UGMA vs UTMA: Understanding the Differences Between Custodial Accounts
Planning for a child’s future education expenses is a top priority for many parents or grandparents. One common way to achieve this is by setting up a custodial account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These accounts allow minors to receive gifts or money from a designated custodian for their future educational expenses or other needs. Although the two accounts share many similarities, they have fundamental differences that can play a significant role in deciding which one to choose.
The UGMA was created in 1956 as a way to transfer assets to a minor beneficiary. It allows investors to contribute cash, securities, and other assets to a custodial account, which is maintained by a chosen adult custodian. In contrast, UTMA came later in 1986, to accommodate contributions of other assets beyond the UGMA’s scope, including real estate, antiques, and intellectual property rights. Like UGMA, the account is under a custodian’s control until it transfers to the beneficiary at a specified age limit. Understanding the fundamental differences between these two custodial accounts can help you make an informed decision in choosing an appropriate account for your child or grandchild.
Assets
UGMA accounts are designed for gifts of securities, cash, or other assets, but not real estate. UTMA accounts can hold any type of asset, including real estate, intellectual property, and even antiques.
- UGMA accounts accept securities, cash, or other assets, except real estate.
- UTMA accounts can receive and hold any asset type, including real estate and other lucrative investments.
Taxes
When it comes to taxes, UGMA and UTMA accounts are treated differently.
- UGMA accounts – investment earnings and gains are at the child’s tax rate (lower tax rate)
- UTMA accounts – UTMA accounts taxed flatly at 10% for the first $1,100 of income and 24% on income above that amount
Age of termination
Another difference to consider is the age of termination for each account.
- UGMA – the account terminates when the child reaches the age of majority, typically at 18 or 21.
- UTMA – can continue until the beneficiary reaches age 25 or later, depending on the state.
UGMA and UTMA accounts are not protected from creditors, so any funds held in these accounts can be claimed if there is a court judgment against the parent or grandparent who established the account. It is important to note that custodial accounts may have a negative impact on the amount of financial aid that a student could receive for their college education. Therefore, seek the counsel of a financial advisor who can help you make an informed decision on the best type of account for your family’s needs.
In conclusion, when it comes to custodial accounts, investors must consider the differences between UGMA and UTMA before making a choice that aligns with their overall financial strategy. The best choice can depend on what you intend to do with the assets, how you want them to be taxed, and when you want the account to terminate. Understanding the range of differences and what each account has to offer gives you the tools to select the best custodial account for you and your family.
What is the difference between UTMA and UGMA accounts?
- UTMA: Stands for Uniform Transfers to Minors Act, which allows the transfer of funds, real estate, and other assets to a minor. The account is generally irrevocable and managed by the custodian until the minor reaches the age of majority in the state where the account was created. At that point, the account becomes the property of the minor.
- UGMA: Stands for Uniform Gifts to Minors Act, which is similar to UTMA but allows for the transfer of only cash and securities. The account is also managed by a custodian until the minor reaches the age of majority in the state where the account was created.
Understanding the differences between UTMA and UGMA accounts is crucial when planning for the financial future of a minor. It is important to consult with a financial advisor or estate planning attorney to determine which option is right for your family’s needs.
UGMA Vs. UTMA – Which Account Type is Right for You?
UGMA and UTMA accounts are not bank accounts, since they cannot be opened directly with a financial institution – it must be a taxable brokerage account. Here are some additional differences to consider when deciding between the two:
UGMA Account
| Pros | Cons |
|---|---|
| May invest in stocks, bonds, mutual funds, or other securities | Can only hold securities or bank deposits |
| Asset transfers can still occur without tax consequences after the child becomes an adult | Cannot, like UTMA accounts, hold real estate, patents, royalties or other non-financial assets |
| Withdrawals don’t require taxes until the funds are used for the beneficiary’s benefit | Income taxes can reduce performance |
UTMA Account
| Pros | Cons |
|---|---|
| Wide variety of non-financial assets can be held till the minor comes of age | Real assets, such as businesses or real estates, can trigger higher tax rates and difficulty to value assets due to ownership splits |
| Significant income earned may be taxed to the benefactor instead of the beneficiary | Once the child reaches the age of majority, assets in the account can be accessed for any purpose whatsoever |
| Low taxes on the first $1,100 of earnings | The account may affect the child’s eligibility for financial aid |
Whether you’re starting down the path of parenthood or looking to give your grandchildren a bit of a head start in life, discussing the creation of a custodial account with your family and financial advisor may be a smart move when financial planning for your family’s future.
Should I open a UGMA or UTMA account?
If you’re looking to save for a child’s future, it can be helpful to open a UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfer to Minors Act) account. Both accounts allow assets to be held in the minor’s name but managed by a custodian until the minor reaches the age of majority. So which account is right for you? Here are some key differences:
- UGMA accounts can only hold cash, securities, and insurance policies, while UTMA accounts can also hold real estate, intellectual property, and other forms of property.
- UGMA accounts usually have a lower age of termination, meaning the minor gains control of the assets at an earlier age.
- UTMA accounts can be used to transfer more types of property and can have a longer time frame for the minor to gain control.
Ultimately, the decision between a UGMA and UTMA account will depend on your specific financial goals and the types of assets you plan to transfer to the minor. Be sure to consult with a financial advisor or attorney for personalized advice.
If you’re interested in opening a UGMA or UTMA account, several financial institutions, such as Fidelity and Vanguard, offer these types of accounts.
Which One is Right for You and Your Beneficiary?
