Uniform Transfers to Minors Act (UTMA): A Guide to Gifting and Saving for Minors

The Uniform Transfers to Minors Act (UTMA) is a state law that provides a simple and effective way for adults to transfer financial assets to a minor without the need for a formal trust. This act allows for the creation of a custodial account that holds and protects the assets until the minor reaches the age of majority, as defined by state law.

How UTMA Accounts Work

A UTMA account is established by an adult, known as the donor, who makes an irrevocable gift of assets to a minor beneficiary. An adult, often the donor but can be another individual, is appointed as the custodian of the account. This custodian has the fiduciary duty to manage the assets in the minor's best interest.

Key Features of a UTMA Account:

• Irrevocable Gift: Once assets are transferred to a UTMA account, the gift is permanent and cannot be revoked.4 The assets legally belong to the minor.
  
  

• Custodial Management: The custodian controls the account, making investment decisions and authorizing distributions for the minor's benefit.
  
  

Transfer of Control: The custodian is required to transfer control of the account to the minor upon them reaching the age of termination, which varies by state.

Establishing a UTMA Account

Opening a UTMA account is a relatively straightforward process, typically done at a financial institution like a bank or brokerage firm.

Steps to Open a UTMA Account:

1. Choose a Financial Institution: Select a bank, credit union, or brokerage firm that offers custodial accounts under your state's UTMA law.

2. Provide Necessary Information: You will need to provide the minor's name, date of birth, and Social Security number, as well as the name of the designated custodian.

3. Fund the Account: The account can be funded with various assets, including cash, securities, and in most states, real estate, and other property.
   
   

Any adult, including parents, grandparents, other relatives, or friends, can contribute to a UTMA account. 

The Role and Responsibilities of the Custodian

The custodian of a UTMA account acts as a fiduciary and has significant responsibilities in managing the account's assets.

Primary Duties of a Custodian:

• Prudent Investment: The custodian must manage and invest the account's assets prudently. This generally means making conservative investment choices to preserve and grow the principal.

• Use of Funds for Minor's Benefit: The custodian can use the funds in the account for the "benefit of the minor." This is a broad term that can include expenses related to education, healthcare, and general welfare.
  
  

• Record Keeping: The custodian must keep detailed records of all transactions within the account.

• Transfer of Assets: Upon the minor reaching the age of termination, the custodian is legally obligated to transfer all assets in the account to the beneficiary.
  
  

Assets That Can Be Held in a UTMA Account

A significant advantage of UTMA accounts is the wide range of assets that can be transferred. This is a key distinction from its predecessor, the Uniform Gifts to Minors Act (UGMA), which is generally limited to cash and securities.

Assets Permitted in a UTMA Account:

• Cash

• Stocks, bonds, and mutual funds
  
  

• Real estate
  
  

• Tangible personal property (e.g., artwork, jewelry)
  
  

Intellectual property (e.g., patents, royalties)

Age of Majority and Transfer of Control

The age at which the minor gains full control of the assets in a UTMA account is determined by the laws of the state where the account is established. This is often referred to as the "age of termination."

While the age of majority is typically 18 or 21 in most states, many states allow the donor to specify a later age for the transfer of control, often up to age 25. It is crucial to check the specific UTMA statute in your state.

Advantages and Disadvantages of UTMA Accounts

Pros:

Simplicity and Low Cost: UTMA accounts are easy and inexpensive to set up and maintain compared to formal trusts.

• Flexibility in Asset Types: A wide variety of assets can be transferred to a UTMA account.
  
  

• No Contribution Limits: There are no limits on the amount that can be contributed to a UTMA account, although large gifts may have gift tax implications.
  
  

• Flexibility of Use: The funds can be used for any purpose that benefits the minor, not just education.
  
  

Cons:

• Irrevocable Gift: The transfer of assets is permanent and cannot be undone.
  
  

• Loss of Control: The minor gains full control of the assets at the age of termination and can use them for any purpose, which may not align with the donor's original intentions.
  
  

Impact on Financial Aid: The assets in a UTMA account are considered the minor's property, which can significantly reduce their eligibility for need-based financial aid for college.

"Kiddie Tax": A portion of the unearned income in a UTMA account may be taxed at the parents' higher tax rate.

Tax Implications

The earnings in a UTMA account, such as interest, dividends, and capital gains, are taxed.30 For 2024, the first $1,300 of unearned income is tax-free. The next $1,300 is taxed at the child's tax rate.31 Any unearned income over $2,600 is subject to the "kiddie tax," meaning it is taxed at the parents' income tax rate.

UTMA vs. Other Savings Vehicles

UTMA accounts are often compared to other savings vehicles for minors, such as 529 plans and Coverdell Education Savings Accounts (ESAs).

• 529 Plans: These are tax-advantaged savings plans designed specifically for education expenses. They generally have a smaller impact on financial aid eligibility and offer greater control to the account owner. However, there are penalties for using the funds for non-qualified expenses.
  
  

• Coverdell ESAs: These accounts also offer tax-free growth and withdrawals for qualified education expenses. They have lower contribution limits and income restrictions for contributors.
  
  

The best choice depends on the donor's goals, the intended use of the funds, and considerations regarding financial aid and control over the assets.