Understanding UTMA Accounts: A Guide for Parents and Guardians | Ruth Cantu, CPA

Understanding UTMA Accounts: A Guide for Parents and Guardians?

By:?Ruth Cantu, CPA?

As parents and guardians, securing our child’s financial future is a top priority. One powerful tool that can help you achieve this is the Uniform Transfers to Minors Act (UTMA) account. UTMA accounts are custodial accounts designed to allow adults to transfer assets to minors, offering a flexible and tax-advantageous way to save for a child's future. Through a UTMA account minors are able to receive gifts like cash, real estate, or securities without the need for a formal trust. The key feature of a UTMA account is that the assets in the account are held in the name of the minor, with a custodian (often a parent or guardian) managing the account until the child reaches the age of majority—typically 18 or 21, depending on state laws.?

One of the main advantages of UTMA accounts is the potential for tax savings. The first $1,250 of unearned income (such as interest or dividends) is tax-free, and the next $1,250 is taxed at the child’s tax rate, which is often lower than the parent’s rate. Unlike 529 college savings plans, which are limited to education expenses, UTMA accounts do not have spending restrictions. Once the minor reaches the age of majority, they can use the funds for any purpose, whether it’s for education, starting a business, or buying a home. Setting up a UTMA account is also relatively simple compared to establishing a trust and there’s no need for a lawyer. Another major benefit is that the account can hold a wide range of assets, including cash, stocks, bonds, and even property.?

Key Considerations:?

1. Control Over Assets: While the custodian manages the account, they are bound by fiduciary duty to act in the best interest of the minor. However, once the child reaches the age of majority, they gain full control over the assets. This can be both a benefit and a risk, depending on the maturity and financial responsibility of the individual.?
2. Financial Aid Impact: Assets in a UTMA account are considered the child’s property, which can affect financial aid eligibility for college. Since the assets are in the child’s name, they may reduce the amount of need-based financial aid the child qualifies for.?
3. Irrevocability: Transfers into a UTMA account are irrevocable, meaning once the assets are gifted to the account, they cannot be taken back by the donor. It’s important to be certain about the decision to transfer assets to a UTMA account.?

How to Set Up a UTMA Account?

Setting up a UTMA account is very straightforward. Here’s a step-by-step guide:?

1. Choose a Custodian: The custodian is responsible for managing the account until the minor reaches the age of majority. This is usually a parent, guardian, or a trusted family member.?
2. Select a Financial Institution: UTMA accounts can be opened at most banks, brokerage firms, or credit unions. Compare the fees, investment options, and services offered by different institutions.?
3. Fund the Account: Once the account is open, you can transfer assets into it. There’s no limit to the amount you can transfer, but keep in mind the annual gift tax exclusion limit, which is $17,000 per donor per recipient as of 2024.?
4. Manage the Investments: The custodian is responsible for managing the investments within the UTMA account. It’s important to make informed decisions, as the goal is to grow the assets for the minor’s benefit.?

UTMA accounts offer a flexible, tax-advantageous way to save for a child’s future. By understanding the benefits and considerations of these accounts, parents and guardians can make informed decisions that align with their financial goals and the best interests of their children. Whether you’re saving for college, a first home, or simply building a nest egg, a UTMA account could be a valuable tool in your financial planning arsenal.?

Sources:?

1. Internal Revenue Service (IRS) - The IRS provides detailed information on tax rules related to custodial accounts, including the tax benefits and implications of UTMA accounts.?

• IRS Topic No. 553 - Tax on a Child's Investment and Other Unearned Income?

1. FINRA (Financial Industry Regulatory Authority) - FINRA offers guidance on the rules and regulations governing UTMA accounts, including the responsibilities of custodians and the types of assets that can be held.?

• FINRA - Custodial Accounts?

1. Investopedia - This financial education website provides a comprehensive overview of UTMA accounts, including their benefits, limitations, and comparison with other savings accounts.?

• Investopedia - Uniform Transfers to Minors Act (UTMA)?

1. NerdWallet - A personal finance website that explains the pros and cons of UTMA accounts, offering practical advice for parents and guardians considering this savings option.?

• NerdWallet - What Is a UTMA Account??

These sources can help you further understand the details and implications of UTMA accounts:?

• https://checkpoint.riag.com/app/main/docLinkNew?DocID=i3dd794fc32a211dd88bac7f8ee2eaa77&SrcDocId=T0FEDANA%3A76792.1-1&feature=tfederal&lastCpReqId=42604?
• https://checkpoint.riag.com/app/main/docLinkNew?DocID=i283dd76e32a211dd88bac7f8ee2eaa77&SrcDocId=T0FEDANA%3A76792.1-1&feature=tfederal&lastCpReqId=42604?
• Stevens, Nicholas Charles Jr. Est, (2003)?TC Summary Opinion 2003-163?.?
• Information Letter 2016-0010?.?

Disclaimer?

The information provided in this article is for general informational purposes only and should not be construed as legal, tax, or financial advice. While every effort has been made to ensure the accuracy of the information, laws and regulations regarding UTMA accounts and other financial matters can vary by state and are subject to change. Before opening a UTMA account or making any financial decisions, it is strongly recommended that you consult with a qualified financial advisor, tax professional, or legal expert who can provide guidance tailored to your specific circumstances in choosing between an UTMA or 529 Plan. The author and publisher are not responsible for any errors or omissions or for any actions taken based on the information contained in this article.?

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