Choosing between an UGMA and UTMA account depends entirely on your specific needs and goals. To find the right account option for you, consider the following factors:
- Type of assets you want to invest in
- Your tax situation and that of your intended beneficiary
- The age by which you want your beneficiary to gain control of the account
- Your beneficiary’s intended use of the funds
It’s important to speak with a financial advisor who is familiar with UGMA and UTMA accounts to help determine which type of account best suits your specific needs and goals. Some financial institutions, such as Fidelity or Wells Fargo, may also offer helpful resources that guide you through the account creation process and provide you with insights and advice related to your unique situation. Ultimately, whether you opt for an UGMA or UTMA account, or decide to use another tax-free or tax-deferred savings strategy – consistency and patience, with a good plan, can help your savings grow and work harder for your beneficiary’s benefit down the line.
Should I get a UTMA or UGMA?
Here are some key differences between the UTMA and UGMA custodial accounts to help you decide which one is right for you:
- UTMA accounts may hold a wider range of assets than UGMA accounts, including real estate, art, patents, and royalties.
- UGMA accounts generally have a higher maximum age limit for when the funds must be transferred to the beneficiary (typically 25 years old versus 21 for UTMA).
- UTMA accounts may have tax consequences for the minor once they reach a certain age (usually 18 or 21), while UGMA accounts do not.
Consider working with a financial advisor or using online tools, such as those offered by companies like Vanguard, Fidelity, or E*TRADE, to help you make an informed decision and open the appropriate account for your needs.
Drawbacks to Consider
While both UGMA and UTMA accounts have their benefits, they also have some potential drawbacks.
- Assets in the account are irrevocable and belong to the beneficiary once they reach the age of majority.
- If your beneficiary uses the funds to pay for non-educational expenses or other purposes, they will face tax penalties and fees.
- The accounts may negatively impact your beneficiary’s eligibility for financial aid when applying for college.
- Investments in the accounts may be limited to specific products, or may have higher fees than other investment accounts.
When choosing a custodial account or investment structure, it’s crucial that you weigh the advantages against these potential downsides. It’s important to speak with a financial planner who can help you evaluate whether one of these accounts, or another type of investment strategy, is right for you and your beneficiary. Keep in mind, some financial institutions, like Charles Schwab or Edward Jones, offer other tax-advantaged savings accounts like 529 plans that you may want to consider before committing to an UGMA or UTMA account.
What is the difference between a UTMA and UGMA account?
- UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) are both custodial accounts that allow adults to transfer assets to minors without the need for a formal trust.
- The main difference between the two is the types of assets that can be transferred. UGMA accounts can only hold certain assets such as cash, securities, and insurance policies. UTMA accounts, on the other hand, can hold a wide range of assets including real estate, patents, and royalties.
- Another difference is the age at which the minor gains control of the assets. With a UGMA account, the minor gains control at age 18 or 21, depending on the state. With a UTMA account, the minor gains control at age 18.
- It’s important to note that once assets are transferred to a UTMA or UGMA account, they belong to the minor and cannot be taken back.
For more information on custodial accounts, please visit the website of your financial institution or consult with a financial advisor.
Choosing Between UGMA and UTMA Accounts
Selecting between an UGMA and UTMA account depends on your situation and goals. Here are a few things to consider:
- If you want to give the child flexibility to use the assets for any purpose, an UTMA account may be a better choice due to its ability to hold any type of asset.
- If you want to make sure the assets are strictly for education expenses, an UGMA account might work better.
- UGMA accounts can only hold certain types of assets, while UTMA accounts can hold any type of asset, including real estate, intellectual property, and even antiques.
- UTMA accounts can last until the beneficiary reaches age 25, or even later in some states, while UGMA accounts terminate when the child reaches the age of majority, which varies by state but is typically 18 or 21.
- Earnings and gains in UGMA accounts are taxed at the child’s tax rate, while UTMA accounts have a flat tax of 10% for the first $1,100 of income and 24% on income above that amount.
When it comes to deciding between UGMA and UTMA accounts, working with a financial advisor can be useful in terms of determining which account can best fit your child or grandchild’s needs. It’s important to seek out advice from a professional to make an informed decision.
What is the main advantage of an UGMA UTMA account?
An UGMA and UTMA account offers several benefits, but the main advantage is that it allows parents or guardians to transfer assets to their children free of gift tax. Here are some other advantages of UGMA and UTMA accounts:
- Investments in the account grow tax-free until the child reaches the age of majority.
- Parents or guardians can use the funds for the child’s education or any other expenses deemed beneficial for the child.
- The account is in the child’s name, which can help in financial aid calculations when the child applies for college.
- The account is irrevocable, meaning the assets belong to the child and cannot be taken back by the donor.
- UGMA and UTMA accounts provide a simple and efficient way to transfer assets to a child.
If you’re interested in opening an UGMA or UTMA account, it’s important to consult with a financial advisor to determine if it’s the right choice for your family’s financial goals.
Conclusion
In summary, UGMA and UTMA accounts are great strategies for parents and grandparents to save for a child’s future education expenses. As a custodial account, the account holder retains control over the account’s assets, which will eventually be transferred to the beneficiary once they reach the age of majority. UGMA and UTMA accounts have different features and may make more sense to use in certain situations than in others. Although contributions are subject to gift taxes, UGMA and UTMA accounts provide a unique tax-saving option. Parents or grandparents who are interested in these types of accounts should research and compare them before making a decision. Financial advisors could help parents or grandparents choose between the two accounts based on their individual situation. Overall, either UGMA or UTMA accounts provide the opportunity to save money and contribute to a child’s education.
