Overview

Prior to 529 plans, UGMA/UTMA was the most tax efficient manner to save for college and transfer wealth to children and grandchildren. UGMA stands for The Uniform Gifts to Minors Act, and UTMA stands for The Uniform Transfers to Minors Act. UGMA and UTMA are virtually similar in all respects.

Purpose of UGMA/UTMA

UGMA is a means by which children who are not of ‘Age of Majority,’ 18 in most states 21 in others, can own securities (stocks, mutual funds, bonds, etc.).

Control of Accounts

In establishing a UGMA/UTMA account, the individual who will be responsible for overseeing and management of the account is referred to as the ‘Custodian.’ The person who opens the account can differ from the individual whose name appears as the ‘Custodian.’ The ‘Custodian’ is legally bound to judiciously manage the funds in the UGMA/UTMA account, meaning that they cannot use the funds to bet or gamble, for example. Upon reaching the age of majority, the minor can then assume control over the account, even if it counter’s the wishes of the ‘Custodian.’

Tax Implications

  • UGMA/UTMA is subject to the $11,000 Gift Tax Exclusion, which allows an individual to give up to $11,000 per year to another person without being subjected to the Gift Tax.
  • The first $750 in earnings each year is free from federal taxes and the next $750 is taxed at the child’s tax rate. Afterwards, earnings are taxed at the normal rates.
  • UGMA/UTMA accounts can be rolled over into 529 plan accounts, which is a very common occurrence considering the more generous tax benefits and account ownership flexibility.

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