The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are types of custodial accounts that are set up by an adult on behalf of a minor. All the money and assets (e.g. mutual funds, stocks, bonds, Certificates of Deposits, etc.) in these types of accounts are typically turned over to the beneficiary’s control at the age of 18 to 21 (depending on the state in which the account was opened) and they can use the funds in any way they choose.
UGMA/UTMA: An Overview
UGMA/UTMA accounts are generally set up at a bank or brokerage firm. The custodian of an UGMA/UTMA account controls and manages the assets for a minor (the beneficiary of the account). A parent does not have to be the custodian of the account, and you can choose someone else to manage an UGMA/UTMA on your child’s behalf.
It is important to keep in mind that once an UGMA/UTMA is set up, it is considered an “irrevocable” gift, meaning that you cannot take back any money or assets that have been contributed to the account. As the custodian, you can make certain withdrawals from the account to cover expenses for the benefit of the child, such as school fees, tutoring, computer equipment, etc. It is also possible for family and friends to make contributions to an UGMA/UTMA on behalf of a child.
Some Things To Consider About UGMA/UTMA Accounts
- The custodian does not own the assets in the accounts; the minor ultimately owns the assets.
- UGMA/UTMA accounts do not guarantee that funds will be used for a specific purpose such as college expenses. Once the beneficiary is of legal age, he or she can use the funds any way they want.
- The custodian can invest the account’s assets in different types of investments, and make changes as and when they choose. There are no limitations on contributions.
- These accounts are not tax-deferred. Reporting of any income in the account depends on the amount of income the account generates and the minor’s age.
- UGMA/UTMA accounts can be taxed to the child or to the parent. If a child has unearned income below a specific threshold, the parent may elect to include the child’s dividends and capital gain distributions on their tax return by filing Form 8814. If this election is not made and the child has unearned income that exceeds a specific threshold, the child must file a tax return. Even if a child has income below the filing threshold, it may be desirable to file a tax return anyway to claim a refund of any tax withheld. The child may need to file Form 8615 with their tax return and pay tax at their parent’s rates. Form 8615 is not filed if the election is made to include the income on the parent’s tax return. You can visit IRS Publication 929 for more information on the taxation of unearned income to a child, including the thresholds mentioned above and consult your tax advisor.
- For financial aid purposes, the assets in an UGMA/UTMA account are considered to be the student’s and, therefore, may affect the amount of financial aid the student receives
Many families consider UGMA/UTMA custodial accounts when looking to save for a child’s education. While the flexibility and tax savings it offers are attractive, it is important to take into consideration the impact it may have on financial aid eligibility.
- The beneficiary will need to re-register their account after they have reached the age of majority. Due to the UGMA/UTMA laws, the initial account application is established and signed by the custodian. When the beneficiary reaches the age of majority, he/she must enter into an investment agreement with OppenheimerFunds by filling out and signing a new account application. The laws also state that once the beneficiary reaches the age of majority, no third party may receive information or negotiate on the account. To ensure the correct parties have access to the correct information, the beneficiary must re-register the account in their own name. If the FBO would like to reregister the account into anything other than his/her own name, please contact a service associate at 1-800-525-7048.
- In order to re-register an UGMA/UTMA in the beneficiary’s name once they have reached the age of majority, OppenheimerFunds requires:
- An Account Application for Nonretirement Accounts filled out and signed by the beneficiary. Financial advisor information does not transfer over automatically. If the beneficiary wishes to name a financial advisor to their account, the financial advisor information must be recorded on the application.
- A Letter of Instruction signed by the beneficiary instructing us that they have reached the age of majority and would like to reregister their account solely in their own name.
UGMA/UTMA Accounts and 529 Plans
It is possible to transfer an UGMA/UTMA account into a 529 college savings plan. Such accounts, also know as Custodial 529 plans, allow you to take advantage of the tax benefits offered by 529 plans. However, there are certain conditions:
- The beneficiary must remain the same. The custodian cannot change to a new beneficiary when transferring to a 529 plan.
- The custodian doesn’t gain control of the 529 account. The child remains the owner of the account and will gain control of the assets on reaching legal age.
- There may be certain tax implications when transferring funds from an UGMA/UTMA to a 529 plan. It is best to consult a financial or tax advisor beforehand.
Depending on the UGMA/UTMA, there may be other rules and restrictions than those discussed above. So, it is best to check directly with your particular account.
UGMA/UTMA accounts are a way to allow a child to own assets once they reach adulthood and can also help along the way to pay for education expenses. When considering a UGMA/UTMA for your college savings needs, be sure to do your research and explore all options. It is important that you factor in both the benefits and the limitations before you make a decision.
This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or other advisor regarding your specific legal, investment or tax situation.
Federal and state tax laws and regulations are subject to change and may adversely affect your investment in a Section 529 plan.
Investments in 529 college savings plans are neither FDIC insured nor guaranteed and may lose value. Investors should consider before investing whether their or their designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Please note the plan’s disclosure document includes details such as investment objectives, risks, charges and expenses, and other information that you should read and consider carefully before investing. You can obtain a copy of the plan document from each 529 plan sponsor.