If you are considering setting up an account for your children with the goal of gifting them assets, then a Uniform Transfer to Minors Act account (UTMA) might work for you.

This account is an alternative to a trust account and allows the transfer of certain gifts beyond what is allowed for under the Uniform Gift to Minors Act account (UGMA).

The UTMA was adopted by many US states in 1986 and finalized by the National Conference of Commissioners on Uniform State Laws. The law allows minors to receive gifts, and have the assets grow at a preferable tax rate until the minor reaches majority.

This type of account is set up by parents for a minor.

Instead of putting the assets in a trust that is controlled by the trustee for a minor, you as the parent can manage the account, for use for the minor child.

UTMA Account Benefits

Here are the different accounts that can be created to benefit a minor.

• Custodial Account
• Trust Account
• 529 College Savings Account
• Coverdell ESA
• Guardian Account

The UTMA (Uniform Transfer to Minors Act) account is very similar to another custodial account called the Uniform Gift to Minors Act account (UGMA). The difference between the accounts is that the UTMA account allows you to gift non-financial assets such as real estate as well as provides for a longer period for a parent to control the account.

A trust account is established by a parent for their minor children. The account is outside the parent’s ownership and the use of the money in the account is directed by a trusted adult.

The money will stay in trust until the child reaches majority or the age specified by the trust. The benefit of a trust account is that parents do not have to pay a gift tax and the earnings are taxed at the child’s rate.

There are several different types of college savings accounts that are more effective than the UTMA and UGMA custodial accounts.

Different Types of Accounts

A 529 savings account is a post-tax savings account where funds are exempt from capital gains and income tax as long as they are used for qualified educational expenses. This includes tuition, room, and board.

Additionally, the money from a 529 account can be used for other qualified expenses such as books and computer expenses. Some states allow the 529 contributions to qualify as a deductible contribution from state income tax, but they can have various restrictions.

The Coverdell ESA account is another type of savings account geared toward benefiting those who are spending capital on educational expenses. The account allows up to $2,000 per year in after-tax contributions to be deposited to the account in the child’s name.

These contributions grow tax-deferred and may be used tax-free for qualified educational expenses. One of the greatest benefits of this type of account is its flexibility. If the money is not used by the time the child is 30, it must be given to the child or transferred to another family member that is a minor.

Very few other accounts allow you to transfer the money to a different minor.

A guardian account is for people that are unable to manage their money because of physical or mental incapacity.

You can set up a guardian account for an adult or minor. You will need a court order to open a guardian account and the instruction in the order will describe how the funds will be managed.

A guardian account terminates when the order expires or when a minor reaches a state-defined majority.

How Do You Set up An UTMA Account?

Fortunately, you can set up a UTMA without the assistance of a lawyer. The funds that are gifted to a minor are subject to state and federal gift tax rules.

The tax benefits of a UTMA account changed as recently as 2018. The first $1,100 of earned income is tax free.

The second $1,100 of earned income is taxed at a minor’s rate (also known as the “kiddie tax” rate) and after $2,200 of earned income the tax-rate reverts to the parent’s rate.

Pros and Cons of a UTMA Account

The UTMA provides several advantages and disadvantages for both the parent and minors to using the UTMA account.

Pros

• A parent controls the use of the money for a child without holding legal ownership of the assets in the account.
• The UTMA accounts provide tax benefits for income earned under a certain threshold.
• The account provides flexibility as you can use the money for most investments.

Cons:

• The money is designated to the minor and could have a negative impact on college financial aid.
• Parents must turn over control of the funds at a designated age.
• There is no mechanism to transferring the money in the account to another child such as with a 529 or an ESA account.

How to Open a UGMA Account

You can open a UTMA account at a brokerage or a bank. Here are the steps.

• Enter personal information about the account owner – verify your identity.
• Set up account features and preferences.
• Review & confirm.
• Fund Your Account

Bottom Line

A UTMA account is a tax effective way to provide an account for a child that is a minor. This account provides maximum flexibility for using the money in the account. The UTMA provides special tax treatment, at a child’s tax rate, for a certain tranche of earned income, before reverting to the parent’s tax rate.

While the UTMA is the most flexible custodial account, it does have some drawbacks. If you plan to use the money specifically for educational purposes, you will get better tax treatment using a 529 or ESA account.

The money that is placed in a UTMA account is earmarked for the minor child and cannot be changed to another beneficiary. The money needs to be transferred to the minor when the beneficiary reaches the majority.

In some states, the transfer date can be extended to 25.