gift tax return — which isn’t the same thing as owing gift tax,” he said. “You don’t start to owe gift tax until you give more than your lifetime exemption, currently $5.25 million — which would be quite a trust fund.”

Medina said as a bonus, when made correctly, these gifts will be outside of your estate for estate tax purposes, and New Jersey doesn’t have any rules about gift taxes except that gifts made within three years of death will be rolled back into your estate.
To your specific goal of retirement funding, it sounds like a trust would be the way to go.
There are some income tax considerations, too.
Under custodianships like UGMA or UTMA, the income is taxable to the minor whether or not it is distributed, Medina said.