UTMA Accounts: A Flexible Way to Save for Minors

Uniform Transfers to Minors Act (UTMA) accounts are often established to help fund a child’s education, but they offer more flexibility than traditional college savings plans in how the funds can be used.

Saving with Flexibility in Mind

A UTMA account is a type of savings account that allows parents, grandparents, other relatives, and friends to gift assets to a minor without establishing a formal trust. It is simple to create, and contributions qualify for annual exclusion treatment. The donor or custodian manages the assets on the minor’s behalf until ownership is transferred to them, when they can access the funds for educational and noneducational expenses. When the child reaches the age of majority, which varies depending on the state, the account will terminate.

UTMA is an extension of the Uniform Gifts to Minors Act (UGMA). UGMA accounts are adopted in all 50 states, while 48 have adopted UTMAs. The UTMA extends the original definition of gifts beyond cash and securities.

Funding

The account can be funded with a variety of assets, including cash, stocks, bonds, mutual funds, exchange-traded funds, and unique assets such as real estate, artwork, royalties, and intellectual property. The custodian has a broad range of options since they are not limited to investments on a state-sponsored platform, as is the case with a 529 plan. Also, there is no cap on UTMA contributions, although exceeding the annual exclusion triggers gift tax reporting, use of the gift tax credit, and if no credit remains, gift tax liability.

Account Control

The donor can act as custodian or appoint a third party to manage the assets on the minor’s behalf until they become of legal age in their state, at which point they become the owner of the assets and can withdraw the entire balance at any time and for any reason. In some states, the account can only be transferred with the custodian’s permission at age 18 and is transferred automatically only at 21. In at least one state (Florida), the account can be created to provide that the funds are made available to the minor at age 21 and, if not withdrawn, retained in the account until age 25.

Tax Considerations

Earnings are taxed at the child’s rate, which is typically lower, up to a certain threshold, at which point the income is taxed at the parents’ rate under what is known as the Kiddie Tax. Contributions are not tax-deductible and are subject to federal gift tax laws and limitations.

Financial Aid Impact

The potential impact on financial aid may be the most significant drawback to UTMA accounts. Although the adult owner acts as the custodian of the account until the child reaches the age of majority, its assets are considered the child’s and must be included on the Free Application for Federal Student Aid (FAFSA) form, potentially negatively impacting their aid eligibility.

Selecting the Right Plan for Your Goals

As tuition costs continue to rise, having a savings strategy is crucial. A UTMA meets that goal while also offering an easier, more flexible structure than a traditional college savings plan, such as a 529. It may be an appropriate choice if you are not confident the child will attend college, you plan to save more than the maximum allowed in a 529 plan, or simply want to establish an investment account that can be used for more than education-related expenses. Work with your advisor to help determine which savings strategy best supports the child’s financial needs and future goals.