When Managing Minors’ Custodial Accounts, Timing Is Everything: UTMA & UGMA Accounts

Maura Schauss |

Nina Falci, WWA Operations Coordinator

Uniform Transfers to Minor Act (UTMA) and Uniform Gift to Minors Act (UGMA) accounts are usually opened by parents and grandparents at a bank or brokerage to deposit gifts of cash and securities to their minor children or grandchildren. These accounts can be opened easily without needing to create a formal trust. The deposits are irrevocable gifts which must be used to benefit the minor. Although the adult oversees the account, the account is registered under the child’s SSN.

We outline some time-sensitive elements with UTMA or UGMA accounts to be aware of as children begin high school, or approach their 18th birthdays and are no longer considered minors.

A Bit of History

UTMA/UGMA accounts were very popular as education savings accounts before 529 and ESA accounts were introduced in the mid-1990s. They are less popular now, but there are many minors still covered under these accounts.

Be Aware of Some Drawbacks to the UTMA/UGMA

Although UTMA/UGMA accounts can be an effective way to save for a child’s education. There are some downsides:

  1. Earnings on the account are taxable to the child annually. This contrasts with 529 accounts where the earnings can be tax free if the funds are used to pay for qualified education expenses, as defined by the IRS.*
  1. When the child reaches the age of majority, which varies by state, and is usually 18-25, control of the full account balance automatically transfers to the young adult and can be spent on anything (e.g. that red sports car or a trip to the Bahamas).
  1. Assets in UTMA/UGMA accounts are considered assets of the student when completing the Free Application for Federal Student Aid FAFSA® form and could negatively affect eligibility for or amount of financial aid.

Considerations If Your Child is UNDER Age 14 or 15

If you currently have an UTMA/UGMA account in your child’s name and your child is under age 14 or 15, consider moving the assets from the UTMA/UGMA account to a custodial 529 or brokerage account (joint with parent) no later than the child’s 14th to 15th birthday.

This strategy is important because FAFSA® has a two-year lookback rule when reporting account assets. As a result, the assets should be removed from the UTMA/UGMA account three years before the financial aid application will be submitted, which varies by state, but can be as early as February of the year the student will enter college.

Considerations If Your Child is Within the Three-Year Window Prior to Completing the FAFSA®

If your child is already within the three-year window, consider moving the money as soon as possible. Since the FAFSA® is filed annually during your child’s college years, existence of the UTMA/UGMA might negatively impact financial aid for the first one to two years of college, but not after that. If you are concerned about your minor getting full control to the UTMA/UGMA account, then you would want to move the funds before the age of majority for these accounts in your state.

Partnering with a Financial Advisor Matters

Need assistance on how to manage your child’s various college savings accounts? It’s important to adopt a strategy which integrates well with your overall goals and objectives.

We can help you develop your approach aligned with your unique goals. Connect with us by phone at 703.584.2700, email clientservices@washingtonwealthadv.com or Schedule a meeting using our online booking system.

 

IMPORTANT WASHINGTON WEALTH ADVISORS DISCLOSURE INFORMATION

 

ABOUT WASHINGTON WEALTH ADVISORS

Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our fiduciary approach, independent advice, and proactive investment management help to support our clients’ overall financial peace of mind.

 

*https://www.irs.gov/pub/irs-pdf/p970.pdf

 

Sources:

https://studentaid.gov/apply-for-aid/fafsa/fafsa-deadlines#college

https://www.fidelity.com/learning-center/personal-finance/custodial-account-for-kids