Uniform Transfers to Minors Act (UTMA) Custodial Accounts

Parents, grandparents, and other adults often want to gift cash, stocks, or other securities to a beloved child. One of the simplest ways to accomplish this is by establishing a custodial account under the Uniform Transfers to Minors Act (UTMA). UTMA and its sister law, the Uniform Gifts to Minors Act (UGMA), simply allow a "donor" (usually a parent or grandparent) to contribute to a custodial account in the name of a minor without the complications of establishing a formal trust or guardianship. UGMA was the original act, but UTMA, which expanded the definition of a gift to include things like real estate, fine art, or royalties, has largely replaced UGMA in most states.

Advantages of UTMA/UGMA Custodial Accounts

  • Save for the Future. Establishing a custodial account under UTMA/UGMA is an easy way to teach a child you love about finances and the stock market. Whether you gift cash or securities, children can watch the money grow along with them. Or perhaps you simply want to start saving for your children's college education or to ensure they'll have a financial cushion when they graduate. Custodial accounts are a great way to help.
  • Estate Tax Relief. Donor's gifts to UTMA custodial accounts are tax-free, up to $13,000 each year (2009). So, for example, a minor's grandparents can each donate $13,000 to a minor's account every year. Over a ten-year period, this means that the couple will have reduced their taxable estate by $260,000, not to mention benefiting from annual income tax savings.
  • Depending on the age of the child, transferring assets to a custodial account can greatly reduce your tax burden, since unearned income is generally taxed at the child's lower rate. Please see IRS Publication 929 for details, which can be found at www.irs.gov.

Disadvantages of UTMA/UGMA Accounts

  • Gifts are irrevocable; that is, once you've contributed to an account, you can't take it back, even if you have an emergency.
  • If you, the custodian, die before the minor gains control of the account, the assets are counted as part of your estate.
  • An account may actually hurt a child's chances of receiving financial aid in college, since 35% of a child's own assets must be used before he or she can receive financial assistance.
  • Once the minor reaches legal age (usually between 18 and 21) and gains control over the account, you have no control over how the money is spent. The account may have been established to help pay for college, but the child is free to use the money for a car, vacation, or a high-tech stereo system.

UTMA and UGMA Accounts are established and governed under applicable state UTMA or UGMA law. For more specific information regarding UTMA/UGMA Accounts, please consult your applicable state's UTMA/UGMA law.