Uniform Gifts to Minors Act: Pros & Cons of Custodial Accounts

NCAL IMAGE Uniform Gift To Minors Act

The Uniform Gifts to Minors Act allows assets to be transferred to a custodian for the benefit of a minor child. Here's how to decide if it's right for your family.

Parents often discuss what they want for their children. No matter the exhaustive list of desires, sending a child to college and preparing him or her for their future is often among the highest priorities. Though paying for college is a big undertaking, and planning requires thoughtful consideration and research, there are many ways families have gotten the job done.

One method of funding a child’s college education is taking advantage of the Uniform Gifts to Minors Act. The UGMA option, as well as UTMA accounts, are among the most traditional savings strategies. Like any other strategy, however, both come with some pros and cons.

Let’s break down the characteristics families should consider when deciding whether one of these options work best for their saving plan.

What is a UGMA or UTMA Account?

UGMA (Uniform Gifts to Minors Act) accounts and UTMA (Uniform Transfers to Minors Act) accounts are two types of custodial savings accounts.

At their core, these are used to gift and protect assets for minors until they are mature enough to independently control them. The age of maturity varies from state to state but is likely either 18 or 21. Parents can create long-term trusts specifically for their children. Once they reach the designated age, those assets become the sole property of the child. Until then, the custodian may withdraw funds but only for expenses relating to the child’s welfare or education.

While these two custodial savings accounts are similar, there are a few distinctions to be aware of – mainly in what assets you are allowed to gift. Generally, UGMA accounts allow the donor to gift financial assets like cash, stocks, bonds, or mutual funds. Gifts allowed in a UTMA account also include property assets such as real estate or other real property.

Each state has certain guidelines and regulations relating to its UGMA/UTMA implementation, so it is essential to understand exactly what your choice of account would mean based on the state in which it is opened.

Pros and Cons

As mentioned before, every financial strategy requires families to weigh the positives and negatives. These custodial savings accounts are no different.

Aside from the essential purpose of these accounts, the largest UGMA and UTMA benefits come in their flexibility and size. There is no limit to how much donors can contribute or where you invest. Unlike a 529 plan, the flexibility in spending this money extends beyond a college education – if it benefits the child. This could include K–12 educational expenses, music lessons, etc.

There are also tax benefits — to a degree.

In UTMA accounts, the first $1,050 is not taxed. The $1,050 after that is taxed at the minor’s tax rate of 10 percent. After those advantages, the remaining amount is taxed at the parent’s rate.

The drawback of those initial tax advantages comes later. Despite mostly being taxed at the parent’s rate, these accounts still count against the child when applying for federal student aid. With more money being considered theirs, calculations may determine they have less need and therefore may qualify for less aid. There are also capital gains tax implications that should be considered.

The final trait of these accounts, which you can see as a pro or con, is simple — the child gets full control of the funds once reaching the age threshold.

When saving this money, you hope to ease the burden of one of the largest investments your child will make in their life. After all, a college education is essentially why you’re setting up the account in the first place. However, there is no guarantee that your child will spend the money as you intended. No matter how strongly you advise them, there is always some risk involved when they receive sole custody of the assets.

Deciding What is the Best for You

Considering these benefits and downsides of the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act already sets you on the right path. Whether one of these custodial accounts works for your family depends on a variety of factors — all relating to your own preferences.

Consider the assets you might transfer to your child and how these pros and cons affect your comfort with setting up a UGMA or UTMA account. It may help to speak with a trusted financial advisor as well.

No matter what kind of education savings account you choose, when it’s time for your child to head off to college, it might not be enough to cover the entire cost of school. At that point, parents could investigate NC Assist student loans to continue easing the burden for their child. NC Parent Assist loans offers zero loan fees and competitive fixed rates that beat federal PLUS loan rates. We’re here to help when it comes to setting up your student for long-term success.

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