UTMA, UGMA, OMG
April 26, 2018
Custodial accounts are the simplest way to give property to minors, easily established at banks and brokerage firms, and do not require the need for an attorney to create a special trust. The gifts are deemed irrevocable, and age limits then apply for when the assets become fully available to the beneficiary child, typically age 18 or 21, depending upon the state (and in some circumstances, up to age 25). The acronym UTMA, or “ut-mah”, is now the most common way to achieve this, and this stands for Uniform Transfers to Minors Act. The UTMA, which is available in all states except South Carolina, effectively replaces the older, original UGMA custodial account, or “ug-mah” (Uniform Gifts to Minors Act).
The UGMA was initially introduced about sixty years ago, quickly becoming popular and adopted by all states. Like the Uniform Building Code promoting uniform standards in that industry across the country, the UGMA provided a uniform framework for handling assets that minors inherit as gifts or bequests, with the adult custodian (typically a parent) dealing with things until the child comes of age. But UGMA accounts only allow bank deposits, stocks, bonds, mutual funds, and insurance policies; and eventually different states permitted different types of additional assets, and the UGMA became less uniform. The UTMA was created in the early Eighties to address this, eliminating all restrictions and allowing any type of property to be held — real, personal, tangible or intangible. Plus, UTMAs allow transfers based on the occurrence of future events and by powers of appointment.
UTMA/UGMA assets can generally be used for any purpose benefitting the child — from braces, to golf lessons, to iPhones and even a new car when old enough to drive. Many parents — and participating grandparents, too — may have initially earmarked such funds for college-related expenses; but increasingly, the newer 529 Plans are more popular for this specific purpose because they accumulate tax-free. Instead, untouched custodial accounts could be an important source of funds later in life, especially if the current annual exclusion amount of $15,000 per recipient is being used to fund it. For example, this could enable a college graduate to accept a lower salary (such as non-profit work), fund a business idea, or help with a down payment on a first home someday. Of course, the funds fall under the complete control of the beneficiary at a certain age, but with counseling — and possibly the incentive of additional contributions — this could persuade many children not to squander the funds on frivolous things.
Various tax law changes since 1986 have applied the so-called “kiddie tax” to these accounts, and starting this year, any unearned income over $2,100 is taxed at trust and estate tax rates. Lower-yielding, more growth-oriented assets could help reduce this burden, and this might be appropriate for young children with long time horizons. UTMA/UGMAs also count as the child’s property in college financial aid considerations, so this should be considered if such assistance is desired. When the time comes to relinquish the assets to the child, many custodians simply re-register the account in the child’s name, which requires their signature. Many financial institutions will send reminders to custodians that change is needed as the age of majority approaches. Finally, if significant funds and/or significant restrictions are desired on monies to be set aside for children, then more traditional trust accounts are probably in order; but FWIW, this could, AAMOF, be done in addition to using the simple and popular UTMA account. OMG.
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