Uniform Gift to Minors Act (UMGA) & Uniform Transfer to Minors Act (UTMA) Custodial Accounts

Uniform Gift to Minors Act (UMGA) & Uniform Transfer to Minors Act (UTMA) Custodial Accounts

This Uniform Gift to Minors Act (UMGA) & Uniform Transfer to Minors Custodial Accounts Savings Option is ideal for parents who want to transfer assets to their children!

Some people may elect to transfer assets to the child along the way and the assets are to be used in part for educational expenses. This can be done by setting up a custodial (trust) account, and this falls under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act. A quick comparison between the 2 options:

UGMA UTMA
 
Permits the minor to have possession of securities without going through a trustee or the court. Permits the minor to not only have possession of securities, but also other properties such as real estate, fine art, patents, and royalties.
The state statute determines the trust terms. Permits property transfer through inheritance.
18 is the age of trust termination for most UGMA’s. More flexible than UGMA.

How it works:

  1. To setup a custodial account, the donor much pick a person to be the trustee. At the same time, the donor needs to provide the name and Social Security of the minor.
  2. The donor gives the money to the trust.
  3. The money now belongs to the minor, but it is managed by the trust until the child reaches the age of trust termination. This age could be either 18 or 21, depending on the state and whether it is a UGMA or UTMA trust.

It is extremely important to title the account correctly:

For UGMA custodial accounts: "[Custodian’s Name] as custodian for [Minor’s Name] under the [Name of Minor’s State of Residence] Uniform Gift to Minors Act".

For UTMA custodial accounts: "[Custodian’s Name] as custodian for [Minor’s Name] under the [Name of Minor’s State of Residence] Uniform Transfer to Minors Act".

For Canadian custodial accounts: "[Custodian’s Name] as trustee for [Minor’s Name], a minor".

Remarks:

  1. Custodial accounts are often established at banks and brokerages. Please note that UGMA accounts have no special tax treatments. 
  2. The trustee has the right to manage the money prudently for the benefit of the minor child. When the child has not reached the age of trust termination, money in the custodial account is considered as part of the guardian’s taxable estate. Income from the custodial account must be noted on the child’s tax return and is taxed at the child’s rate. Parents need to submit an income tax return for the child. Children aged 14 and older must sign their own tax returns.

Restrictions:

  1. When the money is given to the child, it is in possession of the child. The money cannot be transferred back to the parents because the original transfer was final (irreversible).
  2. The custodian cannot transfer money to his or her own name or use the money for personal benefits. If a custodian does this or the behavior makes the IRS believes this, then the custodian would owe taxes at his or her own rate. The child could also sue the custodian to recover the money.
  3. Expenses for the child cannot be parental obligations. Parental obligation expenses are costs that the parents are normally expected to spend for their children. These costs include food, clothing, medical care and shelter. However, it is allowed to spend the money on the child’s college education.
  4. Parents can save some money in a college savings account owned by them. This only works if there are non-parental obligation expenses. To undo the UGMA account in this way, parents must talk to a qualified accountant.

Effect on the child’s financial aid eligibility:

When applying for financial aid, custodial accounts are considered as assets. This could affect the child’s eligibility. However, a custodial 529 College Savings Plan for a dependent child is considered as an asset of the parents. In this case, the 529 College Savings Plan would have a less severe effect on the child’s financial aid application.

The custodial 529 account should be titled the same as the original UGMA or UTMA account. The custodian cannot alter the beneficiary (child) of the section 529 plan. The custodian’s responsibility to use the UGMA or UTMA account assets for the benefit of the child continues when the money are taken out from the account.

Tip: Liquidate the account and transfer the gains into a custodial 529 College Savings Plan account or Coverdell Education Savings Accounts to make the parents become the asset owners. This can lessen the negative impact on the child’s financial aid qualification.