UTMA and UGMA Accounts

UTMA and UGMA accounts allow you to provide a minor with financial savings and a head start. UTMA stands for Uniform Transfer to Minors Act. UGMA stands for Uniform Gift to Minors Act. These accounts can give adults an opportunity to transfer assets to a minor without setting up a trust. In this article, we will go over the basics of UTMA and UGMA accounts.

The Basics

With these accounts you can transfer funds to a minor, but they cannot access them until they reach the age of majority. This age will differ from state to state. The gift giver cannot specify a purpose for the funds; they become the minor’s to do with as they please when they reach the appropriate age. Once you deposit funds into a UTMA or UGMA account you cannot transfer them back. However, you can appoint yourself as a custodian and use funds to cover education and welfare related expenses of the minor.

Differences

The first main difference between a UTMA and UGMA account is the type of assets it can hold. With a UTMA account you can hold almost any type of asset like real estate, vehicles, art, and patents. On the other hand, with an UGMA account you can only have them hold financial assets like cash, stocks, bonds, and mutual funds. The second difference is state availability. UGMA accounts are available in all 50 states whereas UTMA accounts are not accepted in South Carolina or Vermont. Specifics regarding the permissible assets differ between each state.

Tax Implications

UTMA and UGMA accounts do not offer tax deferral benefits. This means you must pay taxes on dividends, interest, and capital gains in the year you earn them. The minor’s parent or guardian will have to file a tax return on their child’s behalf. This is only a requirement when you reach IRS income thresholds. The parent or guardian may also opt to report the income on their own tax return by using a Form 8814.

The tax advantage is that the income is taxed at the minor’s lower tax rate. But they are subject to the kiddie tax. With these rules the first $1,350 of income is tax free. The next $1,350 is taxed at the child’s tax rate and any income over $2,700 is taxed at the parent’s marginal tax rate.

Impact on Financial Aid

FAFSA will consider UTMA and UGMA accounts as the student’s property even if it is managed by a custodian. With the FAFSA formula, student owned assets are assessed up to 20% of their value and parent owned assets are assessed up to 5.64%. This means that if you have a $10,000 account in the student’s name $2,000 would count against financial eligibility. Whereas if the account was in the parent’s name only $564 would count against eligibility. One way to avoid this problem is to use the UTMA or UGMA accounts for education expenses before you apply for FAFSA. Second, you can transfer the funds into a 529 plan.

Why Create UTMA and UGMA Accounts

UTMA and UGMA accounts allow you to provide for a child permanently. It eliminates the complexity of trying to transfer an asset to a minor since they cannot enter into a contract. If you feel that one of these accounts is right for your financial situation, meet with a qualified financial planner who can help you set one up.

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