By Marc Shaffer
A UTMA could be a beneficial choice for your family if you have children or grandchildren. Often, adults open these accounts for minors for future education needs, but they are not strictly for education funding purposes. I have friends who have used their UTMA accounts for a down payment on a home, to fund an overseas adoption, and to open a business. Not only did they provide them with funds, but they were also a learning opportunity. Most of these friends had to manage their accounts from the time they were no longer a minor to the time the funds were used. The account became their responsibility to oversee and manage for their future.
What is a UTMA?
UTMA (Uniform Transfers to Minors Act) accounts are custodial accounts, held in the name of the minor, but controlled by a parent or other relative until the child reaches the age of majority in your state. UTMA accounts allow parents to save money and invest, while maintaining full control until their child is an adult. This type of account allows you to transfer financial assets to a minor without establishing a trust. Accounts are set up with one parent listed and a second as the successor custodian, if needed, because both parents cannot be listed as custodians.
At what age do UTMA accounts transfer?
Generally, the UTMA account transfers to the beneficiary when he or she becomes a legal adult, which is usually 18 or 21 (age 18 in both Kansas and Missouri). However, the age of adulthood may be defined differently for custodial accounts, like UTMAs or 529 plans, depending on your state.
How are contributions made? Who can make contributions?
Contributions are made with after-tax dollars. A person can contribute up to $15,000 annually without incurring a gift tax ($30,000 per married couple) and without having to file a gift tax return.
People outside of the custodian listed on the account can also make contributions to the account, such as grandparents gifting money to the minor for their birthday. The first $1,100 of a child’s unearned income is tax-free. The next $1,100 is taxed at the child’s rate. Anything over that is taxed as the parent’s income. This type of account could allow you to save on taxes depending upon how big the account is and the amount of unearned income.
We can invest UTMAs for benefit of the minor according to a risk posture appropriate for their future benefit (i.e. aggressive, moderate, conservative).
How are withdrawals handled for minors?
Withdrawals can be made from the account to benefit the minor anytime leading up to their age of majority. The funds can be used to purchase a new vehicle, buy gifts, pay for educational expenses, travel, etc. However, at the age of majority the account converts to an individual account in the minor’s name and they would control the withdrawals.
Is a UTMA right for every child?
A UTMA may not make the most sense for your personal situation. If you would like to maintain more control and not have an account that converts to the minor at the age of majority, you could also consider setting up an after-tax account (i.e. joint, individual or trust) to invest the same way you would a UTMA and just earmark the account for the minor. Although the tax benefits would not be the same, it would allow you to maintain control and use the money for other purposes than the minor if you choose.
Another important item to keep in mind is that assets in a UTMA may reduce eligibility for need-based financial aid by 20% or 25% of the asset value, which is much more than the maximum 5.64% reduction for a 529 Plan Account that is owned by a dependent student or student’s parents.
How will my child know how to manage the account after the conversion?
A UTMA can be a great learning opportunity for the younger generation. Even though an adult is a custodian of the account, you can get your child involved in decisions for the account throughout their childhood and teenage years. We have seen many conversions where the child took advantage of the opportunity to add to their account and/or establish other accounts, such as a Roth IRA, for ongoing investing.
When it comes time for conversion, the team at Searcy Financial can help both the former custodian and new custodian discuss the account, the transfer process, and financial advice regarding longer term financial goals. We work to educate the new account holder and become a resource for them for ongoing investment management for years to come. If there is an interest, we offer guidance through our parent company, Searcy Financial, and our subsidiary company, Allos Investment Advisors.
If you would like to explore setting up an account like this for the benefit of your child or another minor, we would be happy to discuss the opportunity with you.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Published for the blog on March 19, 2021 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.