Important Considerations for Uniform Transfer to Minors and Uniform Gift to Minors Accounts

Parents and grandparents often ask how they can set up an account for minor children, to help them build good saving habits or to make financial gifts, while also delaying access until a future point in time. One common approach is to open a Uniform Transfer to Minors Act account (UTMA) or Uniform Gift to Minors Account (UGMA). While these accounts can be simple and cost-effective, they come with some drawbacks that should be evaluated along with other options. Below are several important factors to consider before choosing to open an UTMA or UGMA account:

• UTMAs and UGMAs are custodial accounts that can be opened at most financial institutions. An adult is appointed as custodian to manage the assets for the benefit of the child until they reach the age of majority (usually 18-to-25 years old), at which point the account must be transferred to the child. Accounts may be frozen by the financial institution if not transferred to the child at the age of majority
• The assets in the account are considered the legal property of the child. Provided the donor is not also serving as the custodian of the account, the assets will be excluded from the estate of the donor
• Gifts into these accounts are irrevocable. Donors cannot later change their mind and take the assets back, nor can they or the custodian change the beneficiary
• The custodian is a fiduciary, so they must invest and manage the assets responsibly and in the best interest of the child. Funds can only be used for the child’s benefit and cannot be used to cover the legal support obligations of the parent (e.g., food, shelter, medical care, childcare, etc.). Improper use of funds would be a breach of fiduciary duty and has landed more than one family in court
• Income earned on the account is taxed to the child and may benefit from their lower rates if total unearned income is under $2,300 for 2022. If income exceeds that threshold, it may be subject to higher tax rates
• There are no contribution limits to an UTMA or UGMA account, and most gifts under $16,000 (adjusted annually for inflation) qualify for the annual gift exclusion. In other words, gifts under $16,000 aren’t required to be reported on a gift tax return. However, there may be tax implications if you make a gift to the child’s account that exceeds the annual gift exclusion limit, or if the age of majority is beyond age 21
• Assets in UTMA or UGMA accounts may have a negative impact on financial aid or scholarships because the assets are counted as assets of the child

Setting up a custodial account for a minor child can be useful in the right circumstances. Understanding the advantages and drawbacks, as well as evaluating other options such as a 529 college savings plans or irrevocable trusts, are important steps in deciding what is right for your individual family and circumstances. Your portfolio manager can work with you and your tax and legal advisors to help you evaluate your goals and options, so that you select the savings plan and strategy best suited for your family.

Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.