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 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.
- Taxation of UGMA/UTMA accounts can be confusing. While the accounts are not tax deferred, the first $950 of earned income from investments in a UGMA/UTMA is generally tax-exempt. The subsequent income up to $950 is generally taxed at the child’s rate. Any income earned over $1,900 is generally taxed at the parent’s rate.
- 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.
UGMA/UTMA Accounts and 529 Plans
It is possible to roll over 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. You cannot change to a new beneficiary when transferring to a 529 plan.
- You don’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.
- The 529 plan is considered an asset of the child for financial aid purposes. However, if the beneficiary is the account owner’s child, the assets are treated differently for financial aid calculation and may increase the child’s ability to receive aid.
- 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. 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.