Uniform Transfers to Minors Act (UTMA) Explained: How does UTMA work?
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Summary:
The Uniform Transfers to Minors Act (UTMA) is a state law that allows adults to transfer assets to a custodian for the benefit of a minor. UTMA accounts offer several benefits, including tax advantages, flexibility in using funds, and estate planning benefits. However, UTMA accounts also have limitations, including limited control over funds and potential impact on financial aid eligibility. UTMA differs from the Uniform Gifts to Minors Act (UGMA) in some key ways, including the ability to transfer a wider range of assets and the option to manage the assets until the minor reaches a specified age.
What is UTMA?
UTMA is a state law that allows adults to transfer assets to a custodian for the benefit of a minor. The assets can include cash, stocks, bonds, real estate, and other types of property. The custodian has the legal authority to manage and invest the assets for the benefit of the minor until they reach the age of majority, which is usually 18 or 21, depending on the state. Once the minor reaches the age of majority, the assets are transferred to them outright.
How does UTMA work?
Setting up a UTMA account is a relatively simple process. The adult opens the account and designates a custodian, who can be themselves or another person, to manage the assets until the minor reaches a certain age. The assets are transferred to the account, and the custodian has the legal authority to manage and invest them for the benefit of the minor. The custodian is responsible for making all investment decisions and using the assets to provide for the minor’s needs, such as education or healthcare expenses. Once the minor reaches the age of majority, the assets are transferred to them outright.
Advantages of UTMA accounts
There are several advantages to setting up a UTMA account:
- Tax benefits: UTMA accounts offer some tax advantages, including the ability to shift income from the adult to the minor, who may be in a lower tax bracket.
- Flexibility in using funds: UTMA accounts allow for a wide range of assets to be transferred, and the custodian has broad discretion in using the assets for the minor’s benefit.
- Estate planning benefits: UTMA accounts can be a useful tool for estate planning, as they allow adults to transfer assets to minors without the need for a trust or court approval.
Limitations of UTMA accounts
There are also some limitations to setting up a UTMA account:
- Limited control over funds: Once the assets are transferred to the UTMA account, the adult has limited control over how they are used. The custodian has sole discretion in managing and investing the assets until the minor reaches a certain age.
- Impact on financial aid eligibility: UTMA accounts can impact a minor’s eligibility for financial aid, as they are considered an asset of the minor.
- Tax implications upon termination of UTMA account: When the minor reaches the age of majority, the assets are transferred to them outright, and they are responsible for paying any taxes on the assets. This can result in a tax liability for the minor, depending on the type of assets and their value.
UTMA vs UGMA
While both the Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA) allow adults to transfer assets to a custodian for the benefit of a minor, there are some key differences between the two.
Firstly, UTMA allows for a wider range of assets to be transferred to the custodian, including real estate, patents, and royalties, whereas UGMA only allows for cash, securities, and insurance policies.
Secondly, UTMA offers more flexibility in how the assets are managed. While UGMA requires that the assets be turned over to the minor when they reach the age of majority, UTMA allows the custodian to manage the assets until the minor reaches a specified age (which varies by state), or until the custodian decides to transfer the assets to the minor.
However, UTMA also has some limitations when compared to UGMA. UTMA accounts can have a greater impact on financial aid eligibility, as the assets are considered to be the minor’s and can be counted towards their expected family contribution. Additionally, the custodian has limited control over how the funds are used, as they must be used for the minor’s benefit, such as education or healthcare expenses.
PRO TIP: Age at which the child gains control of the funds varies between states and can range from 18 to 25 years old for UTMA accounts, while UGMA accounts typically transfer to the child when they reach the age of majority in their state.
It’s important to carefully consider the differences between UTMA and UGMA before choosing which type of account to open. While UTMA may offer greater flexibility and a wider range of assets, UGMA may be a better choice if financial aid eligibility is a concern or if the custodian wants more control over how the funds are used.
FAQs
What is a UTMA account?
A UTMA account is a state-law-created trust that allows adults to transfer assets to a custodian for the benefit of a minor.
How does UTMA differ from UGMA?
UTMA has some key differences from UGMA, including the ability to transfer a wider range of assets and the option to manage the assets until the minor reaches a specified age.
Can assets in a UTMA account be used for any purpose?
No, the assets in a UTMA account must be used for the minor’s benefit, such as education or healthcare expenses.
Can UTMA accounts be opened for multiple minors?
Yes, UTMA accounts can be opened for multiple minors.
Can the custodian be changed?
Yes, the custodian can be changed, but the process for doing so varies by state.
Can assets be added to a UTMA account after it is opened?
Yes, assets can be added to a UTMA account after it is opened, but any additional assets will be subject to gift tax rules.
Key takeaways
- UTMA is a state law that allows adults to transfer assets to a custodian for the benefit of a minor.
- UTMA has some key differences from UGMA, including the ability to transfer a wider range of assets and the option to manage the assets until the minor reaches a specified age.
- UTMA accounts offer tax benefits, flexibility in using funds, and estate planning benefits, but also have limitations, including limited control over funds and impact on financial aid eligibility.
- UTMA accounts can be opened for multiple minors, the custodian can be changed, and assets can be added to the account after it is opened.
- Assets in a UTMA account must be used for the minor’s benefit, and the custodian has broad discretion in how the assets are used.
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