If you’re planning to transfer assets to your child and don’t want to set up a trust, one possible solution is a Uniform Transfers to Minors Act account, commonly called a UTMA. UTMAs offer several advantages. For one, you can transfer pretty much any type of assets into the account, including artwork, real estate, stocks, and more. Until the child reaches the age of majority, the account is managed by the appointed custodian.
Should you create a UTMA account? Find out what is UTMA, the pros and cons, contribution limits, withdrawal limits, and more below.
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What is a UTMA account?
A UTMA account refers to a savings account established under the rules of the Uniform Transfers to Minors Act (UTMA). They are custodial savings accounts for minors. The account is set up by an adult on behalf of a minor and managed by the adult or designated custodian until the child reaches the age of majority, which is typically between 18 and 21. However, in certain states, the age of majority can be as old as 25.
UTMA accounts are similar to UGMA accounts, which are created under the Uniform Gifts to Minors Act, but UTMA accounts allow a broader range of assets, including real estate, securities, bank deposits, and insurance policies.
Can you convert a UTMA individual account? Not until the child reaches the age of majority, and then they have the option to do so.
How does a UTMA account work?
Uniform Transfers to Minors Act (UTMA) is a law that defines the proper transfer of assets from an adult to a minor. The UTMA rules define a tax-advantaged way to give assets to minors without requiring a trust. A UTMA account is a custodial account.
When you set up a UTMA account, you can either act as the custodian or appoint another custodian for the account until the child reaches the age of majority. The assets in the UTMA account then belong to the minor, even though they cannot access the assets until the age of majority.
Once the minor reaches the age of majority, they can convert a UTMA to an individual account. In the meantime, the custodian is responsible for investing or managing the assets on the minor’s behalf.
Keep in mind that there are some less-than-obvious disadvantages to a UTMA related to the relatively young age in which the minor gets access to the funds. Many 18 or 21-year-olds may not responsibly manage access to a large lump sum.
Suppose there is $100,000 in the UTMA, and your child, grandchild, niece, or nephew reaches the age of majority for your state. There is nothing you can do to stop them from gaining access to those funds. And the young adults are at an age when they are not making the best financial choices. While you may have envisioned the UTMA as the downpayment to their first home or the seed to their retirement fund, they could burn through those funds before their 22nd birthday.
In addition, some states allow minors to petition for partial access earlier. For that, you need to understand your individual state’s UTMA rules.
What can UTMA funds be used for?
The funds in the UTMA account are a gift to the minor, so before they can manage the account themselves, they can be used for any expenses related to the minor, including education, sports, or living expenses.
Unlike a 529 plan, the funds in a UTMA account can also be used toward any type of expense, not just educational ones. For example, if your child wants to get additional coaching for their favorite sport, those expenses could come from UTMA funds.
There are no penalties for withdrawing funds from a UTMA account as long as the expenses are directly related to the minor. However, you’ll need to keep close records of the expenses from UTMA and document their direct benefit to the child.
Profits on interest-bearing UTMA accounts are usually reported on the child’s tax return. However, some families report these profits on the parents’ tax return at their parental tax rate.
UTMA transfer rules
UTMA transfers enable minors to receive gifts and assets directly in their name instead of through a trust. This simplifies the transfer process, avoids the costs and complexities associated with setting up a trust, and provides a straightforward way for minors to manage and have control over the assets once they reach the age of majority.
Here is what you need to know if you are considering setting up a UTMA account.
UTMA contribution limits
Any single individual can contribute up to $18,000 per child per UTMA account without paying gift tax. The limit is $36,000 for married couples. Gifts above $18,000 per adult per year usually require you to fill out a gift tax form and submit it to the IRS, although it is unlikely you would owe tax on that money unless you’ve given more than $13.6 million in your lifetime.
UTMA withdrawals and tax rules
UTMA accounts have no withdrawal limits. However, UTMA withdrawal rules set out that the funds belong to the minor from the moment of transfer, so the funds can only be used for the direct benefit of the minor. Can parents take money out of UTMA accounts? Yes, but only for purposes related to the minor.
UTMA accounts aren’t tax-exempt, so you’ll need to file taxes each year on income over $2,300 on the UTMA. Earnings must be reported either on the child’s tax return at a lower tax rate or on the parents’ tax return at their rate. Consult your accountant about your situation.
Types of assets
You can transfer nearly any type of asset to a UTMA account for a child. Assets include real estate, intellectual property, works of art, stocks, bonds, mutual funds, annuities, insurance policies, cash, and other assets. One of the main advantages of a UTMA account is that family heirlooms, property, stocks, fine art, valuable jewelry, and other assets can be easily transferred to a UTMA account.
Closing a UTMA account
Once the child reaches the age of majority, they can transfer or use the funds and close the UTMA account. However, after setting up the UTMA account, parents don’t have the option of closing it. How do you close out a UTMA account? You can’t until the child reaches the age of majority when they can do whatever they want with the funds.
Irrevocability
Transfers to a UTMA account are irrevocable. From the moment the transfer is finalized, the assets held in a UTMA account belong to the minor whose name is on the account.
If the parents need to use those funds at any point, they will not be available to them, unless it is for the direct benefit of the child. When the minor reaches the age of majority, they can legally do whatever they want with those funds.
Financial aid
A UTMA account may affect a minor’s need-based college financial aid eligibility. While this may not be a deciding factor in whether or not you start a UTMA account for your child, it can affect your child’s financial assistance prospects.
3 Steps for transferring UTMA to a child
Transferring a UTMA account to a child is simple. You can also consult a tax or business lawyer to help you set up the legal structure, although most financial institutions can do it for you.
Step 1: Set up a brokerage account
If you plan to invest cash or securities into a UTMA account for your child, start by opening a UTMA account at your bank, local investment firm, or brokerage company. The custodial UTMA account will be in your child’s name and governed by the rules of UTMA with you or the adult you appoint named as custodian.
You can also set up a brokerage account via mobile apps or online with major brokerages like Vanguard, Charles Schwab, Extrade by Morgan Stanley, or Interactive Brokers.
Step 2: Add assets
Once the UTMA account is set up, you can choose to add assets daily, weekly, monthly, annually, or less often. You could add precious jewelry, art, property, bonds, stocks, investment accounts, cash, or other assets.
Step 3: Use the funds
The funds stay in the account until the child reaches the age of majority or unless you choose to withdraw them on behalf of your child or to support the child’s financial needs. The funds can be used for nearly everything, including education, sports, and living expenses. For example, if you have significant education or sports expenses for your child, you could use the UTMA funds.
You can also save the UTMA funds for future life events, like a first car, apartment, or wedding. Once they get access to the funds, the child may also choose to convert the UTMA to an individual account.
UTMA account pros
There are pros and cons to UTMA accounts. The advantages include:
Tax benefits: Income generated by assets in UTMA accounts may be taxed at the minor’s lower tax rate, potentially resulting in tax savings.
Asset control: The custodian controls how the assets in the UTMA account are managed and invested until the minor reaches the age of majority.
Estate planning: UTMA accounts can be used in estate planning, allowing adults to transfer assets to minors without the need for a trust or formal estate planning documents.
Financial education: UTMA accounts can teach minors about financial responsibility and investment management, as they may become involved in decisions regarding the assets in the account.
Flexible use: The assets in UTMA accounts can be used for any purpose that benefits the minor, including education expenses, medical expenses, and other needs.
UTMA account cons
While UTMA accounts are a convenient way to transfer assets to a minor, they have a few significant possible downsides. Before setting up a UTMA, consider these disadvantages:
Loss of control: Once the minor reaches the age of majority, they gain access to the assets. The UTAM is irrevocable, so once assets are transferred there, the minor will receive the assets and may do what they choose with them.
Tax considerations: Income generated by the assets is subject to the “kiddie tax” if it exceeds certain thresholds, potentially resulting in higher taxes for the minor. While this isn’t necessarily a major downside, it’s worth considering and ensuring the proper tax filings are done on the minor’s behalf.
Use of funds: The assets in UTMA accounts must be used for the benefit of the minor. Once the minor reaches the age of majority, they can use the funds for any purpose that may not align with the custodian’s intentions.
No legal protection: UTMA accounts do not offer the same level of legal protection as trusts. Once the minor reaches the age of majority, they have full control over the assets, and the custodian cannot impose any restrictions.
Impact on financial aid: Assets held in UTMA accounts may impact the minor’s eligibility for financial aid when applying for college, as they are considered the student’s assets and may reduce or eliminate the student’s ability to qualify for financial aid.
Should You Open a UTMA Account?
Opening a UTMA account can be a way to help set your child up for financial security. Because of the possible tax advantages, it can also be a way to save some money on the funds you’d spend anyway on your child’s education, sports, or other activities.
However, because a UTMA has limitations and is irrevocable, you should carefully consider whether it is the best vehicle to transfer assets to your child. If you’re unsure whether it’s the best option, you can also find reliable free financial advice to discuss your situation, consider managed investment accounts, or set up auto savings to build your nest egg.
FAQ
Can I close a UTMA account?
Closing UTMA accounts can only happen after the child reaches the age of majority for your state. You, as the parent or custodian, cannot close a UTMA account, as it is not your own account. When the child reaches the age of majority, they may do whatever they want with the funds, including transferring the funds to another account and closing the UTMA account.
What happens to the UTMA account when the minor turns 21?
When a minor turns 21, in some states a UTMA account is transferred to the minor and they may choose to convert it to a standard bank account. In some states, the age of majority is 18, so the minor will have access to the UTMA account from 18. In a few other states, the custodian may choose to delay access to the UTMA until the minor reaches age 25.
Do I have to pay taxes on UTMA accounts?
Yes, you have to pay taxes on a UTMA account. Usually, the taxes are reported on the child’s taxes, but in some cases, the parent will report the income on their taxes. As of 2024, if the child receives less than $2,600 in capital gains or investment income, they don’t have to report anything. If they earn more than $2,600, a separate tax return must be filed on their behalf.
Can you change the custodian on a UTMA account?
Yes, you can change the custodian of a UTMA. To do so, you generally must provide the signature of the previous custodian, a death certificate, or an official court document. If the child’s legal name changes, you can also update their name on the same form.
Can you transfer a UTMA before the age of majority?
No, you generally can’t transfer a UTMA before the age of majority, although the precise rules or limitations can vary from state to state. The age of majority also varies from state to state. In states, a UTMA account can only be handed over with the custodian’s permission at age 18, and at age 21 it is transferred automatically. In other states, it is automatically transferred at either age 18 or 21. In a few states, the custodian may delay the age of transfer up to age 25.
